CIA-2013.6.30-10Q

 
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 June 30, 2013
or
¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from  _____ to _____
Commission File Number:  000-16509
CITIZENS, INC.
(Exact name of registrant as specified in its charter)
Colorado
84-0755371
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
400 East Anderson Lane, Austin, TX
78752
(Address of principal executive offices)
(Zip Code)
 
(512) 837-7100
 
(Registrant's telephone number, including area code)
 
N/A
 
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ 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 ¨
Accelerated filer x
Non-accelerated filer ¨
Smaller reporting company ¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No

As of August 2, 2013, the Registrant had 49,080,114 shares of Class A common stock, no par value, outstanding and 1,001,714 shares of Class B common stock outstanding.
 






























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


1

Table of Contents

PART I.  FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Financial Position
(In thousands)
 
 
 
 
 
 
 
 
 
June 30, 2013
 
December 31, 2012
Assets
(Unaudited)
 
 
Investments:
 
 
 
Fixed maturities available-for-sale, at fair value (cost: $630,177 and $559,736 in 2013 and 2012, respectively)
$
649,109

 
604,520

Fixed maturities held-to-maturity, at amortized cost (fair value: $161,012 and $193,739 in 2013 and 2012, respectively)
159,208

 
187,008

Equity securities available-for-sale, at fair value (cost: $52,392 and $52,744 in 2013 and 2012, respectively)
52,699

 
53,741

Mortgage loans on real estate
687

 
1,509

Policy loans
45,824

 
42,993

Real estate held for investment (less $1,357 and $1,287 accumulated depreciation in 2013 and 2012, respectively)
8,509

 
8,496

Other long-term investments
56

 
57

Short-term investments

 
2,340

Total investments
916,092

 
900,664

Cash and cash equivalents
41,013

 
56,299

Accrued investment income
11,378

 
10,304

Reinsurance recoverable
6,673

 
9,651

Deferred policy acquisition costs
140,787

 
135,569

Cost of customer relationships acquired
24,474

 
25,116

Goodwill
17,160

 
17,160

Other intangible assets
865

 
879

Federal income tax receivable
224

 
270

Property and equipment, net
7,138

 
7,383

Due premiums, net (less $1,346 and $1,345 allowance for doubtful accounts in 2013 and 2012, respectively)
10,443

 
10,527

Prepaid expenses
1,335

 
344

Other assets
962

 
782

Total assets
$
1,178,544

 
1,174,948


(Continued)

See accompanying notes to consolidated financial statements.

2

Table of Contents

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Financial Position
(In thousands, except share amounts)
 
 
 
 
 
 
 
 
 
June 30, 2013
 
December 31, 2012
Liabilities and Stockholders' Equity
(Unaudited)
 
 
Liabilities:
 
 
 
Policy liabilities:
 
 
 
Future policy benefit reserves:
 
 
 
Life insurance
$
795,886

 
762,319

Annuities
53,223

 
51,750

Accident and health
2,712

 
5,491

Dividend accumulations
12,821

 
11,962

Premiums paid in advance
29,811

 
27,455

Policy claims payable
8,809

 
11,015

Other policyholders' funds
8,010

 
9,440

Total policy liabilities
911,272

 
879,432

Commissions payable
2,195

 
2,606

Deferred federal income tax
6,796

 
17,301

Payable for securities in process of settlement
179

 
2,358

Other liabilities
9,457

 
10,143

Total liabilities
929,899

 
911,840

Commitments and contingencies (Note 7)


 


Stockholders' equity:
 

 
 

Class A, no par value, 100,000,000 shares authorized, 52,215,852 shares issued and outstanding in 2013 and 2012, including shares in treasury of 3,135,738 in 2013 and 2012
259,383

 
259,383

Class B, no par value, 2,000,000 shares authorized, 1,001,714 shares issued and outstanding in 2013 and 2012
3,184

 
3,184

Accumulated deficit
(15,172
)
 
(17,335
)
Accumulated other comprehensive income:
 

 
 

Unrealized gains on securities, net of tax
12,261

 
28,887

Treasury stock, at cost
(11,011
)
 
(11,011
)
Total stockholders' equity
248,645

 
263,108

Total liabilities and stockholders' equity
$
1,178,544

 
1,174,948



See accompanying notes to consolidated financial statements.


