10-Q 1 cia-2013930x10q.htm 10-Q CIA-2013.9.30-10Q

 
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 September 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 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 November 4, 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


PART I.  FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Financial Position
(In thousands)
 
 
 
 
 
 
 
 
 
September 30, 2013
 
December 31, 2012
Assets
(Unaudited)
 
 
Investments:
 
 
 
Fixed maturities available-for-sale, at fair value (cost: $585,127 and $559,736 in 2013 and 2012, respectively)
$
599,379

 
604,520

Fixed maturities held-to-maturity, at amortized cost (fair value: $221,115 and $193,739 in 2013 and 2012, respectively)
223,339

 
187,008

Equity securities available-for-sale, at fair value (cost: $52,392 and $52,744 in 2013 and 2012, respectively)
53,067

 
53,741

Mortgage loans on real estate
680

 
1,509

Policy loans
47,359

 
42,993

Real estate held for investment (less $1,392 and $1,287 accumulated depreciation in 2013 and 2012, respectively)
8,477

 
8,496

Other long-term investments
56

 
57

Short-term investments

 
2,340

Total investments
932,357

 
900,664

Cash and cash equivalents
41,687

 
56,299

Accrued investment income
11,740

 
10,304

Reinsurance recoverable
4,490

 
9,651

Deferred policy acquisition costs
143,131

 
135,569

Cost of customer relationships acquired
23,901

 
25,116

Goodwill
17,160

 
17,160

Other intangible assets
858

 
879

Federal income tax receivable

 
270

Property and equipment, net
6,920

 
7,383

Due premiums, net (less $1,296 and $1,345 allowance for doubtful accounts in 2013 and 2012, respectively)
9,994

 
10,527

Prepaid expenses
875

 
344

Other assets
1,001

 
782

Total assets
$
1,194,114

 
1,174,948


(Continued)

See accompanying notes to consolidated financial statements.

2


CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Financial Position, Continued
(In thousands, except share amounts)
 
 
 
 
 
 
 
 
 
September 30, 2013
 
December 31, 2012
Liabilities and Stockholders' Equity
(Unaudited)
 
 
Liabilities:
 
 
 
Policy liabilities:
 
 
 
Future policy benefit reserves:
 
 
 
Life insurance
$
812,824

 
762,319

Annuities
54,178

 
51,750

Accident and health
1,245

 
5,491

Dividend accumulations
13,234

 
11,962

Premiums paid in advance
30,504

 
27,455

Policy claims payable
8,044

 
11,015

Other policyholders' funds
8,006

 
9,440

Total policy liabilities
928,035

 
879,432

Commissions payable
2,096

 
2,606

Federal income tax payable
415

 

Deferred federal income tax
4,517

 
17,301

Payable for securities in process of settlement
1,712

 
2,358

Other liabilities
9,608

 
10,143

Total liabilities
946,383

 
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
(13,348
)
 
(17,335
)
Accumulated other comprehensive income:
 

 
 

Unrealized gains on securities, net of tax
9,523

 
28,887

Treasury stock, at cost
(11,011
)
 
(11,011
)
Total stockholders' equity
247,731

 
263,108

Total liabilities and stockholders' equity
$
1,194,114

 
1,174,948



See accompanying notes to consolidated financial statements.


3


CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Comprehensive Income
Three Months Ended September 30,
(In thousands, except per share amounts)
(Unaudited)
 
2013
 
2012
Revenues:
 
 
 
 
 
Premiums:
 
 
 
 
 
 
 
Life insurance
 
 
$
42,091

 
 
 
41,257

Accident and health insurance
 
 
380

 
 
 
414

Property insurance
 
 
1,276

 
 
 
1,281

Net investment income
 
 
9,570

 
 
 
8,114

Realized investment gains, net
 
 
30

 
 
 
763

Decrease in fair value of warrants
 
 

 
 
 
241

Other income
 
 
269

 
 
 
112

Total revenues
 
 
53,616

 
 
 
52,182

Benefits and expenses:
 
 
 

 
 
 
 

Insurance benefits paid or provided:
 
 
 

 
 
 
 

Claims and surrenders
 
 
16,763

 
 
 
15,627

Increase in future policy benefit reserves
 
 
17,398

 
 
 
16,901

Policyholders' dividends
 
 
2,362

 
 
 
2,600

Total insurance benefits paid or provided
 
 
36,523

 
 
 
35,128

Commissions
 
 
9,940

 
 
 
9,769

Other general expenses
 
 
6,163

 
 
 
6,055

Capitalization of deferred policy acquisition costs
 
 
(7,067
)
 
 
 
(7,547
)
Amortization of deferred policy acquisition costs
 
 
4,758

 
 
 
4,134

Amortization of cost of customer relationships acquired
 
 
681

 
 
 
598

Total benefits and expenses
 
 
50,998

 
 
 
48,137

Income before federal income tax
 
 
2,618

 
 
 
4,045

Federal income tax expense
 
 
794

 
 
 
1,134

Net income
 
 
1,824

 
 
 
2,911

Per Share Amounts:
 
 
 

 
 

 
 

Basic earnings per share of Class A common stock
$
0.03

 
 

 
0.06

 
 

Basic earnings per share of Class B common stock
0.02

 
 

 
0.03

 
 

Diluted earnings per share of Class A common stock
0.03

 
 

 
0.06

 
 

Diluted earnings per share of Class B common stock
0.02

 
 

 
0.03

 
 

Other comprehensive income (loss):
 

 
 

 
 

 
 

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

 
 

 
 

 
 

Unrealized holding gains (losses) arising during period
 

 
(4,128
)
 
 

 
8,542

Reclassification adjustment for gains included in net income
 

 
(84
)
 
 

 
(708
)
Unrealized gains (losses) on available-for-sale securities, net
 

 
(4,212
)
 
 

 
7,834

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

 
(1,474
)
 
 

 
2,878

Other comprehensive income (loss)
 

 
(2,738
)
 
 

 
4,956

Comprehensive income (loss)
 

 
$
(914
)
 
 

 
7,867


See accompanying notes to consolidated financial statements.

4



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Comprehensive Income
Nine Months Ended September 30,
(In thousands, except per share amounts)
(Unaudited)
 
2013
 
2012
Revenues:
 
 
 
 
 
Premiums:
 
 
 
 
 
 
 
Life insurance
 
 
$
123,728

 
 
 
118,608

Accident and health insurance
 
 
1,135

 
 
 
1,244

Property insurance
 
 
3,658

 
 
 
3,792

Net investment income
 
 
27,224

 
 
 
23,303

Realized investment gains, net
 
 
143

 
 
 
1,107

Decrease in fair value of warrants
 
 

 
 
 
314

Other income
 
 
882

 
 
 
321

Total revenues
 
 
156,770

 
 
 
148,689

Benefits and expenses:
 
 
 

 
 
 
 

Insurance benefits paid or provided:
 
 
 

 
 
 
 

Claims and surrenders
 
 
48,229

 
 
 
46,490

Increase in future policy benefit reserves
 
 
52,253

 
 
 
47,793

Policyholders' dividends
 
 
6,671

 
 
 
6,755

Total insurance benefits paid or provided
 
 
107,153

 
 
 
101,038

Commissions
 
 
29,427

 
 
 
28,164

Other general expenses
 
 
20,204

 
 
 
19,013

Capitalization of deferred policy acquisition costs
 
 
(21,101
)
 
 
 
(20,530
)
Amortization of deferred policy acquisition costs
 
 
13,747

 
 
 
12,693

Amortization of cost of customer relationships acquired
 
 
1,819

 
 
 
1,834

Total benefits and expenses
 
 
151,249

 
 
 
142,212

Income before federal income tax
 
 
5,521

 
 
 
6,477

Federal income tax expense
 
 
1,534

 
 
 
1,651

Net income
 
 
3,987

 
 
 
4,826

Per Share Amounts:
 
 
 

 
 

 
 

Basic earnings per share of Class A common stock
$
0.08

 
 

 
0.10

 
 

Basic earnings per share of Class B common stock
0.04

 
 

 
0.05

 
 

Diluted earnings per share of Class A common stock
0.08

 
 

 
0.10

 
 

Diluted earnings per share of Class B common stock
0.04

 
 

 
0.05

 
 

Other comprehensive income (loss):
 

 
 

 
 

 
 

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

 
 

 
 

 
 

Unrealized holding gains (losses) arising during period
 

 
(29,576
)
 
 

 
17,106

Reclassification adjustment for gains included in net income
 

 
(188
)
 
 

 
(915
)
Unrealized gains (losses) on available-for-sale securities, net
 

 
(29,764
)
 
 

 
16,191

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

 
(10,400
)
 
 

 
5,837

Other comprehensive income (loss)
 

 
(19,364
)
 
 

 
10,354

Comprehensive income (loss)
 

 
$
(15,377
)
 
 

 
15,180


See accompanying notes to consolidated financial statements.

5


CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Cash Flows
Nine Months Ended September 30,
(In thousands)
(Unaudited)
 
2013
 
2012
Cash flows from operating activities:
 
 
 
Net income
$
3,987

 
4,826

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

 
 

Realized gains on sale of investments and other assets
(143
)
 
(1,107
)
Net deferred policy acquisition costs
(7,354
)
 
(7,837
)
Amortization of cost of customer relationships acquired
1,819

 
1,834

Decrease in fair value of warrants

 
(314
)
Depreciation
955

 
915

Amortization of premiums and discounts on investments
6,228

 
4,115

Deferred federal income tax benefit
(2,384
)
 
(2,232
)
Change in:
 

 
 

Accrued investment income
(1,436
)
 
(2,391
)
Reinsurance recoverable
5,161

 
334

Due premiums
533

 
(524
)
Future policy benefit reserves
47,989

 
47,530

Other policyholders' liabilities
(84
)
 
3,025

Federal income tax receivable
685

 
2,089

Commissions payable and other liabilities
(1,045
)
 
(1,823
)
Other, net
(581
)
 
(846
)
Net cash provided by operating activities
54,330

 
47,594

Cash flows from investing activities:
 

 
 

Sale of fixed maturities, available-for-sale
317

 
503

Maturities and calls of fixed maturities, available-for-sale
41,054

 
125,622

Maturities and calls of fixed maturities, held-to-maturity
37,213

 
154,630

Purchase of fixed maturities, available-for-sale
(71,818
)
 
(184,728
)
Purchase of fixed maturities, held-to-maturity
(75,386
)
 
(138,756
)
Sales of equity securities, available-for-sale

 
2,856

Calls of equity securities, available-for-sale
400

 
820

Principal payments on mortgage loans
829

 
36

Increase in policy loans, net
(4,366
)
 
(3,694
)
Sale of other long-term investments
1

 
4

Purchase of other long-term investments
(86
)
 
(116
)
Purchase of property and equipment
(386
)
 
(402
)
Maturity of short-term investments
2,841

 
2,000

Purchase of short-term investments
(531
)
 
(2,378
)
Net cash used in investing activities
(69,918
)
 
(43,603
)

6


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

 
822

Annuity deposits
4,293

 
4,769

Annuity withdrawals
(3,317
)
 
(3,007
)
Net cash provided by financing activities
976

 
2,584

Net increase (decrease) in cash and cash equivalents
(14,612
)
 
6,575

Cash and cash equivalents at beginning of year
56,299

 
33,255

Cash and cash equivalents at end of period
$
41,687

 
39,830

Supplemental disclosures of operating activities:
 

 
 

Cash paid during the period for income taxes, net
$
3,232

 
1,794


Supplemental Disclosures of Non-Cash Investing Activities:

None.




See accompanying notes to consolidated financial statements.

7

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 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 September 30, 2013, and the consolidated statements of comprehensive income for the three and nine month periods ended September 30, 2013 and 2012, and consolidated statement of cash flows for the nine-month periods ended September 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 September 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, endowments, 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.

