CIA-2014.6.30-10Q

 
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, 2014
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 smaller 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 1, 2014, 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, 2014
 
December 31, 2013
Assets
(Unaudited)
 
 
Investments:
 
 
 
Fixed maturities available-for-sale, at fair value (cost:  $628,591 and $595,944 in 2014 and 2013, respectively)
$
663,501

 
605,256

Fixed maturities held-to-maturity, at amortized cost (fair value:  $234,415 and $223,533 in 2014 and 2013, respectively)
228,948

 
227,696

Equity securities available-for-sale, at fair value (cost:  $54,075 and $45,883 in 2014 and 2013, respectively)
56,637

 
47,259

Mortgage loans on real estate
650

 
671

Policy loans
52,001

 
48,868

Real estate held for investment (less $1,502 and $1,429 accumulated depreciation in 2014 and 2013, respectively)
8,218

 
8,440

Other long-term investments
44

 
45

Total investments
1,009,999

 
938,235

Cash and cash equivalents
57,437

 
54,593

Accrued investment income
12,877

 
12,251

Reinsurance recoverable
4,730

 
4,394

Deferred policy acquisition costs
150,891

 
146,691

Cost of customer relationships acquired
24,624

 
23,374

Goodwill
17,306

 
17,160

Other intangible assets
976

 
851

Property and equipment, net
6,513

 
6,662

Due premiums, net (less $1,312 and $1,429 allowance for doubtful accounts in 2014 and 2013, respectively)
10,080

 
11,209

Prepaid expenses
1,995

 
95

Other assets
1,038

 
765

Total assets
$
1,298,466

 
1,216,280


(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, 2014
 
December 31, 2013
Liabilities and Stockholders' Equity
(Unaudited)
 
 
Liabilities:
 
 
 
Policy liabilities:
 
 
 
Future policy benefit reserves:
 
 
 
Life insurance
$
876,228

 
834,269

Annuities
56,489

 
55,485

Accident and health
1,217

 
1,250

Dividend accumulations
14,677

 
13,662

Premiums paid in advance
34,700

 
32,560

Policy claims payable
10,733

 
9,488

Other policyholders' funds
7,099

 
7,982

Total policy liabilities
1,001,143

 
954,696

Commissions payable
2,377

 
2,562

Federal income tax payable
645

 
590

Deferred federal income tax
10,501

 
1,704

Payable for securities in process of settlement
6,103

 

Other liabilities
12,338

 
10,919

Total liabilities
1,033,107

 
970,471

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 2014 and 2013, including shares in treasury of 3,135,738 in 2014 and 2013
259,383

 
259,383

Class B, no par value, 2,000,000 shares authorized, 1,001,714 shares issued and outstanding in 2014 and 2013
3,184

 
3,184

Accumulated deficit
(10,195
)
 
(12,542
)
Accumulated other comprehensive income:
 

 
 

Unrealized gains on securities, net of tax
23,998

 
6,795

Treasury stock, at cost
(11,011
)
 
(11,011
)
Total stockholders' equity
265,359

 
245,809

Total liabilities and stockholders' equity
$
1,298,466

 
1,216,280



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)

 
 
 
 
 
 
 
 
 
2014
 
2013
Revenues:
 
 
 
 
 
Premiums:
 
 
 
 
 
 
 
Life insurance
 
 
$
44,667

 
 
 
42,223

Accident and health insurance
 
 
390

 
 
 
406

Property insurance
 
 
1,272

 
 
 
1,205

Net investment income
 
 
10,083

 
 
 
9,265

Realized investment gains (losses), net
 
 
(73
)
 
 
 
82

Other income
 
 
163

 
 
 
427

Total revenues
 
 
56,502

 
 
 
53,608

Benefits and expenses:
 
 
 

 
 
 
 

Insurance benefits paid or provided:
 
 
 

 
 
 
 

Claims and surrenders

 
16,668

 

 
16,660

Increase in future policy benefit reserves
 
 
19,979

 
 
 
17,896

Policyholders' dividends
 
 
2,412

 
 
 
2,235

Total insurance benefits paid or provided
 
 
39,059

 
 
 
36,791

Commissions

 
10,403

 

 
10,429

Other general expenses
 
 
7,448

 
 
 
7,342

Capitalization of deferred policy acquisition costs
 
 
(7,423
)
 