3

Table of Contents

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

 
2013
 
2012
Revenues:
 
 
 
 
 
Premiums:
 
 
 
 
 
 
 
Life insurance
 
 
$
42,223

 
 
 
39,945

Accident and health insurance
 
 
406

 
 
 
417

Property insurance
 
 
1,205

 
 
 
1,234

Net investment income
 
 
9,265

 
 
 
7,612

Realized investment gains, net
 
 
82

 
 
 
246

Decrease in fair value of warrants
 
 

 
 
 
37

Other income
 
 
427

 
 
 
111

Total revenues
 
 
53,608

 
 
 
49,602

Benefits and expenses:
 
 
 

 
 
 
 

Insurance benefits paid or provided:
 
 
 

 
 
 
 

Claims and surrenders
 
 
16,660

 
 
 
16,109

Increase in future policy benefit reserves
 
 
17,896

 
 
 
16,751

Policyholders' dividends
 
 
2,235

 
 
 
2,281

Total insurance benefits paid or provided
 
 
36,791

 
 
 
35,141

Commissions
 
 
10,429

 
 
 
9,731

Other general expenses
 
 
7,342

 
 
 
6,342

Capitalization of deferred policy acquisition costs
 
 
(7,672
)
 
 
 
(7,044
)
Amortization of deferred policy acquisition costs
 
 
4,363

 
 
 
4,433

Amortization of cost of customer relationships acquired
 
 
560

 
 
 
660

Total benefits and expenses
 
 
51,813

 
 
 
49,263

Income before federal income tax
 
 
1,795

 
 
 
339

Federal income tax expense (benefit)
 
 
488

 
 
 
(64
)
Net income
 
 
1,307

 
 
 
403

Per Share Amounts:
 
 
 

 
 

 
 

Basic earnings per share of Class A common stock
$
0.03

 
 

 
0.01

 
 

Basic earnings per share of Class B common stock
0.01

 
 

 

 
 

Diluted earnings per share of Class A common stock
0.03

 
 

 
0.01

 
 

Diluted earnings per share of Class B common stock
0.01

 
 

 

 
 

Other comprehensive income (loss):
 

 
 

 
 

 
 

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

 
 

 
 

 
 

Unrealized holding gains (losses) arising during period
 

 
(25,544
)
 
 

 
6,003

Reclassification adjustment for gains included in net income
 

 
(73
)
 
 

 
(121
)
Unrealized gains (losses) on available-for-sale securities, net
 

 
(25,617
)
 
 

 
5,882

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

 
(8,953
)
 
 

 
2,063

Other comprehensive income (loss)
 

 
(16,664
)
 
 

 
3,819

Comprehensive income (loss)
 

 
$
(15,357
)
 
 

 
4,222

See accompanying notes to consolidated financial statements.

4

Table of Contents

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

 
2013
 
2012
Revenues:
 
 
 
 
 
Premiums:
 
 
 
 
 
 
 
Life insurance
 
 
$
81,637

 
 
 
77,351

Accident and health insurance
 
 
755

 
 
 
830

Property insurance
 
 
2,382

 
 
 
2,511

Net investment income
 
 
17,654

 
 
 
15,189

Realized investment gains, net
 
 
113

 
 
 
344

Decrease in fair value of warrants
 
 

 
 
 
73

Other income
 
 
613

 
 
 
209

Total revenues
 
 
103,154

 
 
 
96,507

Benefits and expenses:
 
 
 

 
 
 
 

Insurance benefits paid or provided:
 
 
 

 
 
 
 