8

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 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

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 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
 
September 30, 2013
 
Life
Insurance
 
Home
Service
Insurance
 
Other
Non-Insurance
Enterprises
 
Consolidated
 
(In thousands)
Revenues:
 
 
 
 
 
 
 
Premiums
$
32,800

 
10,947

 

 
43,747

Net investment income
5,924

 
3,309

 
337

 
9,570

Realized investment gains, net
23

 
2

 
5

 
30

Other income
261

 
(7
)
 
15

 
269

Total revenue
39,008

 
14,251

 
357

 
53,616

Benefits and expenses:
 
 
 

 
 

 
 

Insurance benefits paid or provided:
 

 
 

 
 

 
 

Claims and surrenders
11,249

 
5,514

 

 
16,763

Increase in future policy benefit reserves
16,756

 
642

 

 
17,398

Policyholders' dividends
2,343

 
19

 

 
2,362

Total insurance benefits paid or provided
30,348

 
6,175

 

 
36,523

Commissions
6,282

 
3,658

 

 
9,940

Other general expenses
2,780

 
3,205

 
178

 
6,163

Capitalization of deferred policy acquisition costs
(5,685
)
 
(1,382
)
 

 
(7,067
)
Amortization of deferred policy acquisition costs
3,947

 
811

 

 
4,758

Amortization of cost of customer relationships acquired
171

 
510

 

 
681

Total benefits and expenses
37,843

 
12,977

 
178

 
50,998

Income before income tax expense
$
1,165

 
1,274

 
179

 
2,618



10

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 2013
(Unaudited)


 
Nine Months Ended
 
September 30, 2013
 
Life
Insurance
 
Home
Service
Insurance
 
Other
Non-Insurance
Enterprises
 
Consolidated
 
(In thousands)
Revenues:
 
 
 
 
 
 
 
Premiums
$
95,767

 
32,754

 

 
128,521

Net investment income
16,412

 
9,830

 
982

 
27,224

Realized investment gains, net
104

 
33

 
6

 
143

Other income
675

 
129

 
78

 
882

Total revenue
112,958

 
42,746

 
1,066

 
156,770

Benefits and expenses:
 
 
 

 
 

 
 

Insurance benefits paid or provided:
 

 
 

 
 

 
 

Claims and surrenders
32,016

 
16,213

 

 
48,229

Increase in future policy benefit reserves
49,845

 
2,408

 

 
52,253

Policyholders' dividends
6,618

 
53

 

 
6,671

Total insurance benefits paid or provided
88,479

 
18,674

 

 
107,153

Commissions
18,558

 
10,869

 

 
29,427

Other general expenses
8,560

 
9,696

 
1,948

 
20,204

Capitalization of deferred policy acquisition costs
(16,941
)
 
(4,160
)
 

 
(21,101
)
Amortization of deferred policy acquisition costs
11,802

 
1,945

 

 
13,747

Amortization of cost of customer relationships acquired
492

 
1,327

 

 
1,819

Total benefits and expenses
110,950

 
38,351

 
1,948

 
151,249

Income (loss) before income tax expense
$
2,008

 
4,395

 
(882
)
 
5,521





11

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 2013
(Unaudited)


 
Three Months Ended
 
September 30, 2012
 
Life
Insurance
 
Home
Service
Insurance
 
Other
Non-Insurance
Enterprises
 
Consolidated
 
(In thousands)
Revenues:
 
 
 
 
 
 
 
Premiums
$
31,876

 
11,076

 

 
42,952

Net investment income
4,538

 
3,273

 
303

 
8,114

Realized investment gains, net
720

 
43

 

 
763

Decrease in fair value of warrants

 

 
241

 
241

Other income
56

 
5

 
51

 
112

Total revenue
37,190

 
14,397

 
595

 
52,182

Benefits and expenses:
 

 
 

 
 

 
 

Insurance benefits paid or provided:
 

 
 

 
 

 
 

Claims and surrenders
10,213

 
5,414

 

 
15,627

Increase in future policy benefit reserves
16,058

 
843

 

 
16,901

Policyholders' dividends
2,395

 
205

 

 
2,600

Total insurance benefits paid or provided
28,666

 
6,462

 

 
35,128

Commissions
6,115

 
3,654

 

 
9,769

Other general expenses
2,622

 
2,962

 
471

 
6,055

Capitalization of deferred policy acquisition costs
(6,090
)
 
(1,457
)
 

 
(7,547
)
Amortization of deferred policy acquisition costs
3,358

 
776

 

 
4,134

Amortization of cost of customer relationships acquired
164

 
434

 

 
598

Total benefits and expenses
34,835

 
12,831

 
471

 
48,137

Income before income tax expense
$
2,355

 
1,566

 
124

 
4,045


12

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 2013
(Unaudited)


 
Nine Months Ended
 
September 30, 2012
 
Life
Insurance
 
Home
Service
Insurance
 
Other
Non-Insurance
Enterprises
 
Consolidated
 
(In thousands)
Revenues:
 
 
 
 
 
 
 
Premiums
$
90,646

 
32,998

 

 
123,644

Net investment income
12,949

 
9,503

 
851

 
23,303

Realized investment gains, net
909

 
170

 
28

 
1,107

Decrease in fair value of warrants

 

 
314

 
314

Other income
188

 
17

 
116

 
321

Total revenue
104,692

 
42,688

 
1,309

 
148,689

Benefits and expenses:
 

 
 

 
 

 
 

Insurance benefits paid or provided:
 

 
 

 
 

 
 

Claims and surrenders
30,912

 
15,578

 

 
46,490

Increase in future policy benefit reserves
45,477

 
2,316

 

 
47,793

Policyholders' dividends
6,525

 
230

 

 
6,755

Total insurance benefits paid or provided
82,914

 
18,124

 

 
101,038

Commissions
17,127

 
11,037

 

 
28,164

Other general expenses
7,953

 
8,932

 
2,128

 
19,013

Capitalization of deferred policy acquisition costs
(16,109
)
 
(4,421
)
 

 
(20,530
)
Amortization of deferred policy acquisition costs
10,758

 
1,935

 

 
12,693

Amortization of cost of customer relationships acquired
557

 
1,277

 

 
1,834

Total benefits and expenses
103,200

 
36,884

 
2,128

 
142,212

Income (loss) before income tax expense
$
1,492

 
5,804

 
(819
)
 
6,477


13

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 2013
(Unaudited)



(4) Earnings Per Share

The following tables set forth the computation of basic and diluted earnings per share.
 
Three Months Ended
 
September 30, 2013
 
September 30, 2012
 
(In thousands,
except per share amounts)
Basic and diluted earnings per share:
 
 
 
Numerator:
 
 
 
Net income
$
1,824

 
2,911

Net income allocated to Class A common stock
$
1,806

 
2,882

Net income allocated to Class B common stock
18

 
29

Net income
$
1,824

 
2,911

Denominator:
 

 
 

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

 
49,019

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

 
49,030

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

 
0.06

Basic earnings per share of Class B common stock
0.02

 
0.03

Diluted earnings per share of Class A common stock
0.03

 
0.06

Diluted earnings per share of Class B common stock
0.02

 
0.03


 
Nine Months Ended
 
September 30, 2013
 
September 30, 2012
 
(In thousands,
except per share amounts)
Basic and diluted earnings per share:
 
 
 
Numerator:
 
 
 
Net income
$
3,987

 
4,826

Net income allocated to Class A common stock
$
3,947

 
4,777

Net income allocated to Class B common stock
40

 
49

Net income
$
3,987

 
4,826

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

 
48,962

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

 
48,972

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

 
1,002

Basic earnings per share of Class A common stock
$
0.08

 
0.10

Basic earnings per share of Class B common stock
0.04

 
0.05

Diluted earnings per share of Class A common stock
0.08

 
0.10

Diluted earnings per share of Class B common stock
0.04

 
0.05



14

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 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 September 30, 2013.
 
September 30, 2013
 
December 31, 2012
 
Carrying
Value
 
% of Total
Carrying Value
 
Carrying
Value
 
% of Total
Carrying Value
 
(In thousands)
 
 
 
(In thousands)
 
 
Fixed maturity securities
$
822,718

 
84.4
%
 
$
791,528

 
82.7
%
Equity securities
53,067

 
5.4
%
 
53,741

 
5.6
%
Mortgage loans
680

 
0.1
%
 
1,509

 
0.2
%
Policy loans
47,359

 
4.9
%
 
42,993

 
4.5
%
Real estate and other long-term investments
8,533

 
0.9
%
 
8,553

 
0.9
%
Short-term investments

 
%
 
2,340

 
0.2
%
Cash and cash equivalents
41,687

 
4.3
%
 
56,299

 
5.9
%
Total cash, cash equivalents and investments
$
974,044

 
100.0
%
 
$
956,963

 
100.0
%


15

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 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.
 
September 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
$
10,124

 
2,679

 

 
12,803

U.S. Government-sponsored enterprises
62,949

 
1,510

 
152

 
64,307

States and political subdivisions
320,691

 
8,195

 
9,964

 
318,922

Foreign governments
104

 
27

 

 
131

Corporate
187,120

 
13,093

 
1,442

 
198,771

Commercial mortgage-backed
318

 
11

 

 
329

Residential mortgage-backed
3,821

 
297

 
2

 
4,116

Total available-for-sale securities
585,127

 
25,812

 
11,560

 
599,379

Held-to-maturity securities:
 

 
 

 
 

 
 

U.S. Government-sponsored enterprises
8,909

 
283

 

 
9,192

States and political subdivisions
176,686

 
2,461

 
5,407

 
173,740

Corporate
37,744

 
752

 
313

 
38,183

Total held-to-maturity securities
223,339

 
3,496

 
5,720

 
221,115

Total fixed maturities
$
808,466

 
29,308

 
17,280

 
820,494

Equity securities:
 

 
 

 
 

 
 

Stock mutual funds
$
10,463

 
1,022

 

 
11,485

Bond mutual funds
41,504

 
23

 
672

 
40,855

Common stock
17

 

 
3

 
14

Preferred stock
408

 
305

 

 
713

Total equity securities
$
52,392

 
1,350

 
675

 
53,067



16

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 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 September 30, 2013, the Company had $4.1 million of mortgage-backed security holdings based on amortized cost, of which $3.8 million, or 92.7%, 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

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 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 nine months ended September 30, 2013 and 2012.


18

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 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.
 
September 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
$
11,609

 
152

 
8

 

 

 

 
11,609

 
152

 
8

States and political subdivisions
148,560

 
8,662

 
163

 
13,375

 
1,302

 
15

 
161,935

 
9,964

 
178

Corporate
39,735

 
1,098

 
25

 
2,434

 
344

 
2

 
42,169

 
1,442

 
27

Commercial mortgage-backed
4

 

 
1

 
46

 
2

 
1

 
50

 
2

 
2

Total available-for-sale securities
199,908

 
9,912

 
197

 
15,855

 
1,648

 
18

 
215,763

 
11,560

 
215

Held-to-maturity securities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

States and political subdivisions
88,943

 
4,453

 
106

 
14,394

 
954

 
17

 
103,337

 
5,407

 
123

Corporate
7,390

 
313

 
6

 

 

 

 
7,390

 
313

 
6

Total held-to-maturity securities
96,333

 
4,766

 
112

 
14,394

 
954

 
17

 
110,727

 
5,720

 
129

Total fixed maturities
$
296,241

 
14,678

 
309

 
30,249

 
2,602

 
35

 
326,490

 
17,280

 
344

Equity securities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Bond mutual funds
$
30,904

 
307

 
4

 
6,058

 
365

 
2

 
36,962

 
672

 
6

Common stocks

 

 

 
13

 
3

 
1

 
13

 
3

 
1

Total equities
$
30,904

 
307

 
4

 
6,071

 
368

 
3

 
36,975

 
675

 
7


As of September 30, 2013, the Company had 18 fixed maturity available-for-sale securities and 17 held-to-maturity securities that were in an unrealized loss position for greater than 12 months.  These securities consisted of municipals, corporates and mortgage-backed securities. There are two bond mutual funds and one common stock that are now in a loss position for greater than 12 months. These are diversified U.S. Government bond funds that have a large percentage of mortgage exposure in Pass Thru and CMO security types which have refinanced in the current interest rate environment. The funds are comprised of only U.S. Government bond assets.


19

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 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
$

 

 

 
972

 
28

 
1

 
972

 
28

 
1

Bond mutual funds
3,335

 
88

 
1

 
2,959

 
41

 
2

 
6,294

 
129

 
3

Common stock
15

 
2

 
1

 

 

 

 
15

 
2

 
1

Total equities
$
3,350

 
90

 
2

 
3,931

 
69

 
3

 
7,281

 
159

 
5

 
We have reviewed these securities for the periods ended September 30, 2013 and December 31, 2012 and determined that no other-than-temporary impairment exists based on our evaluation of the credit worthiness of the issuers and the fact that we do not intend to sell the investments nor is it likely that we will be required to sell the securities before recovery of their amortized cost bases which may be maturity.  We continue to monitor all securities on an on-going basis, and future information may become available which could result in impairments being recorded.