 
 
(7,672
)
Amortization of deferred policy acquisition costs
 
 
4,893

 
 
 
4,363

Amortization of cost of customer relationships acquired
 
 
614

 
 
 
560

Total benefits and expenses
 
 
54,994

 
 
 
51,813

Income before federal income tax
 
 
1,508

 
 
 
1,795

Federal income tax expense
 
 
358

 
 
 
488

Net income
 
 
1,150

 
 

 
1,307

Per Share Amounts:
 

 
 

 
 

 
 

Basic earnings per share of Class A common stock
$
0.03

 
 

 
$
0.03

 
 

Basic earnings per share of Class B common stock
0.01

 
 

 
0.01

 
 

Diluted earnings per share of Class A common stock
0.03

 
 

 
0.03

 
 

Diluted earnings per share of Class B common stock
0.01

 
 

 
0.01

 
 

Other comprehensive income (loss):
 

 
 

 
 

 
 

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

 
 

 
 

 
 

Unrealized holding gains (losses) arising during period
 

 
12,296

 
 

 
(25,544
)
Reclassification adjustment for (gains) losses included in net income
 

 
73

 
 

 
(73
)
Unrealized gains (losses) on available-for-sale securities, net
 

 
12,369

 
 

 
(25,617
)
Income tax expense (benefit) on unrealized gains (losses) on available-for-sale securities
 

 
4,340

 
 

 
(8,953
)
Other comprehensive income (loss)
 

 
8,029

 
 

 
(16,664
)
Comprehensive income (loss)
 

 
$
9,179

 
 

 
(15,357
)
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)

 
2014
 
2013
Revenues:
 
 
 
 
 
Premiums:
 
 
 
 
 
 
 
Life insurance
 
 
$
86,064

 
 
 
81,637

Accident and health insurance
 
 
741

 
 
 
755

Property insurance
 
 
2,537

 
 
 
2,382

Net investment income
 
 
19,989

 
 
 
17,654

Realized investment gains (losses), net
 
 
(129
)
 
 
 
113

Other income
 
 
332

 
 
 
613

Total revenues
 
 
109,534

 
 
 
103,154

Benefits and expenses:
 
 
 

 
 
 
 

Insurance benefits paid or provided:
 
 
 

 
 
 
 

Claims and surrenders
 
 
33,125

 
 
 
31,466

Increase in future policy benefit reserves
 
 
37,677

 
 
 
34,855

Policyholders' dividends
 
 
4,514

 
 
 
4,309

Total insurance benefits paid or provided
 
 
75,316

 
 
 
70,630

Commissions
 
 
20,313

 
 
 
19,487

Other general expenses
 
 
13,950

 
 
 
14,041

Capitalization of deferred policy acquisition costs
 
 
(14,491
)
 
 
 
(14,034
)
Amortization of deferred policy acquisition costs
 
 
10,102

 
 
 
8,989

Amortization of cost of customer relationships acquired
 
 
1,145

 
 
 
1,138

Total benefits and expenses
 
 
106,335

 
 
 
100,251

Income before federal income tax
 
 
3,199

 
 
 
2,903

Federal income tax expense
 
 
852

 
 
 
740

Net income
 
 
2,347

 
 
 
2,163

Per Share Amounts:
 
 
 

 
 

 
 

Basic earnings per share of Class A common stock
$
0.05

 
 

 
$
0.05

 
 

Basic earnings per share of Class B common stock
0.02

 
 

 
0.02

 
 

Diluted earnings per share of Class A common stock
0.05

 
 

 
0.05

 
 

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
 

 
26,392

 
 

 
(25,448
)
Reclassification adjustment for (gains) losses included in net income
 

 
105

 
 

 
(104
)
Unrealized gains (losses) on available-for-sale securities, net
 

 
26,497

 
 

 
(25,552
)
Income tax expense (benefit) on unrealized gains (losses) on available-for-sale securities
 

 
9,294

 
 

 
(8,926
)
Other comprehensive income (loss)
 

 
17,203

 
 

 
(16,626
)
Comprehensive income (loss)
 

 
$
19,550

 
 

 
(14,463
)
See accompanying notes to consolidated financial statements.