Claims and surrenders
 
 
31,466

 
 
 
30,863

Increase in future policy benefit reserves
 
 
34,855

 
 
 
30,892

Policyholders' dividends
 
 
4,309

 
 
 
4,155

Total insurance benefits paid or provided
 
 
70,630

 
 
 
65,910

Commissions
 
 
19,487

 
 
 
18,395

Other general expenses
 
 
14,041

 
 
 
12,958

Capitalization of deferred policy acquisition costs
 
 
(14,034
)
 
 
 
(12,983
)
Amortization of deferred policy acquisition costs
 
 
8,989

 
 
 
8,559

Amortization of cost of customer relationships acquired
 
 
1,138

 
 
 
1,236

Total benefits and expenses
 
 
100,251

 
 
 
94,075

Income before federal income tax
 
 
2,903

 
 
 
2,432

Federal income tax expense
 
 
740

 
 
 
517

Net income
 
 
2,163

 
 
 
1,915

Per Share Amounts:
 
 
 

 
 

 
 

Basic earnings per share of Class A common stock
$
0.05

 
 

 
0.04

 
 

Basic earnings per share of Class B common stock
0.02

 
 

 
0.02

 
 

Diluted earnings per share of Class A common stock
0.05

 
 

 
0.04

 
 

Diluted earnings per share of Class B common stock
0.02

 
 

 
0.02

 
 

Other comprehensive income (loss):
 

 
 

 
 

 
 

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

 
 

 
 

 
 

Unrealized holding gains (losses) arising during period
 

 
(25,448
)
 
 

 
8,564

Reclassification adjustment for gains included in net income
 

 
(104
)
 
 

 
(207
)
Unrealized gains (losses) on available-for-sale securities, net
 

 
(25,552
)
 
 

 
8,357

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

 
(8,926
)
 
 

 
2,959

Other comprehensive income (loss)
 

 
(16,626
)
 
 

 
5,398

Comprehensive income (loss)
 

 
$
(14,463
)
 
 

 
7,313

See accompanying notes to consolidated financial statements.

5

Table of Contents

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Cash Flows
Six Months Ended June 30,
(In thousands)
(Unaudited)
 
 
 
 
 
2013
 
2012
Cash flows from operating activities:
 
 
 
Net income
$
2,163

 
1,915

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Realized gains on sale of investments and other assets
(113
)
 
(344
)
Net deferred policy acquisition costs
(5,045
)
 
(4,424
)
Amortization of cost of customer relationships acquired
1,138

 
1,236

Decrease in fair value of warrants

 
(73
)
Depreciation
637

 
607

Amortization of premiums and discounts on investments
4,256

 
2,438

Deferred federal income tax benefit
(1,579
)
 
(1,679
)
Change in:
 

 
 

Accrued investment income
(1,074
)
 
(899
)
Reinsurance recoverable
2,978

 
476

Due premiums
84

 
399

Future policy benefit reserves
32,049

 
30,685

Other policyholders' liabilities
(421
)
 
1,925

Federal income tax receivable
46

 
820

Commissions payable and other liabilities
(1,097
)
 
(1,417
)
Other, net
(1,008
)
 
(1,515
)
Net cash provided by operating activities
33,014

 
30,150

Cash flows from investing activities:
 

 
 

Sale of fixed maturities, available-for-sale
58

 
503

Maturities and calls of fixed maturities, available-for-sale
33,943

 
105,077

Maturities and calls of fixed maturities, held-to-maturity
26,465

 
115,630

Purchase of fixed maturities, available-for-sale
(109,596
)
 
(118,558
)
Purchase of fixed maturities, held-to-maturity

 
(94,276
)
Calls of equity securities, available-for-sale
400

 
420

Principal payments on mortgage loans
822

 
22

Increase in policy loans, net
(2,831
)
 
(2,024
)
Sale of other long-term investments
1

 
4

Purchase of other long-term investments
(83
)
 