20

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 2013
(Unaudited)

The amortized cost and fair value of fixed maturity securities at September 30, 2013 by contractual maturity are shown in the table below.  Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
 
September 30, 2013
 
Amortized
Cost
 
Fair
Value
 
(In thousands)
Available-for-sale securities:
 
 
 
Due in one year or less
$
5,077

 
5,142

Due after one year through five years
110,617

 
117,370

Due after five years through ten years
99,777

 
102,778

Due after ten years
365,517

 
369,644

   Securities not due at a single maturity date
4,139

 
4,445

Total available-for-sale securities
585,127

 
599,379

Held-to-maturity securities:
 

 
 

Due in one year or less
3,783

 
3,834

Due after one year through five years
43,808

 
44,518

Due after five years through ten years
45,721

 
46,413

Due after ten years
130,027

 
126,350

Total held-to-maturity securities
223,339

 
221,115

Total fixed maturities
$
808,466

 
820,494


The securities not due at a single maturity date are primarily mortgage-backed obligations of U.S. Government-sponsored enterprises and corporate securities.

The Company uses the specific identification method of the individual security to determine the cost basis used in the calculation of realized gains and losses related to security sales.  Proceeds and gross realized gains from sales of securities for the three and nine months ended September 30, 2013 and 2012 are summarized as follows.
 
Fixed Maturities Available-for-Sale
 
Equity Securities
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
 
2013
 
2012
 
2013
 
2012
 
(In thousands)
Proceeds
$
259

 

 
317

 
503

 

 
2,856

 

 
2,856

Gross realized gains
$
7

 

 
8

 
4

 

 
632

 

 
632

Gross realized losses
$
1

 

 
1

 
3

 

 

 

 

 
During the nine months ended September 30, 2013, four fixed maturity security was sold which resulted in minimal realized gains and losses. There was one previously impaired equity stock mutual fund security sold during the three and nine month period ended September 30, 2012 which resulted in a realized gain of $0.6 million. There were no securities sold from the held-to-maturity portfolio for the three or nine months ended September 30, 2013 or 2012.


21

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 2013
(Unaudited)

(6) Fair Value Measurements

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  We hold available-for-sale fixed maturity securities and equity securities, which are carried at fair value.

Fair value measurements are generally based upon observable and unobservable inputs.  Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our view of market assumptions in the absence of observable market information.  We utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.  All assets and liabilities carried at fair value are required to be classified and disclosed in one of the following three categories:

Level 1 - Quoted prices for identical instruments in active markets.
Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs or whose significant value drivers are observable.
Level 3 - Instruments whose significant value drivers are unobservable.

Level 1 primarily consists of financial instruments whose value is based on quoted market prices such as U.S. Treasury securities and actively traded mutual fund and stock investments.

Level 2 includes those financial instruments that are valued by independent pricing services or broker quotes.  These models are primarily industry-standard models that consider various inputs, such as interest rates, credit spreads and foreign exchange rates for the underlying financial instruments.  All significant inputs are observable, or derived from observable information in the marketplace or are supported by observable levels at which transactions are executed in the marketplace.  Financial instruments in this category primarily include corporate securities, U.S. Government-sponsored enterprise securities, municipal securities and certain mortgage and asset-backed securities.

Level 3 is comprised of financial instruments whose fair value is estimated based on non-binding broker prices utilizing significant inputs not based on or corroborated by readily available market information.  This category consists of two private placement mortgage-backed securities.


22

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 2013
(Unaudited)

The following tables set forth our assets and liabilities that are measured at fair value on a recurring basis as of the dates indicated.
 
September 30, 2013
Available-for-sale investments
Level 1
 
Level 2
 
Level 3
 
Total
Fair Value
 
(In thousands)
Financial assets:
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
U.S. Treasury and U.S. Government-sponsored enterprises
$
12,803

 
64,307

 

 
77,110

States and political subdivisions

 
318,922

 

 
318,922

Corporate

 
198,771

 

 
198,771

Commercial mortgage-backed

 

 
329

 
329

Residential mortgage-backed

 
4,116

 

 
4,116

Foreign governments

 
131

 

 
131

Total fixed maturities
12,803

 
586,247

 
329

 
599,379

Equity securities:
 

 
 

 
 

 
 

Stock mutual funds
11,485

 

 

 
11,485

Bond mutual funds
40,855

 

 

 
40,855

Common stock
14

 

 

 
14

Preferred stock
713

 

 

 
713

Total equity securities
53,067

 

 

 
53,067

Total financial assets
$
65,870

 
586,247

 
329

 
652,446


 
December 31, 2012
Available-for-sale investments
Level 1
 
Level 2
 
Level 3
 
Total
Fair Value
 
(In thousands)
Financial assets:
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
U.S. Treasury and U.S. Government-sponsored enterprises
$
13,943

 
85,581

 

 
99,524

States and political subdivisions

 
282,262

 

 
282,262

Corporate

 
216,005

 

 
216,005

Commercial mortgage-backed

 
109

 
387

 
496

Residential mortgage-backed

 
6,092

 

 
6,092

Foreign governments

 
141

 

 
141

Total fixed maturities
13,943

 
590,190

 
387

 
604,520

Equity securities:
 

 
 

 
 

 
 

Stock mutual funds
10,685

 

 

 
10,685

Bond mutual funds
41,916

 

 

 
41,916

Common stock
15

 

 

 
15

Preferred stock
1,125

 

 

 
1,125

Total equity securities
53,741

 

 

 
53,741

Total financial assets
$
67,684

 
590,190

 
387

 
658,261

 

23

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 2013
(Unaudited)

Financial Instruments Valuation

Fixed maturity securities, available-for-sale.  At September 30, 2013, our fixed maturity securities, valued using a third-party pricing source, totaled $586.2 million for Level 2 assets and comprised 89.9% of total reported fair value of our financial assets.  The Level 1 and Level 2 valuations are reviewed and updated quarterly through random testing by comparisons to separate pricing models, other third-party pricing services, and back tested to recent trades.  In addition, we obtain information relative to the third-party pricing models and review model parameters for reasonableness.  Fair values for Level 3 assets are based upon unadjusted broker quotes that are non-binding, and consist of two private placement mortgage-backed securities with a total value of $0.3 million.  Our Level 3 assets are current relative to principal and interest payments and are considered immaterial to our financial statements.  For the nine months ended September 30, 2013, there were no material changes to the valuation methods or assumptions used to determine fair values, and no broker or third party prices were changed from the values received.

Equity securities, available-for-sale.  Our available-for-sale equity securities are classified as Level 1 assets as their fair values are based upon quoted market prices.

The following table presents additional information about fixed maturity securities measured at fair value on a recurring basis that are classified as Level 3 assets and for which we have utilized significant unobservable inputs to determine fair value.

September 30,
2013
 
December 31,
2012
 
(In thousands)
 
 
 
 
Balance at beginning of period
$
387

 
459

Total realized and unrealized gains (losses)


 
 

Included in net income

 

Included in other comprehensive income
(5
)
 
(6
)
Principal paydowns
(53
)
 
(66
)
Transfer in and (out) of Level 3

 

Balance at end of period
$
329

 
387


We review the fair value hierarchy classifications each reporting period.  Changes in the observability of the valuation attributes may result in a reclassification of certain financial assets.  Such reclassifications are reported as transfers in and out of Level 3 at the beginning fair value for the reporting period in which the changes occur. There were no transfers in or out of Level 1 or 2.

Financial Instruments not Carried at Fair Value

Estimates of fair values are made at a specific point in time, based on relevant market prices and information about the financial instruments.  The estimated fair values of financial instruments presented below are not necessarily indicative of the amounts the Company might realize in actual market transactions.


24

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 2013
(Unaudited)

The carrying amount and fair value for the financial assets and liabilities on the consolidated balance sheets not otherwise disclosed for the periods indicated are as follows:
 
September 30, 2013
 
December 31, 2012
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
 
(In thousands)
Financial assets:
 
 
 
 
 
 
 
Fixed maturities, held-to-maturity
$
223,339

 
221,115

 
187,008

 
193,739

Mortgage loans
680

 
704

 
1,509

 
1,503

Policy loans
47,359

 
47,359

 
42,993

 
42,993

Short-term investments

 

 
2,340

 
2,340

Cash and cash equivalents
41,687

 
41,687

 
56,299

 
56,299

Financial liabilities:
 

 
 

 
 

 
 

Annuity benefit reserves
54,178

 
58,196

 
51,750

 
54,981


Fair values for fixed income securities, which are characterized as Level 2 assets in the fair value hierarchy, are based on quoted market prices for the same or similar securities.  In cases where quoted market prices are not available, fair values are based on estimates using present value or other assumptions, including a discount rate and estimates of future cash flows.

Mortgage loans are secured principally by residential and commercial properties.  Weighted average interest rates for these loans were approximately 6.4% and 6.6% as of September 30, 2013 and December 31, 2012, respectively, with maturities ranging from 1 to 30 years.  Management estimated the fair value using an annual interest rate of 6.25% at September 30, 2013.  Our mortgage loans are considered Level 3 assets in the fair value hierarchy.

Policy loans had a weighted average annual interest rate of 7.7% as of September 30, 2013 and December 31, 2012, and no specified maturity dates.  The aggregate fair value of policy loans approximates the carrying value reflected on the consolidated balance sheets.  These loans typically carry an interest rate that is tied to the crediting rate applied to the related policy and contract reserves.  Policy loans are an integral part of the life insurance policies we have in force, cannot be valued separately and are not marketable.  Therefore, the fair value of policy loans approximates the carrying value and policy loans are considered Level 3 assets in the fair value hierarchy.
 
The fair value of short-term investments approximate carrying value due to their short-term nature.  Our short-term investments are considered Level 2 assets in the fair value hierarchy.
 
The fair value of cash and cash equivalents approximate carrying value and are characterized as Level 1 assets in the fair value hierarchy.
 
The fair value of the Company's liabilities under annuity contract policies, which are considered Level 3 assets, was estimated at September 30, 2013 using discounted cash flows based upon a swap rate curve with interest rates ranging from 0.33% to 4.19% based upon swap rates adjusted for various risk adjustments. The fair value of liabilities under all insurance contracts are taken into consideration in the overall management of interest rate risk, which seeks to minimize exposure to changing interest rates through the matching of investment maturities with amounts due under insurance contracts.

(7) Commitments and Contingencies

We are a defendant in a lawsuit filed on August 6, 1999, in the Texas District Court, Austin, Texas, now styled Delia Bolanos Andrade, et al., Plaintiffs, v. Citizens Insurance Company of America, et al., Defendants in which a class was originally certified by the trial court and reversed by the Texas Supreme Court in 2007 with an order to the trial court to conduct further proceedings

25

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 2013
(Unaudited)

consistent with its ruling.  The underlying lawsuit alleged that certain life insurance policies CICA made available to non-U.S. residents, when combined with a policy feature that allowed certain cash benefits to be assigned to two non-U.S. trusts for the purpose of accumulating ownership of our Class A common stock, along with allowing the policyholders to make additional contributions to the trusts, were actually offers and sales of securities that occurred in Texas by unregistered dealers in violation of the Texas securities laws.  The remedy sought was rescission and return of the insurance premium payments.  On December 9, 2009, the trial court denied the recertification of the class after conducting additional proceedings in accordance with the Texas Supreme Court's ruling.  The remaining plaintiffs must now proceed individually, and not as a class, if they intend to pursue their claims against us.  Since the December 9, 2009 trial court ruling, no individual cases have been further pursued by the plaintiffs.  The probability of the plaintiffs further pursuing their cases individually remains unknown.  An estimate of any possible loss or range of losses cannot be made at this time in regard to individuals pursuing claims.  However, should the plaintiffs further pursue their claims individually, we intend to vigorously defend any proceedings.