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Table of Contents

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Cash Flows
Six Months Ended June 30,
(In thousands)
(Unaudited)
 
 
 
 
 
2014
 
2013
Cash flows from operating activities:
 
 
 
Net income
$
2,347

 
2,163

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

 
 

Realized (gains) losses on sale of investments and other assets
129

 
(113
)
Net deferred policy acquisition costs
(4,389
)
 
(5,045
)
Amortization of cost of customer relationships acquired
1,145

 
1,138

Depreciation
745

 
637

Amortization of premiums and discounts on investments
4,505

 
4,256

Deferred federal income tax benefit
(1,438
)
 
(1,579
)
Change in:
 

 
 

Accrued investment income
(530
)
 
(1,074
)
Reinsurance recoverable
(336
)
 
2,978

Due premiums
1,129

 
84

Future policy benefit reserves
37,657

 
32,049

Other policyholders' liabilities
3,252

 
(421
)
Federal income tax receivable
33

 
46

Commissions payable and other liabilities
1,229

 
(1,097
)
Other, net
(2,055
)
 
(1,008
)
Net cash provided by operating activities
43,423

 
33,014

Cash flows from investing activities:
 

 
 

Sale of fixed maturities, available-for-sale
580

 
58

Maturities and calls of fixed maturities, available-for-sale
23,530

 
33,943

Maturities and calls of fixed maturities, held-to-maturity
8,374

 
26,465

Purchase of fixed maturities, available-for-sale
(47,239
)
 
(109,596
)
Purchase of fixed maturities, held-to-maturity
(11,586
)
 

Sale of equity securities, available-for-sale
11,105

 

Calls of equity securities, available-for-sale
200

 
400

Purchase of equity securities, available-for-sale
(17,283
)
 

Principal payments on mortgage loans
21

 
822

Increase in policy loans, net
(3,133
)
 
(2,831
)
Sale of other long-term investments
1

 
1

Purchase of other long-term investments
(4
)
 
(83
)
Purchase of property and equipment
(340
)
 
(321
)
Maturity of short-term investments

 
2,841

Purchase of short-term investments

 
(531
)
Net cash used in acquisition
(4,810
)
 

Net cash provided by (used in) investing activities
(40,584
)
 
(48,832
)

6

Table of Contents

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
Six Months Ended June 30,
(In thousands)
(Unaudited)
 
2014
 
2013
 
 
 
 
 
 
 
 
Cash flows from financing activities:
 
 
 
Annuity deposits
2,587

 
2,815

Annuity withdrawals
(2,582
)
 
(2,283
)
Net cash provided by financing activities
5

 
532

Net increase (decrease) in cash and cash equivalents
2,844

 
(15,286
)
Cash and cash equivalents at beginning of year
54,593

 
56,299

Cash and cash equivalents at end of period
$
57,437

 
41,013

Supplemental disclosures of operating activities:
 

 
 

Cash paid during the period for income taxes, net
$
2,213

 
2,273


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, 2014
(Unaudited)


(1) Financial Statements

Basis of Presentation and Consolidation

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

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

The consolidated statements of financial position for June 30, 2014, and the consolidated statements of comprehensive income for the three and six months ended June 30, 2014 and 2013 and cash flows for the six-month periods ended June 30, 2014 and 2013, 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, 2014 and for comparative periods have been made.  The consolidated financial statements have been prepared in accordance with U.S. GAAP accounting principles 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, 2013.  Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period.

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

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

In accordance with our purchase agreement dated October 7, 2013, we finalized the MGLIC stock acquisition on March 7, 2014 for approximately $5.2 million in cash consideration. The assets recorded as of June 30, 2014 were $12.7 million, liabilities of $7.1 million and stockholders equity of $5.6 million. We recorded goodwill of $0.1 million related to this purchase. This entity is reported as part of our home service segment business and is a wholly owned subsidiary of SPLIC. We are in the process of converting the policy inforce data to our policy administration system and anticipate the completion date to be prior to the third quarter reporting.

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

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Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
June 30, 2014
(Unaudited)

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. No individual amounts were material.

Significant Accounting Policies

For a description of significant accounting policies, see Note 1 of the Notes to Consolidated Financial Statements included in our 2013 Form 10-K Annual Report, which should be read in conjunction with these accompanying Consolidated Financial Statements.