(94
)
Purchase of property and equipment
(321
)
 
(350
)
Maturity of short-term investments
2,841

 

Purchase of short-term investments
(531
)
 
(2,378
)
Net cash provided by (used in) investing activities
(48,832
)
 
3,976


6

Table of Contents

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
Six Months Ended June 30,
(In thousands)
(Unaudited)
 
2013
 
2012
 
 
 
 
 
 
 
 
Cash flows from financing activities:
 
 
 
Warrants exercised
$

 
68

Annuity deposits
2,815

 
3,425

Annuity withdrawals
(2,283
)
 
(1,958
)
Net cash provided by financing activities
532

 
1,535

Net increase (decrease) in cash and cash equivalents
(15,286
)
 
35,661

Cash and cash equivalents at beginning of year
56,299

 
33,255

Cash and cash equivalents at end of period
$
41,013

 
68,916

Supplemental disclosures of operating activities:
 

 
 

Cash paid during the period for income taxes, net
$
2,273

 
1,377


Supplemental Disclosures of Non-Cash Investing Activities:

None.




See accompanying notes to consolidated financial statements.

7

Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2013
(Unaudited)


(1) Financial Statements

Basis of Presentation and Consolidation

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

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

The consolidated statements of financial position for June 30, 2013, and the consolidated statements of comprehensive income and cash flows for the three and six-month periods ended June 30, 2013 and 2012, 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 June 30, 2013 and for comparative periods have been made.  The consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and with the instructions to Form 10-Q adopted by the Securities and Exchange Commission (“SEC”).  Accordingly, the financial statements do not include all of the information and footnotes required for complete financial statements and should be read in conjunction with the Company’s consolidated financial statements, and notes thereto, for the year ended December 31, 2012.  Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period.

We provide primarily life insurance and a small amount of health insurance policies through our insurance subsidiaries:  CICA, SPLIC, and CNLIC.  CICA and CNLIC issue ordinary whole-life policies, credit life and disability, burial insurance, pre-need policies, and accident and health related policies, throughout the Midwest and southern United States.  CICA also issues ordinary whole-life 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 assets and liabilities and assumptions, goodwill impairment, valuation allowance on deferred tax assets, and contingencies relating to litigation and regulatory matters.  Certain of these estimates are particularly sensitive to market conditions, and deterioration and/or volatility in the worldwide debt or equity markets could have a material impact on the Consolidated Financial Statements.

Reclassification

Reclassifications have been made in the current year related to certain prior year reported amounts to provide consistent presentation.


8

Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
June 30, 2013
(Unaudited)

Significant Accounting Policies

For a description of significant accounting policies, see Note 1 of the Notes to Consolidated Financial Statements included in our 2012 Form 10-K Annual Report, which should be read in conjunction with these accompanying Consolidated Financial Statements.

(2) Accounting Pronouncements

Accounting Standards Recently Adopted

In February 2013, the FASB issued ASU No. 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income” (“ASU 2013-02”), which requires enhanced reporting of such amounts either on the face of the financial statements or in the notes to the financial statements.  Under ASU 2013-02, the type of reclassification out of accumulated other comprehensive income, as defined under current GAAP, will dictate whether the disclosure must provide the effect of the reclassification on the respective financial statement line items or whether cross-referencing to other disclosures that provide additional detail about the reclassification will be required.  The amendments in ASU 2013-02 are effective prospectively for reporting periods beginning after December 15, 2012.  We have included the enhanced disclosures in the financial statements.