In 2007 and in the aftermath of Hurricane Katrina, the Attorney General for the State of Louisiana filed suit against SPFIC and every other homeowner insurer doing business in the State of Louisiana, on behalf of the State of Louisiana and certain Road Home fund recipients.  On July 18, 2013, a full and final settlement was reached between SPFIC and the State of Louisiana resolving all claims against SPFIC in the Road Home matter for approximately $183,000. This amount did not have a material impact on the consolidated financials.

The Company is currently performing an internal audit related to unclaimed property for all legal reporting entities. By letters dated July 2, 2013 and August 20, 2013, the Company was informed by the Louisiana Department of Treasury and Arkansas Auditor of State, respectively, that they authorized an audit of Citizens, Inc. and its affiliates for compliance with unclaimed property laws. This audit is being conducted by Verus Financial LLC on behalf of the states.
These internal and external audits may result in additional payments to beneficiaries, additional escheatment of funds deemed abandoned under state laws, administrative penalties, interest, and changes to the Company's procedures for the identification and escheatment of abandoned property.  At this time, the Company is not able to estimate any of these possible amounts, but such costs could be substantial for a company our size.

(8) Income Taxes

The effective tax rate was 30.3% and 28.0% for the third quarter and 27.8% and 25.5% for the nine months ended September 30, 2013 and 2012, respectively.   In periods where our effective tax rate is lower than the statutory tax rate of 35%, the difference is primarily due to tax-exempt interest from state and local bonds.

(9) Related Party Transactions

The Company has various routine related party transactions in conjunction with our holding company structure, such as a management service agreement related to costs incurred, a tax sharing agreement between entities, and inter-company dividends and capital contributions.  There were no changes related to these relationships during the nine months ended September 30, 2013.  See our Annual Report on Form 10-K as of December 31, 2012 for a comprehensive discussion of related party transactions.

(10) Subsequent Events

Subsequent to the reporting date of September 30, 2013, the Company entered into a purchase agreement with Magnolia Guaranty Life Insurance Company ("MGLIC") in the amount of $5.2 million. This agreement is dependent upon a due diligence review that will be completed within ninety days of the execution date of the agreement. MGLIC is a Mississippi Company that began writing business in 1992 and issues primarily industrial life policies in the state of Mississippi. The company had approximately $8.0 million of admitted assets as of December 31, 2012.


26

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
September 30, 2013



Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

Certain statements contained in this Quarterly Report on Form 10-Q are not statements of historical fact and constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act (the "Act"), including, without limitation, statements specifically identified as forward-looking statements within this document.  Many of these statements contain risk factors as well.  In addition, certain statements in future filings by the Company with the Securities and Exchange Commission, in press releases, and in oral and written statements made by us or with the approval of the Company, which are not statements of historical fact, constitute forward-looking statements within the meaning of the Act.  Examples of forward-looking statements include, but are not limited to:  (i) projections of revenues, income or loss, earnings or loss per share, the payment or non-payment of dividends, capital structure, and other financial items, (ii) statements of our plans and objectives by our management or Board of Directors, including those relating to products or services, (iii) statements of future economic performance and (iv) statements of assumptions underlying such statements.  Words such as "believes," "anticipates," "assumes," "estimates," "plans," "projects," "could," "expects," "intends," "targeted," "may," "will" and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements.

Forward-looking statements are subject to known and unknown risks, uncertainties and other factors that may cause actual results to differ materially from those contemplated by the forward-looking statements.  Factors that could cause the Company's future results to differ materially from expected results include, but are not limited to:

Changes in foreign and U.S. general economic, market, and political conditions, including the performance of financial markets and interest rates;
Changes in consumer behavior, which may affect the Company's ability to sell its products and retain business;
The timely development of and acceptance of new products of the Company and perceived overall value of these products and services by existing and potential customers;
Fluctuations in experience regarding current mortality, morbidity, persistency and interest rates relative to expected amounts used in pricing and actuarial valuation of the Company's products;
The performance of our investment portfolio, which may be adversely affected by changes in interest rates, adverse developments and ratings of issuers whose debt securities we may hold, and other adverse macroeconomic events;
Results of litigation we may be involved in;
Changes in assumptions related to deferred acquisition costs and the value of any businesses we may acquire;
Regulatory, accounting or tax changes that may affect the cost of, or the demand for, the Company's products or services;
Our concentration of business from persons residing in Latin America and the Pacific Rim;
Changes in tax laws;
Effects of acquisitions and restructuring, including possible difficulties in integrating and realizing the projected results of acquisitions;
Changes in statutory or U.S. GAAP accounting principles, policies or practices; and
Our success at managing risks involved in the foregoing;
The risk factors discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012 under the heading "Part II. - Item 1A - Risk Factors."

Such forward-looking statements speak only as of the date on which such statements are made, and the Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made.


27

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
September 30, 2013


We make available, free of charge, through our Internet website (http://www.citizensinc.com), our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Section 16 Reports filed by officers and directors, news releases, and, if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable after we electronically file such reports with, or furnish such reports to, the Securities and Exchange Commission.  We are not including any of the information contained on our website as part of, or incorporating it by reference into, this Quarterly Report on Form 10-Q.

Overview

Citizens is an insurance holding company serving the life insurance needs of individuals in the United States since 1969 and internationally since 1975.  Through our insurance subsidiaries, we pursue a strategy of offering traditional insurance products in niche markets where we believe we are able to achieve competitive advantages.  As of September 30, 2013, we had approximately $1.2 billion of total assets and approximately $5.0 billion of insurance in force.  Our core insurance operations include issuing and servicing:

U.S. Dollar-denominated ordinary whole life insurance and endowment policies predominantly to high net worth, high income foreign residents, principally in Latin America and the Pacific Rim through independent marketing consultants;
ordinary whole life insurance policies to middle income households concentrated in the Midwest and southern United States through independent marketing consultants; and
final expense and limited liability property policies to middle and lower income households in Louisiana, Arkansas and Mississippi through employee and independent agents in our home service distribution channel.

We were formed in 1969 by our Chairman, Harold E. Riley.  Prior to our formation, Mr. Riley had many years of experience in the international and domestic life insurance business.  Our Company has experienced significant growth through acquisitions in the domestic market and through market expansion in the international market.  We seek to capitalize on the experience of our management team in marketing and operations as we strive to generate bottom line return using knowledge of our niche markets and our well-established distribution channels.  We believe our underwriting processes, policy terms, pricing practices and proprietary administrative systems enable us to be competitive in our current markets, while protecting our shareholders and servicing our policyholders.

Current Acquisition Activity

Subsequent to the reporting date of September 30, 2013, the Company entered into a purchase agreement with Magnolia Guaranty Life Insurance Company ("MGLIC") to purchase the company in the amount of $5.2 million. This agreement is dependent upon a due diligence review that will be completed within ninety days of the execution date of the agreement. MGLIC is a Mississippi Company that began writing business in 1992 and issues primarily industrial life policies in the state of Mississippi. The company had approximately $8.0 million of admitted assets as of December 31, 2012.

Current Financial Highlights

Financial highlights for the three and nine month periods ended September 30, 2013, compared to the same periods in 2012 were:

Insurance premiums rose for the three and nine month periods ended September 30, 2013 to $43.7 million and $128.5 million in 2013 from $43.0 million and $123.6 million in 2012, an increase of 1.9% and 3.9% driven by increased sales and renewal premiums in our life insurance segment.
Net investment income increased 17.9% and 16.8% for the three and nine month periods ended September 30, 2013 compared to 2012.  The average yield on the consolidated portfolio increased to an annualized rate of 4.10%, up from 3.74% for the same period in 2012, as prevailing interest rates rose modestly.  In addition, the increase in the invested assets due to premium revenue growth contributed to the growth in investment income.

28

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
September 30, 2013


Claims and surrenders expense increased 7.3% and 3.7% for the three and nine months ended September 30, 2013 compared to 2012, primarily driven by surrender benefits. Claims reported in the life segment were lower for the nine months in the current year and claims experience in the home service segment was impacted by Hurricane Isaac in 2012 and seasonal weather activity in the current year.
Changes in reserves resulted in liability increases due to the increased sales of endowment products that build up reserves at a faster pace than whole life longer-term mortality based products. Additionally, the sustained low interest rate environment also results in a higher reserve development due to the lower interest yield assumptions in the current period.

Our Operating Segments

Our business is comprised of three operating business segments, as detailed below.

Life Insurance
Home Service Insurance
Other Non-Insurance Enterprises

Our insurance operations are the primary focus of the Company, as those operations generate the majority of our income.  See the discussion under Segment Operations for detailed analysis.  The amount of insurance, number of policies, and average face amounts of ordinary life policies issued during the periods indicated are shown below.
 
Nine Months Ended September 30,
 
2013
 
2012
 
Amount of
Insurance
Issued
 
Number of
Policies
Issued
 
Average Policy
Face Amount
Issued
 
Amount of
Insurance
Issued
 
Number of
Policies
Issued
 
Average Policy
Face Amount
Issued
Life
$
262,191,318

 
4,418

 
$
59,346

 
$
243,529,971

 
4,234

 
$
57,518

Home Service
141,523,143

 
20,617

 
6,864

 
151,309,545

 
21,895

 
6,911


Note:  All discussions of results of operations below compare or state results for the three and nine-month periods ended September 30, 2013 compared to the three and nine-month periods ended September 30, 2012.

Consolidated Results of Operations

A discussion of consolidated results is presented below, followed by a discussion of segment operations and financial results by segment.

29

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
September 30, 2013


Revenues

Revenues are generated primarily by insurance premiums and investment income on invested assets.
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
 
(In thousands)
Revenues:
 
 
 
 
 
 
 
Premiums:
 
 
 
 
 
 
 
Life insurance
$
42,091

 
41,257

 
123,728

 
118,608

Accident and health insurance
380

 
414

 
1,135

 
1,244

Property insurance
1,276

 
1,281

 
3,658

 
3,792

Net investment income
9,570

 
8,114

 
27,224

 
23,303

Realized investment gains, net
30

 
763

 
143

 
1,107

Decrease in fair value of warrants

 
241

 

 
314

Other income
269

 
112

 
882

 
321

Total revenues
53,616

 
52,182

 
156,770

 
148,689

Exclude fair value adjustments of warrants

 
(241
)
 

 
(314
)
Total revenues excluding fair value adjustments
$
53,616

 
51,941

 
156,770

 
148,375


Premium Income.  Premium income derived from life, accident and health, and property insurance sales increased 1.9% and 3.9% for the three and nine months ended September 30, 2013 compared to the same periods ending September 30, 2012, primarily because of growth in the life segment as discussed under Segment Operations.

Net investment income performance is summarized as follows.
 
September 30,
 
December 31,
 
September 30,
 
2013
 
2012
 
2012
 
(In thousands, except for %)
Net investment income, annualized
$
36,299

 
31,725

 
31,071

Average invested assets, at amortized cost
886,157

 
832,552

 
829,936

Annualized yield on average invested assets
4.10
%
 
3.81
%
 
3.74
%

Yields on invested assets vary between segment operations due to different portfolio mixes within each segment.  

30

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
September 30, 2013


Investment income from debt securities accounted for approximately 85.0% of total investment income for the nine months ended September 30, 2013.   In addition, our equity securities portfolio is invested primarily in short duration bond mutual funds as these securities offer a competitive yield.
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
 
(In thousands)
Gross investment income:
 
 
 
 
 
 
 
Fixed maturity securities
$
8,634

 
7,048

 
24,330

 
20,247

Equity securities
420

 
487

 
1,345

 
1,496

Mortgage loans
10

 
31

 
58

 
76

Policy loans
956

 
841

 
2,660

 
2,454

Long-term investments
60

 
96

 
170

 
217

Other investment income
12

 
19

 
50

 
76

Total investment income
10,092

 
8,522

 
28,613

 
24,566

Investment expenses
(522
)
 
(408
)
 
(1,389
)
 
(1,263
)
Net investment income
$
9,570

 
8,114

 
27,224

 
23,303


We have reduced bond holdings of U.S. Government-sponsored enterprises, such as Federal National Mortgage Association (“FNMA”) and Federal Home Loan Mortgage Corporation (“FHLMC”), which comprised 8.9% of the total fixed maturity portfolio based on amortized cost at September 30, 2013 compared to 14.8% at December 31, 2012, due to the low yields in the current environment.  We have increased our investment purchases of corporate and municipal securities over the past several quarters, focusing on utility service sectors in corporate securities.  As a percent of the total, state and political subdivision holdings at September 30, 2013 increased to 61.5% and corporate holdings totaled 27.8% based upon amortized cost compared to 52.4% and 30.6% at December 31, 2012, respectively. In addition, the increase in policy loans, which represents policyholders utilizing their accumulated policy cash value, contributed to the improvement in investment income.