(2) Accounting Pronouncements

Accounting Standards Recently Adopted

On January 1, 2014, we adopted Accounting Standards Update (ASU) ASU 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists” to eliminate diversity in practice. This ASU requires that companies net their unrecognized tax benefits against all same-jurisdiction net operating losses or tax credit carryforwards that would be used to settle the position with a tax authority. The adoption of this ASU did not have an effect on our consolidated financial statements.

In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides a five-step process to achieve that core principle. ASU 2014-09 requires disclosures enabling users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Additionally, qualitative and quantitative disclosures are required about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, using one of two retrospective application methods. Early application is not permitted. The Company is currently evaluating the effect that the adoption of this ASU will have on its financial statements.


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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
June 30, 2014
(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, 2014
 
Life
Insurance
 
Home
Service
Insurance
 
Other
Non-Insurance
Enterprises
 
Consolidated
 
(In thousands)
Revenues:
 
 
 
 
 
 
 
Premiums
$
34,569

 
11,760

 

 
46,329

Net investment income
6,466

 
3,282

 
335

 
10,083

Realized investment gains (losses), net
(48
)
 
(26
)
 
1

 
(73
)
Other income
133

 
3

 
27

 
163

Total revenue
41,120

 
15,019

 
363

 
56,502

Benefits and expenses:
 
 
 

 
 

 
 

Insurance benefits paid or provided:
 

 
 

 
 

 
 

Claims and surrenders
11,163

 
5,505

 

 
16,668

Increase in future policy benefit reserves
18,849

 
1,130

 

 
19,979

Policyholders' dividends
2,397

 
15

 

 
2,412

Total insurance benefits paid or provided
32,409

 
6,650

 

 
39,059

Commissions
6,484

 
3,919

 

 
10,403

Other general expenses
2,965

 
3,499

 
984

 
7,448

Capitalization of deferred policy acquisition costs
(5,848
)
 
(1,575
)
 

 
(7,423
)
Amortization of deferred policy acquisition costs
4,205

 
688

 

 
4,893

Amortization of cost of customer relationships acquired
120

 
494

 

 
614

Total benefits and expenses
40,335

 
13,675

 
984

 
54,994

Income (loss) before income tax expense
$
785

 
1,344

 
(621
)
 
1,508


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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
June 30, 2014
(Unaudited)

 
Six Months Ended
 
June 30, 2014
 
Life
Insurance
 
Home
Service
Insurance
 
Other
Non-Insurance
Enterprises
 
Consolidated
 
(In thousands)
Revenues:
 
 
 
 
 
 
 
Premiums
$
66,380

 
22,962

 

 
89,342

Net investment income
12,749

 
6,569

 
671

 
19,989

Realized investment gains (losses), net
(112
)
 
(18
)
 
1

 
(129
)
Other income
276

 
4

 
52

 
332

Total revenue
79,293

 
29,517

 
724

 
109,534

Benefits and expenses:
 
 
 

 
 

 
 

Insurance benefits paid or provided:
 

 
 

 
 

 
 

Claims and surrenders
21,978

 
11,147

 

 
33,125

Increase in future policy benefit reserves
35,825

 
1,852

 

 
37,677

Policyholders' dividends
4,483

 
31

 

 
4,514

Total insurance benefits paid or provided
62,286

 
13,030

 

 
75,316

Commissions
12,722

 
7,591

 

 
20,313

Other general expenses
5,805

 
6,668

 
1,477

 
13,950

Capitalization of deferred policy acquisition costs
(11,507
)
 
(2,984
)
 

 
(14,491
)
Amortization of deferred policy acquisition costs
8,612

 
1,490

 

 
10,102

Amortization of cost of customer relationships acquired
291

 
854

 

 
1,145

Total benefits and expenses
78,209

 
26,649

 
1,477

 
106,335

Income (loss) before income tax expense
$
1,084

 
2,868

 
(753
)
 
3,199



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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
June 30, 2014
(Unaudited)

 
 
 
 
 
 
 
 
 
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




12

Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
June 30, 2014
(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


13

Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
June 30, 2014
(Unaudited)



(4) Earnings Per Share

The following tables set forth the computation of basic and diluted earnings per share.
 