9

Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
June 30, 2013
(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
 
June 30, 2013
 
Life
Insurance
 
Home
Service
Insurance
 
Other
Non-Insurance
Enterprises
 
Consolidated
 
(In thousands)
Revenues:
 
 
 
 
 
 
 
Premiums
$
32,850

 
10,984

 

 
43,834

Net investment income
5,584

 
3,341

 
340

 
9,265

Realized investment gains, net
81

 
1

 

 
82

Other income
351

 
46

 
30

 
427

Total revenue
38,866

 
14,372

 
370

 
53,608

Benefits and expenses:
 
 
 

 
 

 
 

Insurance benefits paid or provided:
 

 
 

 
 

 
 

Claims and surrenders
11,429

 
5,231

 

 
16,660

Increase in future policy benefit reserves
17,047

 
849

 

 
17,896

Policyholders' dividends
2,216

 
19

 

 
2,235

Total insurance benefits paid or provided
30,692

 
6,099

 

 
36,791

Commissions
6,697

 
3,732

 

 
10,429

Other general expenses
2,928

 
3,225

 
1,189

 
7,342

Capitalization of deferred policy acquisition costs
(6,170
)
 
(1,502
)
 

 
(7,672
)
Amortization of deferred policy acquisition costs
3,870

 
493

 

 
4,363

Amortization of cost of customer relationships acquired
154

 
406

 

 
560

Total benefits and expenses
38,171

 
12,453

 
1,189

 
51,813

Income (loss) before income tax expense
$
695

 
1,919

 
(819
)
 
1,795



10

Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
June 30, 2013
(Unaudited)


 
Six Months Ended
 
June 30, 2013
 
Life
Insurance
 
Home
Service
Insurance
 
Other
Non-Insurance
Enterprises
 
Consolidated
 
(In thousands)
Revenues:
 
 
 
 
 
 
 
Premiums
$
62,967

 
21,807

 

 
84,774

Net investment income
10,488

 
6,521

 
645

 
17,654

Realized investment gains, net
81

 
31

 
1

 
113

Other income
414

 
136

 
63

 
613

Total revenue
73,950

 
28,495

 
709

 
103,154

Benefits and expenses:
 
 
 

 
 

 
 

Insurance benefits paid or provided:
 

 
 

 
 

 
 

Claims and surrenders
20,767

 
10,699

 

 
31,466

Increase in future policy benefit reserves
33,089

 
1,766

 

 
34,855

Policyholders' dividends
4,275

 
34

 

 
4,309

Total insurance benefits paid or provided
58,131

 
12,499

 

 
70,630

Commissions
12,276

 
7,211

 

 
19,487

Other general expenses
5,780

 
6,491

 
1,770

 
14,041

Capitalization of deferred policy acquisition costs
(11,256
)
 
(2,778
)
 

 
(14,034
)
Amortization of deferred policy acquisition costs
7,855

 
1,134

 

 
8,989

Amortization of cost of customer relationships acquired
321

 
817

 

 
1,138

Total benefits and expenses
73,107

 
25,374

 
1,770

 
100,251

Income (loss) before income tax expense
$
843

 
3,121

 
(1,061
)
 
2,903



11

Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
June 30, 2013
(Unaudited)

 
 
 
 
 
 
 
 
 
Three Months Ended
 
June 30, 2012
 
Life
Insurance
 
Home
Service
Insurance
 
Other
Non-Insurance
Enterprises
 
Consolidated
 
(In thousands)
Revenues:
 
 
 
 
 
 
 
Premiums
$
30,601

 
10,995

 

 
41,596

Net investment income
4,253

 
3,075

 
284

 
7,612

Realized investment gains, net
187

 
40

 
19

 
246

Decrease in fair value of warrants

 

 
37

 
37

Other income
75

 
6

 
30

 
111

Total revenue
35,116

 
14,116

 
370

 
49,602

Benefits and expenses:
 

 
 

 
 

 
 

Insurance benefits paid or provided:
 

 
 

 
 

 
 

Claims and surrenders
10,772

 
5,337

 

 
16,109

Increase in future policy benefit reserves
16,201

 
550

 

 
16,751

Policyholders' dividends
2,268

 
13

 

 
2,281

Total insurance benefits paid or provided
29,241

 
5,900

 

 
35,141

Commissions
5,990

 
3,741

 