Change in Fair Value of Warrants.  Prior to 2013, the Company adjusted the liability related to its outstanding warrants to purchase shares of Class A common stock at each reporting date to reflect the current fair value of the warrants computed based on the Class A common stock value calculated using the Black-Scholes option pricing model.  As the Class A common stock value increased and decreased, the change in the warrant liability also would increase and decrease in inverse order.  The adjustment to fair value was recorded as an increase or decrease in the fair value of the warrants in the consolidated statement of operations.  The remaining warrants were the subject of a cashless exercise transaction whereby the Company issued 12,487 Class A shares on October 6, 2012. There were no warrants outstanding during 2013.


31

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
September 30, 2013


Benefits and Expenses
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
 
(In thousands)
Benefits and expenses:
 
 
 
 
 
 
 
Insurance benefits paid or provided:
 
 
 
 
 
 
 
Claims and surrenders
$
16,763

 
15,627

 
48,229

 
46,490

Increase in future policy benefit reserves
17,398

 
16,901

 
52,253

 
47,793

Policyholders' dividends
2,362

 
2,600

 
6,671

 
6,755

Total insurance benefits paid or provided
36,523

 
35,128

 
107,153

 
101,038

Commissions
9,940

 
9,769

 
29,427

 
28,164

Other general expenses
6,163

 
6,055

 
20,204

 
19,013

Capitalization of deferred policy acquisition costs
(7,067
)
 
(7,547
)
 
(21,101
)
 
(20,530
)
Amortization of deferred policy acquisition costs
4,758

 
4,134

 
13,747

 
12,693

Amortization of cost of customer relationships  acquired
681

 
598

 
1,819

 
1,834

Total benefits and expenses
$
50,998

 
48,137

 
151,249

 
142,212

 
Claims and Surrenders.  A detail of claims and surrender benefits is provided below.
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
 
(In thousands)
Death claims
$
5,494

 
5,053

 
16,418

 
16,530

Surrender benefits
6,028

 
5,068

 
16,525

 
14,735

Endowments
3,927

 
3,812

 
11,515

 
11,445

Property claims
613

 
1,017

 
1,582

 
1,880

Accident and health benefits
117

 
91

 
284

 
229

Other policy benefits
584

 
586

 
1,905

 
1,671

Total claims and surrenders
$
16,763

 
15,627

 
48,229

 
46,490


Increase in Future Policy Benefit Reserves.  The increase in future policy benefit reserves for the three and nine months ended September 30, 2013, was influenced by higher reserves for policies issued as we continue to experience growth in new sales of endowment products, which require higher initial reserve levels than whole life products. Internationally, endowment sales have outpaced our whole life products for the past several years. We are experiencing a compounding of reserve increases as these policies build up reserves faster because of the shorter terms when compared to whole life products that build reserves over the expected mortality period.

Policyholder Dividends. The majority of our international policies are participating, and the dividends are factored into the premium rates charged.  

Commissions.  Commission expense is directly related to new and renewal insurance premium fluctuations and production levels by agents and associates. Commission expense for the three and nine months ended September 30, 2013 increased due to higher premiums in the life segment compared to premium levels for the same periods ended September 30, 2012.  

32

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
September 30, 2013



Capitalized and Amortized Deferred Policy Acquisition Costs.  Costs capitalized under current accounting guidance include certain commissions, policy issuance costs, and underwriting and agency expenses that relate to successful sales efforts for insurance contracts.  The decrease for the three months ended September 30, 2013, compared to the same period in 2012 was the result of a decrease in first year premium production in the current year, which decreased capitalized amounts.  Total premium revenue increased for the nine months ended of 2013, and was primarily related to the increase in renewal premiums compared to the prior year.  Commissions paid on renewal premiums are significantly lower than those paid on first year business.

Amortization for the nine months ended September 30, 2013, increased approximately $1.0 million compared to the same period in 2012. The increase was primarily driven by the life segment as CICA experienced lower persistency in 2013 compared to 2012. Amortization of deferred policy acquisition costs is impacted by persistency and may fluctuate from year to year.

Other General Expenses.  Expenses rose for the three and nine months ended September 30, 2013, compared to the same period in 2012 as overall expenses increased because of higher employee health claims of approximately $0.5 million, as we are self-insured, and costs for temporary employees assisting on operations projects totaling $0.1 million, and the Road Home settlement of $0.2 million.

Federal Income Tax.  The effective tax rate for the three and nine month periods ended September 30, 2013, were 30.3% and 27.8% versus 28.0% and 25.5% in 2012, respectively.  Differences between our effective tax rate and the statutory tax rate result from income and expense items that are treated differently for financial reporting and tax purposes.  See Note 8 - Income Taxes in the consolidated financial statements for further discussion.

Segment Operations

The Company has three reportable segments:  Life Insurance, Home Service Insurance and Other Non-Insurance Enterprises.  These segments are reported in accordance with U.S. GAAP.  The Company evaluates profit and loss performance of its segments based on net income or loss before income taxes.
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
 
(In thousands)
Life Insurance
$
1,165

 
2,355

 
2,008

 
1,492

Home Service Insurance
1,274

 
1,566

 
4,395

 
5,804

Other Non-Insurance Enterprises
179

 
124

 
(882
)
 
(819
)
Total
$
2,618

 
4,045

 
5,521

 
6,477


Life Insurance

Our Life Insurance segment issues ordinary whole life insurance domestically and U.S. Dollar-denominated ordinary whole-life policies to foreign residents.  These contracts are designed to provide a fixed amount of insurance coverage over the life of the insured.  Additionally, the Company issues endowment contracts, which are principally accumulation contracts that incorporate an element of life insurance protection.  For the majority of our business, we retain only the first $100,000 of risk on any one life.  We operate this segment through CICA and CNLIC insurance subsidiaries.


33

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
September 30, 2013


International Sales

We focus our sales of U.S. Dollar-denominated ordinary whole life insurance and endowment policies to high net worth, high income residents in Latin America and the Pacific Rim.  We have successfully participated in the foreign marketplace since 1975, and we continue to seek opportunities for expansion of our foreign operations.  We believe positive attributes of our international insurance business include:

larger face amount policies typically issued when compared to our U.S. operations, which results in lower underwriting and administrative costs per unit of coverage;
premiums typically paid annually rather than monthly or quarterly, which reduces our administrative expenses, accelerates cash flow and results in lower policy lapse rates than premiums with more frequently scheduled payments; and
comparable persistency levels and mortality rates as experienced with U.S. policies.

International Products

We offer several ordinary whole life insurance and endowment products designed to meet the needs of our non-U.S. policyowners.  These policies have been structured to provide:

U.S. Dollar-denominated cash values that accumulate, beginning in the first policy year, to a policyholder during his or her lifetime;
premium rates that are competitive with or better than most foreign local companies;
a hedge against local currency inflation;
protection against devaluation of foreign currency;
capital investment in the United States’ more secure economic environment; and
lifetime income guarantees for an insured or for surviving beneficiaries.

Our international products have living benefit features.  Every policy contains guaranteed cash values and most are participating (i.e., provides for cash dividends as apportioned by the board of directors).  Once a policyowner pays the annual premium and the policy is issued, we immediately pay the owner a cash dividend as well as an annual guaranteed endowment, if elected.  The policyowner has several options with regard to the dividend and annual guaranteed endowments, including the right to assign policy values to our stock investment plan, registered under the Securities Act of 1933 (the "Securities Act") and administered in the United States by our unaffiliated transfer agent.


34

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
September 30, 2013


The following table sets forth, by country, our direct premiums from our international life insurance business for the periods indicated.
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
 
(In thousands)
Country
 
 
 
 
 
 
 
Venezuela
$
6,590

 
6,059

 
20,363

 
17,570

Colombia
6,291

 
5,847

 
17,908

 
17,062

Taiwan
3,182

 
3,402

 
10,771

 
10,753

Ecuador
3,607

 
3,482

 
10,812

 
10,305

Argentina
2,464

 
2,738

 
6,654

 
6,950

Other Non-U.S.
8,898

 
8,365

 
24,381

 
22,490

Total
$
31,032

 
29,893

 
90,889

 
85,130

 
We continue to report strong first year and renewal premiums in our top producing countries as noted above. Our international business and premium collections could be impacted by future changes relative to laws, regulations or economic events in the countries from which we accept applications. In particular, there are recent law changes in Colombia that may impede the activities of our independent consultants. See "Item 1A. Risk Factors" for additional information.

Domestic Sales

In the Midwest and the southern United States, we seek to serve middle income households through the sale of cash accumulation ordinary whole life insurance products.  The majority of our inforce business results from blocks of business of insurance companies we have acquired over the past fifteen years.

Domestic Products

Our domestic life insurance products focus primarily on living needs and provide benefits focused toward accumulating money for living benefits while providing a modest death benefit for the policyowner.  The features of our domestic life insurance products include:

cash accumulation/living benefits;
tax-deferred annuity interest earnings;
guaranteed lifetime income or monthly income options for the policyowner or surviving family members;
accidental death benefit coverage options; and
an option to waive premium payments in the event of disability.

Our life insurance products are principally designed to address the insured's concern about outliving his or her monthly income, while at the same time providing death benefits.  The primary purpose of our product portfolio is to help the insured create capital for needs such as retirement income, children's higher education funds, business opportunities, emergencies and extraordinary health care needs.


35

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
September 30, 2013


The following table sets forth our direct premiums by state for the periods indicated.
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
 
(In thousands)
State
 
 
 
 
 
 
 
Texas
$
703

 
1,200

 
2,041

 
3,554

Indiana
401

 
410

 
1,099

 
1,218

Missouri
127

 
138

 
412

 
489

Kentucky
108

 
121

 
350

 
381

Louisiana
(39
)
 
181

 
216

 
400

Other States
172

 
1,040

 
1,573

 
2,726

Total
$
1,472

 
3,090

 
5,691

 
8,768


A number of domestic life insurance companies we acquired had blocks of accident and health insurance policies, which we did not consider to be a core part of our business.  We have ceded this business to Puritan Life Insurance Company ("Puritan"), an unaffiliated insurance company under a coinsurance agreement, under which it assumes substantially all of our accident and health policies.  The premium amounts ceded under the coinsurance agreement for the nine months ended September 30, 2013 and 2012 were $37,000 and $2.9 million, respectively. The coinsurance agreement allows for full assumption by Puritan of this business upon approval by state insurance authorities. The decrease in premiums for the nine months ended September 30, 2013 was due to the fact that Puritan received state approval in Texas and several other states and intends to complete full assumption in 2013.


36

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
September 30, 2013


The results of operations for the life insurance segment for the periods indicated are as follows.
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
 
(In thousands)
Revenue:
 
 
 
 
 
 
 
Premiums
$
32,800

 
31,876

 
95,767

 
90,646

Net investment income
5,924

 
4,538

 
16,412

 
12,949

Realized investment gains, net
23

 
720

 
104

 
909

Other income
261

 
56

 
675

 
188

Total revenue
39,008

 
37,190

 
112,958

 
104,692

Benefits and expenses:
 
 
 
 
 
 
 
Insurance benefits paid or provided:
 
 
 
 
 
 
 
Claims and surrenders
11,249

 
10,213

 
32,016

 
30,912

Increase in future policy benefit reserves
16,756

 
16,058

 
49,845

 
45,477

Policyholders' dividends
2,343

 
2,395

 
6,618

 
6,525

Total insurance benefits paid or provided
30,348

 
28,666

 
88,479

 
82,914

Commissions
6,282

 
6,115

 
18,558

 
17,127

Other general expenses
2,780

 
2,622

 
8,560

 
7,953

Capitalization of deferred policy acquisition costs
(5,685
)
 
(6,090
)
 
(16,941
)
 
(16,109
)
Amortization of deferred policy acquisition costs
3,947

 
3,358

 
11,802

 
10,758

Amortization of cost of customer relationships acquired
171

 
164

 
492

 
557

Total benefits and expenses
37,843

 
34,835

 
110,950

 
103,200

Income before income tax expense
$
1,165

 
2,355

 
2,008

 
1,492


Premiums.  Premium revenues increased for the three and nine month periods ended September 30, 2013, compared to the same periods in 2012. Growth in renewal business was 4.5% and 5.1% for the three and nine periods. First year premium revenues decreased 5.9% primarily due to lower new business from Venezuela and Colombia and increased 8.8% for the three and nine months ended September 30, 2013, driven by sales internationally with endowment to age sixty-five and the twenty-year endowment products continuing to be the top performers in the current year.