 
 
 
 
Three Months Ended
 
June 30, 2014
 
June 30, 2013
 
(In thousands,
except per share amounts)
Basic and diluted earnings per share:
 
 
 
Numerator:
 
 
 
Net income
$
1,150

 
1,307

Net income allocated to Class A common stock
$
1,138

 
1,293

Net income allocated to Class B common stock
12

 
14

Net income
$
1,150

 
1,307

Denominator:
 

 
 

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

 
49,080

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

 
49,080

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

 
1,002

Basic earnings per share of Class A common stock
$
0.03

 
0.03

Basic earnings per share of Class B common stock
0.01

 
0.01

Diluted earnings per share of Class A common stock
0.03

 
0.03

Diluted earnings per share of Class B common stock
0.01

 
0.01

 
Six Months Ended
 
June 30, 2014
 
June 30, 2013
 
(In thousands,
except per share amounts)
Basic and diluted earnings per share:
 
 
 
Numerator:
 
 
 
Net income
$
2,347

 
2,163

Net income allocated to Class A common stock
$
2,323

 
2,141

Net income allocated to Class B common stock
24

 
22

Net income
$
2,347

 
2,163

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

 
49,080

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

 
49,080

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

 
1,002

Basic earnings per share of Class A common stock
$
0.05

 
0.05

Basic earnings per share of Class B common stock
0.02

 
0.02

Diluted earnings per share of Class A common stock
0.05

 
0.05

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, 2014
(Unaudited)

(5) Investments

The Company invests primarily in fixed maturity securities, which totaled 83.6% of total investments and cash and cash equivalents at June 30, 2014.
 
June 30, 2014
 
December 31, 2013
 
Carrying
Value
 
% of Total
Carrying Value
 
Carrying
Value
 
% of Total
Carrying Value
 
(In thousands)
 
 
 
(In thousands)
 
 
Fixed maturity securities
$
892,449

 
83.6
%
 
$
832,952

 
83.9
%
Equity securities
56,637

 
5.3
%
 
47,259

 
4.8
%
Mortgage loans
650

 
0.1
%
 
671

 
0.1
%
Policy loans
52,001

 
4.9
%
 
48,868

 
4.8
%
Real estate and other long-term investments
8,262

 
0.8
%
 
8,485

 
0.9
%
Cash and cash equivalents
57,437

 
5.3
%
 
54,593

 
5.5
%
Total cash, cash equivalents and investments
$
1,067,436

 
100.0
%
 
$
992,828

 
100.0
%


15

Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
June 30, 2014
(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, 2014
 
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
(In thousands)
Fixed maturities:
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
U.S. Treasury securities
$
10,086

 
2,712

 

 
12,798

U.S. Government-sponsored enterprises
38,765

 
1,919

 
1

 
40,683

States and political subdivisions
363,443

 
14,413

 
2,490

 
375,366

Foreign governments
104

 
29

 

 
133

Corporate
212,432

 
18,168

 
116

 
230,484

Commercial mortgage-backed
262

 
9

 

 
271

Residential mortgage-backed
3,499

 
271

 
4

 
3,766

Total available-for-sale securities
628,591

 
37,521

 
2,611

 
663,501

Held-to-maturity securities:
 

 
 

 
 

 
 

U.S. Government-sponsored enterprises
5,815

 
246

 

 
6,061

States and political subdivisions
186,512

 
5,895

 
1,626

 
190,781

Corporate
36,621

 
1,031

 
79

 
37,573

Total held-to-maturity securities
228,948

 
7,172

 
1,705

 
234,415

Total fixed maturities
$
857,539

 
44,693

 
4,316

 
897,916

Equity securities:
 

 
 

 
 

 
 

Stock mutual funds
$
15,738

 
2,137

 

 
17,875

Bond mutual funds
35,869

 
250

 
88

 
36,031

Common stock
727

 
37

 
7

 
757

Preferred stock
1,741

 
233

 

 
1,974

Total equity securities
$
54,075

 
2,657

 
95

 
56,637



16

Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
June 30, 2014
(Unaudited)

 
December 31, 2013
 
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
(In thousands)
Fixed maturities:
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
U.S. Treasury securities
$
10,115

 
2,348

 

 
12,463

U.S. Government-sponsored enterprises
53,587

 
1,209

 
228

 
54,568

States and political subdivisions
341,673

 
6,242

 
11,449

 
336,466

Foreign governments
104

 
23

 

 
127

Corporate
186,671

 
12,289

 
1,399

 
197,561

Commercial mortgage-backed
300

 
9

 