 
9,731

Other general expenses
2,411

 
3,006

 
925

 
6,342

Capitalization of deferred policy acquisition costs
(5,507
)
 
(1,537
)
 

 
(7,044
)
Amortization of deferred policy acquisition costs
3,749

 
684

 

 
4,433

Amortization of cost of customer relationships acquired
184

 
476

 

 
660

Total benefits and expenses
36,068

 
12,270

 
925

 
49,263

Income (loss) before income tax expense
$
(952
)
 
1,846

 
(555
)
 
339


12

Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
June 30, 2013
(Unaudited)



 
Six Months Ended
 
June 30, 2012
 
Life
Insurance
 
Home
Service
Insurance
 
Other
Non-Insurance
Enterprises
 
Consolidated
 
(In thousands)
Revenues:
 
 
 
 
 
 
 
Premiums
$
58,770

 
21,922

 

 
80,692

Net investment income
8,411

 
6,230

 
548

 
15,189

Realized investment gains, net
189

 
127

 
28

 
344

Decrease in fair value of warrants

 

 
73

 
73

Other income
132

 
12

 
65

 
209

Total revenue
67,502

 
28,291

 
714

 
96,507

Benefits and expenses:
 

 
 

 
 

 
 

Insurance benefits paid or provided:
 

 
 

 
 

 
 

Claims and surrenders
20,699

 
10,164

 

 
30,863

Increase in future policy benefit reserves
29,419

 
1,473

 

 
30,892

Policyholders' dividends
4,130

 
25

 

 
4,155

Total insurance benefits paid or provided
54,248

 
11,662

 

 
65,910

Commissions
11,012

 
7,383

 

 
18,395

Other general expenses
5,331

 
5,970

 
1,657

 
12,958

Capitalization of deferred policy acquisition costs
(10,019
)
 
(2,964
)
 

 
(12,983
)
Amortization of deferred policy acquisition costs
7,400

 
1,159

 

 
8,559

Amortization of cost of customer relationships acquired
393

 
843

 

 
1,236

Total benefits and expenses
68,365

 
24,053

 
1,657

 
94,075

Income (loss) before income tax expense
$
(863
)
 
4,238

 
(943
)
 
2,432




13

Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
June 30, 2013
(Unaudited)

(4) Earnings Per Share

The following tables set forth the computation of basic and diluted earnings per share.
 
Three Months Ended
 
June 30, 2013
 
June 30, 2012
 
(In thousands,
except per share amounts)
Basic and diluted earnings per share:
 
 
 
Numerator:
 
 
 
Net income
$
1,307

 
403

Net income allocated to Class A common stock
$
1,293

 
399

Net income allocated to Class B common stock
14

 
4

Net income
$
1,307

 
403

Denominator:
 

 
 

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

 
48,963

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

 
48,989

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

 
1,002

Basic earnings per share of Class A common stock
$
0.03

 
0.01

Basic earnings per share of Class B common stock
0.01

 

Diluted earnings per share of Class A common stock
0.03

 
0.01

Diluted earnings per share of Class B common stock
0.01

 

 
Six Months Ended
 
June 30, 2013
 
June 30, 2012
 
(In thousands,
except per share amounts)
Basic and diluted earnings per share:
 
 
 
Numerator:
 
 
 
Net income
$
2,163

 
1,915

Net income allocated to Class A common stock
$
2,141

 
1,895

Net income allocated to Class B common stock
22

 
20

Net income
$
2,163

 
1,915

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

 
48,961

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

 
48,997

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

 
1,002

Basic earnings per share of Class A common stock
$
0.05

 
0.04

Basic earnings per share of Class B common stock
0.02

 
0.02

Diluted earnings per share of Class A common stock
0.05

 
0.04

Diluted earnings per share of Class B common stock
0.02

 
0.02



14

Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
June 30, 2013
(Unaudited)

(5) Investments

The Company invests primarily in fixed maturity securities, which totaled 84.4% of total investments and cash and cash equivalents at June 30, 2013.
 