Life insurance premium breakout is detailed below.
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
 
(In thousands)
Premiums:
 
 
 
 
 
 
 
First year
$
4,703

 
4,997

 
13,736

 
12,629

Renewal
28,097

 
26,879

 
82,031

 
78,017

Total premiums
$
32,800

 
31,876

 
95,767

 
90,646


The first year premium decrease in the three months ended September 30, 2013 compared to 2012 was driven by a decline of approximately $0.5 million from Venezuela and Colombia but was offset by increased new business from Brazil, Dominican Republic, Uruguay, Paraguay and Honduras totaling $0.2 million. We experience some variation relative to timing of collections

37

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
September 30, 2013


as all premiums are paid to us in U.S. dollars by foreign clients who may be exposed to currency fluctuations and conversion controls in their countries.

Net Investment Income.  Net investment income increased as the impact of the sustained low interest rate environment has leveled and yields are beginning to rise modestly.
 
Nine Months Ended
 
Year Ended
 
Nine Months Ended
 
September 30,
 
December 31,
 
September 30,
 
2013
 
2012
 
2012
 
(In thousands, except for %)
Net investment income, annualized
$
21,883

 
17,828

 
17,265

Average invested assets, at amortized cost
$
541,937

 
494,289

 
489,730

Annualized yield on average invested assets
4.04
%
 
3.61
%
 
3.53
%
 
Realized investment gains, net. Realized gains in the current year are related primarily to fixed maturity issuer bond calls. Realized gains for the three and nine months ended 2012, relate primarily to the sale of one stock mutual fund holding that had been previously impaired.

Claims and Surrenders.  These amounts fluctuate from period to period but were within anticipated ranges based upon management's expectations.
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
 
(In thousands)
Death claims
$
1,587

 
1,466

 
4,301

 
5,232

Surrender benefits
5,180

 
4,403

 
14,447

 
12,746

Endowment benefits
3,923

 
3,806

 
11,502

 
11,426

Accident and health benefits
82

 
74

 
192

 
180

Other policy benefits
477

 
464

 
1,574

 
1,328

Total claims and surrenders
$
11,249

 
10,213

 
32,016

 
30,912


Death claims expense was higher for the three months and lower for the nine months ended September 30, 2013 due to normal fluctuations in reported claims. Mortality experience is closely monitored by the Company as a key performance indicator and these amounts were within expected levels.
The majority of policy surrender benefits paid is attributable to our international business and was related to policies that have been in force over twenty years, where surrender charges are no longer applicable.
Endowment benefit expense primarily results from the election by policyholders of a product feature providing an annual guaranteed benefit.  This is a fixed benefit over the life of the contract, thus this expense will increase with new sales and improved persistency.
Other policy benefits resulted primarily from interest paid on premium deposits and policy benefit accumulations and increased as these policy liabilities also increased.

Increase in Future Policy Benefit Reserves.   Policy benefit reserves increased for the three and nine months ended September 30, 2013 compared to the same period in 2012, from the effect of the current low interest rate environment on reserve development for policies issued and because we continue to experience growth in new sales of endowment products, which require higher initial reserve levels than whole life products. Endowment sales have become more popular with our international clients in the past few years, representing approximately 79% and 80% of total new first year premium in the nine months ended September 30, 2013 and 2012, respectively.


38

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
September 30, 2013


Commissions.  Commission expense increased for the three and nine months ended September 30, 2013, compared to the same periods in 2012.  This expense fluctuates directly with new premium revenues, which were higher for the periods in 2013 compared to 2012.  Commission rates paid to associates are higher on first year premium sales, which were up as noted above for the nine months ended September 30, 2013, compared to 2012.  Renewal premiums for the three and nine months, for which we pay commissions at lower rates, also rose.

Other General Expenses.  The expenses are allocated by segment, based upon an annual expense study performed by the Company, and were up for the three and nine months ended September 30, 2013, compared to the same period in 2012 as overall expenses increased related to employee health claims, as we are self-insured, and costs for temporary employees assisting on operations projects.

Capitalization of Deferred Policy Acquisition Costs ("DAC").  Capitalized costs decreased for the three months and increased for nine months ended September 30, 2013, due primarily to variances in first year premiums and renewal commissions paid compared to 2012 as discussed above.  DAC capitalization is directly correlated to fluctuations in first year commissions.

Amortization of Deferred Policy Acquisition Costs.  Amortization for 2013 increased and is impacted by overall persistency related to this segment. As previously noted, persistency is monitored closely by the Company and was within expectations.

Home Service Insurance

We operate in the Home Service market through our subsidiaries Security Plan Life Insurance Company ("SPLIC") and Security Plan Fire Insurance Company ("SPFIC"), and focus on the life insurance needs of the middle and lower income markets, primarily in Louisiana, Mississippi and Arkansas.  Our policies are sold and serviced through a home service marketing distribution system of employee-agents who work full time on a route system and through funeral homes that sell policies, collect premiums and service policyholders.

The following table sets forth our direct premiums by state for the periods indicated.

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
 
(In thousands)
State
 
 
 
 
 
 
 
Louisiana
$
10,463

 
10,514

 
31,319

 
31,326

Arkansas
419

 
481

 
1,280

 
1,446

Mississippi
126

 
116

 
366

 
337

Other States
228

 
231

 
665

 
695

Total
$
11,236

 
11,342

 
33,630

 
33,804


Home Service Insurance Products

Our home service insurance products consist primarily of small face amount ordinary whole life and pre-need policies, which are designed to fund final expenses for the insured, primarily consisting of funeral and burial costs.  To a much lesser extent, our home service insurance segment sells limited-liability, named-peril property policies covering dwellings and contents.  We provide $30,000 maximum coverage on any one dwelling and contents, while content only coverage and dwelling only coverage is limited to $20,000, respectively.


39

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
September 30, 2013


We provide final expense ordinary life insurance and annuity products primarily to middle and lower income individuals primarily in Louisiana, Mississippi and Arkansas.  New products were approved for sale in Mississippi in 2012 and we expect to increase sales as we expand our marketing force in this state. The new potential acquisition of Magnolia Life Insurance Company which is currently in the due diligence process will also enhance our Mississippi pre-need focus. This acquisition target company has reported approximately $2.1 million in annual premium revenue based upon the company's 2012 statutory accounting.

The results of operations for the home service insurance segment for the periods indicated are as follows.
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
 
(In thousands)
Revenue:
 
 
 
 
 
 
 
Premiums
$
10,947

 
11,076

 
32,754

 
32,998

Net investment income
3,309

 
3,273

 
9,830

 
9,503

Realized investment gains, net
2

 
43

 
33

 
170

Other income
(7
)
 
5

 
129

 
17

Total revenue
14,251

 
14,397

 
42,746

 
42,688

Benefits and expenses:
 
 
 
 
 
 
 
Insurance benefits paid or provided:
 
 
 
 
 
 
 
Claims and surrenders
5,514

 
5,414

 
16,213

 
15,578

Increase in future policy benefit reserves
642

 
843

 
2,408

 
2,316

Policyholders' dividends
19

 
205

 
53

 
230

Total insurance benefits paid or provided
6,175

 
6,462

 
18,674

 
18,124

Commissions
3,658

 
3,654

 
10,869

 
11,037

Other general expenses
3,205

 
2,962

 
9,696

 
8,932

Capitalization of deferred policy acquisition costs
(1,382
)
 
(1,457
)
 
(4,160
)
 
(4,421
)
Amortization of deferred policy acquisition costs
811

 
776

 
1,945

 
1,935

Amortization of cost of customer relationships acquired
510

 
434

 
1,327

 
1,277

Total benefits and expenses
12,977

 
12,831

 
38,351

 
36,884

Income before income tax expense
$
1,274

 
1,566

 
4,395

 
5,804


Premiums.  Premiums were down slightly for the three and nine month periods ended September 30, 2013, as new business for this segment was offset by higher lapses in the current year compared to the same period in 2012.


40

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
September 30, 2013


Net Investment Income.  Net investment income for our home service insurance segment was as follows.

 
Nine Months Ended
 
Year Ended
 
Nine Months Ended
 
September 30,
 
December 31,
 
September 30,
 
2013
 
2012
 
2012
 
(In thousands, except for %)
Net investment income, annualized
$
13,107

 
12,724

 
12,671

Average invested assets, at amortized cost
293,071

 
291,229

 
293,374

Annualized yield on average invested assets
4.47
%
 
4.37
%
 
4.32
%
 
Realized Investment Gains, Net.  Net realized gains for the three and nine months ended September 30, 2013 and 2012, were due to calls of debt securities.

Claims and Surrenders.  Claims and surrenders increased for the three and nine months ended September 30, 2013, compared to the same periods in 2012, as reported claims levels fluctuated compared to the prior year, but were within expected ranges.
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
 
(In thousands)
Death claims
$
3,907

 
3,587

 
12,117

 
11,298

Surrender benefits
848

 
665

 
2,078

 
1,989

Endowment benefits
4

 
6

 
13

 
19

Property claims
613

 
1,017

 
1,582

 
1,880

Accident and health benefits
35

 
17

 
92

 
49

Other policy benefits
107

 
122

 
331

 
343

Total claims and surrenders
$
5,514

 
5,414

 
16,213

 
15,578


Death claims expense increased for the three and nine months in 2013, largely due to higher reported deaths in the three months ended of 2013 and the release of $0.5 million of incurred but unreported death claims liability by the Company during the nine months ended 2012. Mortality experience is closely monitored by the Company as a key performance indicator and amounts were within expected levels.
Property claims decreased 39.7% and 15.9% for the three and nine months ended September 30, 2013 compared to 2012. For the three and nine months ended September 30, 2012, the Company recorded $0.5 million of claims expense related to Hurricane Isaac. We experienced some increased claims reported during the three and nine months ended in 2013 related to seasonal weather events.
 
Increase in Future Policy Benefit Reserves.  The decrease in future policy benefit reserves for the three months ended September 30, 2013 is due to higher lapses, in addition the nine months ended for 2012 reflects approximately $0.2 million decrease in reserves recorded related to ungrouping of certain plans for reserve modeling assumptions.

Commissions.  Commission expense fluctuates based upon sales and premium volume and was within expected ranges in 2013 compared to 2012 based upon premium levels reported.

Other General Expenses.  The expenses are allocated by segment based upon an annual expense study performed by the Company and increased between 2013 and 2012, as overall consolidated expenses increased related to employee health claims, as we are self-insured, and employee costs related to temporary employees assisting on operations projects.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
September 30, 2013



Capitalization of Deferred Policy Acquisition Costs ("DAC").  Capitalized costs decreased for the three and nine months ended September 30, 2013, as commissions expense varied during the periods related to premiums received.  DAC capitalization is directly correlated to fluctuations in new business and commissions.

Amortization of Deferred Policy Acquisition Costs.  Amortization for the three and nine months ended in the current year increased due to lower persistency which resulted in higher amortization compared to the prior year. A change was made in 2012 relative to ungrouping certain plans for developing actuarial derived values which had an impact of increasing amortization for the nine months ended by $0.4 million.

Other Non-Insurance Enterprises

This segment represents the administrative support entities to the insurance operations whose revenues are primarily intercompany and have been eliminated in consolidation under GAAP, which typically results in a segment loss.

Investments

The administration of our investment portfolios is handled by our management, pursuant to board-approved investment guidelines, with all trading activity approved by a committee of the respective boards of directors of our insurance company subsidiaries.  The guidelines used require that fixed maturities, both government and corporate, are investment grade and comprise a majority of the investment portfolio.  State insurance statutes prescribe the quality and percentage of the various types of investments that may be made by insurance companies and generally permit investment in qualified state, municipal, federal and foreign government obligations, high quality corporate bonds, preferred and common stock, mortgage loans and real estate within certain specified percentages.  The assets are intended to mature in accordance with the average maturity of the insurance products and to provide the cash flow for our insurance company subsidiaries to meet their respective policyholder obligations.