 
309

Residential mortgage-backed
3,494

 
270

 
2

 
3,762

Total available-for-sale securities
595,944

 
22,390

 
13,078

 
605,256

Held-to-maturity securities:
 

 
 

 
 

 
 

U.S. Government-sponsored enterprises
8,877

 
197

 
3

 
9,071

States and political subdivisions
181,246

 
1,633

 
6,412

 
176,467

Corporate
37,573

 
771

 
349

 
37,995

Total held-to-maturity securities
227,696

 
2,601

 
6,764

 
223,533

Total fixed maturity securities
$
823,640

 
24,991

 
19,842

 
828,789

Equity securities:
 

 
 

 
 

 
 

Stock mutual funds
$
10,463

 
1,506

 

 
11,969

Bond mutual funds
35,080

 

 
417

 
34,663

Common stock
17

 

 
5

 
12

Preferred stock
323

 
292

 

 
615

Total equity securities
$
45,883

 
1,798

 
422

 
47,259

 
At June 30, 2014, the Company had $3.8 million of mortgage-backed security holdings based on amortized cost, of which $3.5 million, or 92.1%, 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, 2014
(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, 2014 and 2013.


18

Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
June 30, 2014
(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, 2014
 
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
$
160

 
1

 
1

 

 

 

 
160

 
1

 
1

States and political subdivisions
9,760

 
124

 
14

 
81,215

 
2,366

 
72

 
90,975

 
2,490

 
86

Corporate
10,634

 
73

 
8

 
6,081

 
43

 
4

 
16,715

 
116

 
12

Residential mortgage-backed
222

 
2

 
8

 
37

 
2

 
1

 
259

 
4

 
9

Total available-for-sale securities
20,776

 
200

 
31

 
87,333

 
2,411

 
77

 
108,109

 
2,611

 
108

Held-to-maturity securities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

States and political subdivisions
3,975

 
95

 
8

 
55,841

 
1,531

 
60

 
59,816

 
1,626

 
68

Corporate
2,490

 
57

 
2

 
3,001

 
22

 
2

 
5,491

 
79

 
4

Total held-to-maturity securities
6,465

 
152

 
10

 
58,842

 
1,553

 
62

 
65,307

 
1,705

 
72

Total fixed maturities
$
27,241

 
352

 
41

 
146,175

 
3,964

 
139

 
173,416

 
4,316

 
180

Equity securities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Bond mutual funds
$
17,912

 
88

 
2

 

 

 

 
17,912

 
88

 
2

Common stocks

 

 

 
10

 
7

 
1

 
10

 
7

 
1

  Preferred stocks

 

 

 

 

 

 

 

 

Total equities
$
17,912

 
88

 
2

 
10

 
7

 
1

 
17,922

 
95

 
3


As of June 30, 2014, the Company had 77 available-for-sale securities and 62 held-to-maturity securities that were in an unrealized loss position for greater than 12 months. We reported 1 common stock holding in an unrealized loss position for greater than 12 months as of June 30, 2014.


19

Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
June 30, 2014
(Unaudited)

 
December 31, 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
$
14,032

 
228

 
12

 

 

 

 
14,032

 
228

 
12

States and political subdivisions
183,280

 
9,872

 
203

 
15,673

 
1,577

 
16

 
198,953

 
11,449

 
219

Corporate
35,789

 
1,048

 
25

 
2,426

 
351

 
2

 
38,215

 
1,399

 
27

Residential mortgage-backed
57

 
1

 
3

 
42

 
1

 
1

 
99

 
2

 
4

Total available-for-sale securities
233,158

 
11,149

 
243

 
18,141

 
1,929

 
19

 
251,299

 
13,078

 
262

Held-to-maturity securities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

U.S. Government-sponsored enterprises
2,997

 
3

 
1

 

 

 

 
2,997

 
3

 
1

States and political subdivisions
100,153

 
5,236

 
118

 
14,797

 
1,176

 
17

 
114,950

 
6,412

 
135

Corporate
5,225

 
349

 
4

 

 

 

 
5,225

 
349

 
4

Total held-to-maturity securities
108,375

 
5,588

 
123

 
14,797

 
1,176

 
17

 
123,172

 
6,764

 
140

Total fixed maturities
$
341,533

 
16,737

 
366

 
32,938

 
3,105

 
36

 
374,471

 
19,842

 
402

Equity securities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
</