June 30, 2013
 
December 31, 2012
 
Carrying
Value
 
% of Total
Carrying Value
 
Carrying
Value
 
% of Total
Carrying Value
 
(In thousands)
 
 
 
(In thousands)
 
 
Fixed maturity securities
$
808,317

 
84.4
%
 
$
791,528

 
82.7
%
Equity securities
52,699

 
5.5
%
 
53,741

 
5.6
%
Mortgage loans
687

 
0.1
%
 
1,509

 
0.2
%
Policy loans
45,824

 
4.8
%
 
42,993

 
4.5
%
Real estate and other long-term investments
8,565

 
0.9
%
 
8,553

 
0.9
%
Short-term investments

 
%
 
2,340

 
0.2
%
Cash and cash equivalents
41,013

 
4.3
%
 
56,299

 
5.9
%
Total cash, cash equivalents and investments
$
957,105

 
100.0
%
 
$
956,963

 
100.0
%


15

Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
June 30, 2013
(Unaudited)


The following tables represent the cost, gross unrealized gains and losses and fair value for fixed maturities and equity securities as of the periods indicated.
 
June 30, 2013
 
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
(In thousands)
Fixed maturities:
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
U.S. Treasury securities
$
10,139

 
2,856

 

 
12,995

U.S. Government-sponsored enterprises
63,300

 
2,069

 
97

 
65,272

States and political subdivisions
347,580

 
10,582

 
9,170

 
348,992

Foreign governments
104

 
29

 

 
133

Corporate
204,613

 
13,729

 
1,394

 
216,948

Commercial mortgage-backed
349

 
13

 

 
362

Residential mortgage-backed
4,092

 
317

 
2

 
4,407

Total available-for-sale securities
630,177

 
29,595

 
10,663

 
649,109

Held-to-maturity securities:
 

 
 

 
 

 
 

U.S. Government-sponsored enterprises
10,446

 
248

 
5

 
10,689

States and political subdivisions
118,327

 
2,801

 
1,764

 
119,364

Corporate
30,435

 
606

 
82

 
30,959

Total held-to-maturity securities
159,208

 
3,655

 
1,851

 
161,012

Total fixed maturities
$
789,385

 
33,250

 
12,514

 
810,121

Equity securities:
 

 
 

 
 

 
 

Stock mutual funds
$
10,463

 
719

 

 
11,182

Bond mutual funds
41,505

 
15

 
732

 
40,788

Common stock
17

 

 
4

 
13

Preferred stock
407

 
309

 

 
716

Total equity securities
$
52,392

 
1,043

 
736

 
52,699



16

Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
June 30, 2013
(Unaudited)

 
December 31, 2012
 
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
(In thousands)
Fixed maturities:
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
U.S. Treasury securities
$
10,170

 
3,773

 

 
13,943

U.S. Government-sponsored enterprises
81,788

 
3,815

 
22

 
85,581

States and political subdivisions
265,812

 
17,227

 
777

 
282,262

Foreign governments
105

 
36

 

 
141

Corporate
195,755

 
20,536

 
286

 
216,005

Commercial mortgage-backed
481

 
17

 
2

 
496

Residential mortgage-backed
5,625

 
469

 
2

 
6,092

Total available-for-sale securities
559,736

 
45,873

 
1,089

 
604,520

Held-to-maturity securities:
 

 
 

 
 

 
 

U.S. Government-sponsored enterprises
28,632

 
514

 

 
29,146

States and political subdivisions
125,634

 
5,435

 
378

 
130,691

Corporate
32,742

 
1,160

 

 
33,902

Total held-to-maturity securities
187,008

 
7,109

 
378

 
193,739

Total fixed maturity securities
$
746,744

 
52,982

 
1,467

 
798,259

Equity securities:
 

 
 

 
 

 
 

Stock mutual funds
$
10,463

 
250

 
28

 
10,685

Bond mutual funds
41,504

 
541

 
129

 
41,916

Common stock
17

 

 
2

 
15

Preferred stock
760

 
365

 

 
1,125

Total equity securities
$
52,744

 
1,156

 
159

 
53,741

 
At June 30, 2013, the Company had $4.4 million of mortgage-backed security holdings based on amortized cost, of which $4.1 million, or 93.2%, 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

17

Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
June 30, 2013
(Unaudited)

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

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

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

The Company did not recognize any other-than-temporary impairments ("OTTI") during the six months ended June 30, 2013 and 2012.