42

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
September 30, 2013


The following table shows the carrying value of our investments by investment category and cash and cash equivalents, and the percentage of each to total invested cash, cash equivalents and investments.
 
September 30, 2013
 
December 31, 2012
 
Carrying
Value
 
% of Total
Carrying Value
 
Carrying
Value
 
% of Total
Carrying Value
 
(In thousands)
 
 
 
(In thousands)
 
 
Marketable securities:
 
 
 
 
 
 
 
U.S. Treasury and U.S. Government-sponsored enterprises
$
86,019

 
8.8
 
$
128,156

 
13.4
States and political subdivisions
495,608

 
50.9
 
407,896

 
42.6
Corporate
236,515

 
24.3
 
248,747

 
26.0
Mortgage-backed (1)
4,445

 
0.4
 
6,588

 
0.7
Foreign governments
131

 
 
141

 
Short-term investments

 
 
2,340

 
0.2
Total marketable securities
822,718

 
84.4
 
793,868

 
82.9
Cash and cash equivalents
41,687

 
4.3
 
56,299

 
5.9
Other investments:
 

 
 
 
 

 
 
Policy loans
47,359

 
4.9
 
42,993

 
4.5
Equity securities
53,067

 
5.4
 
53,741

 
5.6
Mortgage loans
680

 
0.1
 
1,509

 
0.2
Real estate
8,477

 
0.9
 
8,496

 
0.9
Other long-term investments
56

 
 
57

 
Total cash, cash equivalents and investments
$
974,044

 
100.0
 
$
956,963

 
100.0
(1) Includes $4.1 million and $6.1 million of U.S. Government-sponsored enterprises at September 30, 2013, and December 31, 2012, respectively.

The Company increased holdings in investment grade municipal securities during the nine months of 2013 while reducing holdings in U.S. Treasury and U.S. Government-sponsored enterprises due to the very low yield environment.  Cash and cash equivalents decreased as of September 30, 2013 due to timing of cash inflows and investment into marketable securities. Mortgage loans decreased for the nine months ended September 30, 2013, because one loan totaling approximately $0.7 million was paid off.

The held-to-maturity portfolio as of September 30, 2013, represented 27.1% of the total fixed maturity securities owned based upon carrying values, with the remaining 72.9% classified as available-for-sale.  Held-to-maturity securities are reported in the financial statements at amortized cost and available-for-sale securities are reported at fair value.


43

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
September 30, 2013


The following table sets forth the distribution of the credit ratings of our portfolio of fixed maturity securities by carrying value as of September 30, 2013 and December 31, 2012.
 
September 30, 2013
 
December 31, 2012
 
Carrying
Value
 
% of Total
Carrying Value
 
Carrying
Value
 
% of Total
Carrying Value
 
(In thousands)
 
 
 
(In thousands)
 
 
AAA
$
66,828

 
8.1
 
$
60,752

 
7.7
AA
363,725

 
44.2
 
375,926

 
47.5
A
244,181

 
29.7
 
199,302

 
25.2
BBB
126,596

 
15.4
 
134,119

 
16.9
BB and other
21,388

 
2.6
 
21,429

 
2.7
Totals
$
822,718

 
100.0
 
$
791,528

 
100.0

During the nine months ended of 2013, the Company made new investments primarily in A rated state municipals and corporate bonds, primarily public utility issues.

Credit ratings reported for the periods indicated are assigned by a Nationally Recognized Statistical Rating Organization (“NRSRO”) such as Moody’s Investors Service, Standard & Poor’s or Fitch Ratings.  A credit rating assigned by an NRSRO is a quality based rating, with AAA representing the highest quality and D the lowest, with BBB and above being considered investment grade.  In addition, the Company may use credit ratings of the National Association of Insurance Commissioners (“NAIC”) Securities Valuation Office (“SVO”) as assigned, if there is no NRSRO rating.  Securities rated by the SVO are grouped in the equivalent NRSRO category as stated by the SVO and securities that are not rated by an NRSRO are included in the “other” category.

The Company has no direct sovereign European debt exposure as of September 30, 2013.  We do have indirect exposure in one bond mutual fund holding, but the amount is deemed immaterial to the current investment holdings and consolidated financials.

As of September 30, 2013, the Company held municipal securities that include third party guarantees.  Detailed below is a presentation by NRSRO rating of our municipal holdings by funding type.

Municipals shown including third party guarantees
 
September 30, 2013
 
General Obligation
 
Special Revenue
 
Other
 
Total
 
% Based on
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Amortized
Cost
 
(In thousands)
 
 
AAA
$
37,194

 
36,092

 
14,816

 
14,603

 

 

 
52,010

 
50,695

 
10.2
AA
93,528

 
94,557

 
153,359

 
151,936

 
11,544

 
11,398

 
258,431

 
257,891

 
51.9
A
35,464

 
37,651

 
117,066

 
120,168

 
7,935

 
8,327

 
160,465

 
166,146

 
33.4
BBB
1,709

 
1,773

 
13,578

 
13,873

 
796

 
824

 
16,083

 
16,470

 
3.3
BB and other

 

 
5,673

 
6,175

 

 

 
5,673

 
6,175

 
1.2
Total
$
167,895

 
170,073

 
304,492

 
306,755

 
20,275

 
20,549

 
492,662

 
497,377

 
100.0
 

44

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
September 30, 2013


Municipals shown excluding third party guarantees
 
September 30, 2013
 
General Obligation
 
Special Revenue
 
Other
 
Total
 
% Based on
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Amortized
Cost
 
(In thousands)
 
 
AAA
$
12,558

 
12,589

 
560

 
547

 

 

 
13,118

 
13,136

 
2.6
AA
98,338

 
98,278

 
110,621

 
109,873

 
11,544

 
11,398

 
220,503

 
219,549

 
44.2
A
53,015

 
55,125

 
158,928

 
161,193

 
7,935

 
8,327

 
219,878

 
224,645

 
45.2
BBB
3,984

 
4,081

 
28,710

 
28,967

 
796

 
824

 
33,490

 
33,872

 
6.8
BB and other

 

 
5,673

 
6,175

 

 

 
5,673

 
6,175

 
1.2
Total
$
167,895

 
170,073

 
304,492

 
306,755

 
20,275

 
20,549

 
492,662

 
497,377

 
100.0

The Company held investments in special revenue bonds that had a greater than 10% exposure based upon activity as of September 30, 2013, as noted in the table below.


Fair Value
 
Amortized
Cost
 
% of Total
Fair Value
 
(In thousands)
 
 
Utilities
$
111,970

 
112,943

 
22.7


45

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
September 30, 2013


The tables below represent the Company's exposure of municipal holdings in Louisiana and Texas, which exceed 10% of the total municipal portfolio as of September 30, 2013.
 
September 30, 2013
 
General Obligation
 
Special Revenue
 
Other
 
Total
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
(In thousands)
Louisiana securities including third party guarantees
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
AA
$
8,198

 
7,783

 
21,249

 
20,939

 

 

 
29,447

 
28,722

A
5,966

 
6,199

 
18,279

 
18,044

 
1,011

 
1,040

 
25,256

 
25,283

BBB
1,709

 
1,773

 

 

 

 

 
1,709

 
1,773

BB and other

 

 
4,633

 
5,186

 

 

 
4,633

 
5,186

Total
$
15,873

 
15,755

 
44,161

 
44,169

 
1,011

 
1,040

 
61,045

 
60,964

Louisiana securities excluding third party guarantees
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

AA
$
8,198

 
7,783

 
15,143

 
15,008

 

 

 
23,341

 
22,791

A
5,966

 
6,199

 
18,260

 
17,944

 
1,011

 
1,040

 
25,237

 
25,183

BBB
1,709

 
1,773

 
6,125

 
6,031

 

 

 
7,834

 
7,804

BB and other

 

 
4,633

 
5,186

 

 

 
4,633

 
5,186

Total
$
15,873

 
15,755

 
44,161

 
44,169

 
1,011

 
1,040

 
61,045

 
60,964

Texas securities including third party guarantees
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

AAA
$
32,579

 
31,589

 
8,564

 
8,429

 

 

 
41,143

 
40,018

AA
21,202

 
21,768

 
14,752

 
14,705

 

 

 
35,954

 
36,473

A
1,243

 
1,273

 
14,770

 
14,740

 

 

 
16,013

 
16,013

BBB

 

 
10,099

 
10,263

 

 

 
10,099

 
10,263

BB and other

 

 

 

 

 

 

 

Total
$
55,024

 
54,630

 
48,185

 
48,137

 

 

 
103,209

 
102,767

Texas securities excluding third party guarantees
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

AAA
$
8,505

 
8,602

 
560

 
548

 

 

 
9,065

 
9,150

AA
41,861

 
41,242

 
18,774

 
18,579

 

 

 
60,635

 
59,821

A
4,658

 
4,786

 
18,752

 
18,747

 

 

 
23,410

 
23,533

BBB

 

 
10,099

 
10,263

 

 

 
10,099

 
10,263

BB and other

 

 

 

 

 

 

 

Total
$
55,024

 
54,630

 
48,185

 
48,137

 

 

 
103,209

 
102,767


The Company invests in municipal securities of issuers in the state of Louisiana and receives a credit that reduces its premium tax liability in that state.  At September 30, 2013, total holdings of municipal securities in Louisiana represented 12.4% of all municipal holdings based upon fair value.  The Company also holds 20.9% of its municipal holdings in Texas issuers.  There were no other states or individual issuer holdings that represented or exceeded 10% of the total municipal portfolio as of September 30, 2013.


46

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
September 30, 2013


Valuation of Investments

We evaluate the carrying value of our fixed maturity and equity securities at least quarterly.  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 all 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 not more likely than not that the Company will 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 did not recognize any other-than-temporary impairments for the three and nine months ended September 30, 2013 or 2012.

Liquidity and Capital Resources

Liquidity refers to a company's ability to generate sufficient cash flows to meet the needs of its operations.  Liquidity is managed on insurance operations and seeks to ensure stable and reliable sources of cash flows to meet obligations provided by a variety of sources.

Liquidity requirements of the Company are met primarily by funds provided from operations.  Premium deposits and revenues, investment income and investment maturities are the primary sources of funds, while investment purchases, policy benefits, and operating expenses are the primary uses of funds.  We historically have not had to liquidate investments relative to our insurance operations to provide cash flow and did not do so during the first nine months of 2013.  Our investments as of September 30, 2013, consist of 64.3% of marketable debt securities classified as available-for-sale that could be readily converted to cash for liquidity needs.

A primary liquidity concern is the risk of an extraordinary level of early policyholder withdrawals.  We include provisions within our insurance policies, such as surrender charges, that help limit and discourage early withdrawals.  Since these contractual withdrawals, as well as the level of surrenders experienced, were largely consistent with our assumptions in asset liability management, our associated cash outflows have, to date, not had an adverse impact on our overall liquidity.  Individual life insurance policies are less susceptible to withdrawal than annuity reserves and deposit liabilities because policyholders may incur surrender charges and undergo a new underwriting process in order to obtain a new insurance policy.  Cash flow projections and cash flow tests under various market interest rate scenarios are also performed annually to assist in evaluating liquidity needs and adequacy.  We currently anticipate that available liquidity sources and future cash flows will be adequate to meet our needs for funds.

Cash flows from our insurance operations have been sufficient to meet current needs.  Cash flows from operating activities were $54.3 million and $47.6 million for the nine months ended September 30, 2013 and 2012, respectively.  We have traditionally also had significant cash flows from both scheduled and unscheduled investment security maturities, redemptions, and prepayments.  These cash flows, for the most part, are reinvested in fixed income securities.  Net cash outflows from investing

47

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
September 30, 2013


activities totaled $69.9 million for the nine months ended September 30, 2013 compared to net cash inflows of $43.6 million for the nine months ended September 30, 2012. The investing activities fluctuate from period to period due to timing of securities activities such as calls and maturities and reinvestment of those funds. 
 