18

Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
June 30, 2013
(Unaudited)

The following tables present the fair values and gross unrealized losses of fixed maturities and equity securities that have remained in a continuous unrealized loss position for the periods indicated.
 
June 30, 2013
 
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
$
8,676

 
97

 
7

 

 

 

 
8,676

 
97

 
7

States and political subdivisions
192,682

 
8,438

 
214

 
7,875

 
732

 
8

 
200,557

 
9,170

 
222

Corporate
44,184

 
1,394

 
30

 

 

 

 
44,184

 
1,394

 
30

Residential mortgage-backed
3

 

 
1

 
48

 
2

 
1

 
51

 
2

 
2

Total available-for-sale securities
245,545

 
9,929

 
252

 
7,923

 
734

 
9

 
253,468

 
10,663

 
261

Held-to-maturity securities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

U.S. Government-sponsored enterprises
3,908

 
5

 
2

 

 

 

 
3,908

 
5

 
2

States and political subdivisions
53,296

 
1,764

 
47

 

 

 

 
53,296

 
1,764

 
47

Corporate
5,496

 
82

 
4

 

 

 

 
5,496

 
82

 
4

Total held-to-maturity securities
62,700

 
1,851

 
53

 

 

 

 
62,700

 
1,851

 
53

Total fixed maturities
$
308,245

 
11,780

 
305

 
7,923

 
734

 
9

 
316,168

 
12,514

 
314

Equity securities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Bond mutual funds
$
34,028

 
607

 
5

 
2,875

 
125

 
1

 
36,903

 
732

 
6

Common stocks

 

 

 
13

 
4

 
1

 
13

 
4

 
1

Total equities
$
34,028

 
607

 
5

 
2,888

 
129

 
2

 
36,916

 
736

 
7


As of June 30, 2013, the Company had 9 fixed maturity available-for-sale securities and no held-to-maturity securities that were in an unrealized loss position for greater than 12 months.  These securities consisted of municipals and mortgage-backed securities. There is 1 bond mutual fund that is now in a loss position for greater than 12 months. This is a diversified U.S. Government bond fund that has a large percentage of mortgage exposure in Pass Thru and CMO security types which have refinanced in the current interest rate environment. The fund is comprised of only U.S. Government bond assets.


19

Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
June 30, 2013
(Unaudited)

 
December 31, 2012
 
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
$
10,603

 
22

 
9

 

 

 

 
10,603

 
22

 
9

States and political subdivisions
54,115

 
443

 
61

 
5,099

 
334

 
2

 
59,214

 
777

 
63

Corporate
22,316

 
286

 
16

 

 

 

 
22,316

 
286

 
16

Commercial mortgage-backed
94

 
2

 
1

 

 

 

 
94

 
2

 
1

Residential mortgage-backed

 

 

 
52

 
2

 
1

 
52

 
2

 
1

Total available-for-sale securities
87,128

 
753

 
87

 
5,151

 
336

 
3

 
92,279

 
1,089

 
90

Held-to-maturity securities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

States and political subdivisions
40,611

 
378

 
32

 

 

 

 
40,611

 
378

 
32

Total held-to-maturity securities
40,611

 
378

 
32

 

 

 

 
40,611

 
378

 
32

Total fixed maturities
$
127,739

 
1,131

 
119

 
5,151

 
336

 
3

 
132,890

 
1,467

 
122

Equity securities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Stock mutual funds