The NAIC has established minimum capital requirements in the form of Risk-Based Capital ("RBC").  RBC factors the type of business written by an insurance company, the quality of its assets, and various other aspects of an insurance company's business to develop a minimum level of capital called "authorized control level risk-based capital" and compares this level to adjusted statutory capital that includes capital and surplus as reported under statutory accounting principles, plus certain investment reserves.  Should the ratio of adjusted statutory capital to control level RBC fall below 200%, a series of remedial actions by the affected company would be required.

All insurance subsidiaries were above the RBC minimums at December 31, 2012.  The ratios of adjusted statutory capital to control level RBC are shown below.

 
December 31,
 
2012
 
 
CICA
551
%
CNLIC
2,380
%
SPFIC
421
%
SPLIC
1,282
%
 
Contractual Obligations and Off-balance Sheet Arrangements

There have been no material changes in contractual obligations from those reported in the Company's Form 10-K for the year ended December 31, 2012.  The Company does not have off-balance sheet arrangements at September 30, 2013, and does not expect any future effects on the Company's financial condition related to any such arrangements.  We do not utilize special purpose entities as investment vehicles, nor are there any such entities in which we have an investment that engage in speculative activities of any nature, and we do not use such investments to hedge our investment positions.

Parent Company Liquidity and Capital Resources

Citizens is a holding company and has had minimal operations of its own.  Its assets consist primarily of the capital stock of its subsidiaries, cash, fixed income securities, mutual funds and investment real estate.  Accordingly, Citizens' cash flows depend upon the availability of statutorily permissible payments, primarily payments under management agreements from its two primary life insurance subsidiaries, CICA and SPLIC.  The ability to make payments is limited by applicable laws and regulations of Colorado, CICA's state of domicile, and Louisiana, SPLIC's state of domicile, which subject insurance operations to significant regulatory restriction.  These laws and regulations require, among other things, that these insurance subsidiaries maintain minimum solvency requirements and limit the amount of dividends these subsidiaries can pay to the holding company.  Citizens historically has not relied upon dividends from subsidiaries for its cash flow needs.  However, CICA and SPLIC do dividend available funds from time to time in relation to new acquisition target strategies.


48

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
September 30, 2013


Critical Accounting Policies

We have prepared a current assessment of our critical accounting policies and estimates in connection with preparing our interim unaudited consolidated financial statements as of and for the three and nine months ended September 30, 2013 and 2012. We believe that the accounting policies set forth in the Notes to our Consolidated Financial Statements and “Critical Accounting Policies and Estimates” in the Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2012 continue to describe the significant judgments and estimates used in the preparation of our consolidated financial statements except as specifically noted below.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

General

The nature of our business exposes us to market risk relative to our invested assets and policy liabilities.  Market risk is the risk of loss that may occur when changes in interest rates and public equity prices adversely affect the value of our invested assets.  Interest rate risk is our primary market risk exposure.  Substantial and sustained increases and decreases in market interest rates can affect the fair value of our investments.  The fair value of our fixed maturity portfolio generally increases when interest rates decrease and decreases when interest rates increase. For additional information regarding market risks to which we are subject, see "Item 1 Financial Statements - Note 5. Investments - Valuation of Investments in Fixed Maturity and Equity Securities" above.

The following table summarizes net unrealized gains and losses as of the dates indicated.

 
September 30, 2013
 
December 31, 2012
 
Amortized
Cost
 
Fair
Value
 
Net
Unrealized
Gains
(Losses)
 
Amortized
Cost
 
Fair
Value
 
Net
Unrealized
Gains
(Losses)
 
(In thousands)
Fixed maturities, available-for-sale
$
585,127

 
599,379

 
14,252

 
559,736

 
604,520

 
44,784

Fixed maturities, held-to-maturity
223,339

 
221,115

 
(2,224
)
 
187,008

 
193,739

 
6,731

Total fixed maturities
$
808,466

 
820,494

 
12,028

 
746,744


798,259

 
51,515

Total equity securities
$
52,392

 
53,067

 
675

 
52,744

 
53,741

 
997


Market Risk Related to Interest Rates

Our exposure to interest rate changes results from our significant holdings of fixed maturity investments, which comprised 88.2% of our investment portfolio based on carrying value as of September 30, 2013.  These investments are mainly exposed to changes in U.S. Treasury rates.  Our fixed maturities investments include U.S. Government-sponsored enterprises, U.S. Government bonds, securities issued by government agencies, municipal bonds and corporate bonds.  

To manage interest rate risk, we perform periodic projections of asset and liability cash flows to evaluate the potential sensitivity of our investments and liabilities.  We assess interest rate sensitivity annually with respect to our available-for-sale fixed maturities investments using hypothetical test scenarios that assume either upward or downward shifts in the prevailing interest rates.  The changes in fair values of our debt and equity securities as of September 30, 2013, were within the expected range of this analysis.

Changes in interest rates typically have a sizable effect on the fair values of our debt and equity securities.  The interest rate of the ten-year U.S. Treasury bond increased to 2.6% during the quarter ended September 30, 2013, from 1.8% at December 31, 2012.   Net unrealized gains on fixed maturity securities totaled $12.0 million at September 30, 2013, compared to $51.5 million at December 31, 2012.

49

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
September 30, 2013



The fixed maturity portfolio is exposed to call risk, as a significant portion of the current bond holdings are callable.  A decreasing interest rate environment can result in increased call activity as experienced over the past several years, and an increasing rate environment will likely result in securities being paid at their stated maturity.

There are no fixed maturities or other investments classified as trading instruments.  Approximately 73.1% of fixed maturities were held in available-for-sale and 26.9% in held-to-maturity based upon fair value at September 30, 2013.  At September 30, 2013, and December 31, 2012, we had no investments in derivative instruments, nor did we have any subprime or collateralized debt obligation risk.

Market Risk Related to Equity Prices

Changes in the level or volatility of equity prices affect the value of equity securities we hold as investments.  Our equity investments portfolio represented 5.7% of our total investments at September 30, 2013, with 98.6% invested in diversified equity and bond mutual funds.  We believe that significant decreases in the equity markets would not have a material adverse impact on our total investment portfolio.

Item 4. CONTROLS AND PROCEDURES

We have established disclosure controls and procedures to ensure, among other things, that material information relating to our Company, including its consolidated subsidiaries, is made known to our officers who certify our financial reports and to the other members of our senior management and the Board of Directors.

Our Chief Executive Officer, Vice Chairman and Chief Financial Officer are responsible for establishing and maintaining our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")).  Based upon an evaluation at the end of the period, the Chief Executive Officer, Vice Chairman and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.

During the three months ended September 30, 2013, there were no changes in the Company's internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company's internal controls over financial reporting (as defined in rules 13a-15(f) and 15d-15(f) under the Exchange Act).

50

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
September 30, 2013



PART II.  OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

We are a defendant in a lawsuit filed on August 6, 1999, in the Texas District Court, Austin, Texas, now styled Delia Bolanos Andrade, et al., Plaintiffs, v. Citizens Insurance Company of America, et al., Defendants in which a class was originally certified by the trial court and reversed by the Texas Supreme Court in 2007 with an order to the trial court to conduct further proceedings consistent with its ruling.  The underlying lawsuit alleged that certain life insurance policies CICA made available to non-U.S. residents, when combined with a policy feature that allowed certain cash benefits to be assigned to two non-U.S. trusts for the purpose of accumulating ownership of our Class A common stock, along with allowing the policyholders to make additional contributions to the trusts, were actually offers and sales of securities that occurred in Texas by unregistered dealers in violation of the Texas securities laws.  The remedy sought was rescission and return of the insurance premium payments.  On December 9, 2009, the trial court denied the recertification of the class after conducting additional proceedings in accordance with the Texas Supreme Court's ruling.  The remaining plaintiffs must now proceed individually, and not as a class, if they intend to pursue their claims against us.  Since the December 9, 2009 trial court ruling, no individual cases have been further pursued by the plaintiffs.  The probability of the plaintiffs further pursuing their cases individually remains unknown.  An estimate of any possible loss or range of losses cannot be made at this time in regard to individuals pursuing claims.  However, should the plaintiffs further pursue their claims individually, we intend to vigorously defend any proceedings.

In 2007 and in the aftermath of Hurricane Katrina, the Attorney General for the State of Louisiana filed suit against SPFIC and every other homeowner insurer doing business in the State of Louisiana, on behalf of the State of Louisiana and certain Road Home fund recipients.  On July 18, 2013, a full and final settlement was reached between SPFIC and the State of Louisiana resolving all claims against SPFIC in the Road Home matter for approximately $183,000. This amount did not have a material impact on the consolidated financials.


Item 1A. RISK FACTORS

There are no updates to our risk factors as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2012 except as noted below.

We are a defendant in lawsuits, which may adversely affect our financial condition and detract from the time our management is able to devote to our business, and we are subject to risks related to litigation and regulatory matters.

The Company is currently performing an internal audit related to unclaimed property for all legal reporting entities. By letters dated July 2, 2013 and August 20, 2013, the Company was informed by the Louisiana Department of Treasury and Arkansas Auditor of State, respectively, that they authorized an audit of Citizens, Inc. and its affiliates for compliance with unclaimed property laws. This audit is being conducted by Verus Financial LLC on behalf of the states.
Our internal audit and the external audit performed on behalf of Louisiana and Arkansas may result in additional payments to beneficiaries, additional escheatment of funds deemed abandoned under state laws, administrative penalties, interest, and changes to the Company's procedures for the identification and escheatment of abandoned property.  At this time, the Company is not able to estimate any of these possible amounts, but such costs could be substantial for a company our size.

Recent changes in Colombian law may impede the activities of our independent consultants in Colombia.

Our independent consultants are contractually obligated to comply with the laws and regulations of the jurisdictions in which they operate. Certain independent consultants in Colombia have indicated new laws that became effective in July 2013 could impede their routine activities relative to introducing new clients to company product offerings and facilitating renewal premium collections. We are unable to quantify the effect of the Colombian  law changes upon our business, but believe they could have an adverse impact upon the Colombian portion of our business. For the nine months ended September 30, 2013, approximately 20% of our direct premiums from international clients was generated through our Colombian consultants See “Management's Discussion and Analysis of Financial Condition and Results of Operations - Segment Operations - Life Insurance - International Products.”



51

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
September 30, 2013



Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

Item 3. DEFAULTS UPON SENIOR SECURITIES

None.

Item 4. MINE SAFETY DISCLOSURES

Not applicable.

Item 5. OTHER INFORMATION

On November 6, 2013, the Company issued a news release (the "Release") reporting, among things, results of operations for its third quarter of 2013.  A copy of the Release is furnished as Exhibit 99.1 to this Quarterly Report on Form 10-Q.  Citizens also announced that it would hold a conference call to discuss its financial results at 11:00 a.m. Central Standard Time on Thursday, November 7, 2013.


52

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
September 30, 2013


Item 6. EXHIBITS

Exhibit Number
 
The following exhibits are filed herewith:
 
 
 
11
 
Statement re:  Computation of per share earnings (see financial statements)
 
 
 
31.1
 
Certification of Chief Executive Officer and Vice Chairman pursuant to Section 302 of the Sarbanes-Oxley Act*
 
 
 
31.2
 
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act*
 
 
 
32.1
 
Certification of Chief Executive Officer and Vice Chairman pursuant to Section 906 of the Sarbanes-Oxley Act*
 
 
 
32.2
 
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act*
 
 
 
99.1
 
News Release reporting third quarter and nine months results issued on 11/6/2013 (furnished herewith)
 
 
 
101.INS
 
XBRL Instance Document (furnished herewith)
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema (furnished herewith)
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase (furnished herewith)
 
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase (furnished herewith)
 
 
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase (furnished herewith)
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase (furnished herewith)
 
 
__________________

* Filed herewith.

53


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
CITIZENS, INC.
 
 
 
 
 
 
 
 
 
By:
/s/ Harold E. Riley
 
 
 
Harold E. Riley
 
 
 
Chairman and Chief Executive Officer
 
 
 
 
 
 
 
 
 
 
By:
/s/ Rick D. Riley
 
 
 
Rick D. Riley
 
 
 
Vice Chairman and President
 
 
 
 
 
 
 
 
 
 
By:
/s/ Kay E. Osbourn
 
 
 
Kay E. Osbourn
 
 
 
Executive Vice President, Chief Financial Officer and Treasurer
 
 
 
 
 
 
 
 
Date:
November 6, 2013
 
 

54