Company Quick10K Filing
Quick10K
Citizens
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$6.84 50 $344
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-07-12 Other Events
8-K 2019-06-04 Shareholder Vote
8-K 2019-01-23 Officers, Exhibits
8-K 2019-01-23 Officers, Exhibits
8-K 2019-01-18 Officers, Exhibits
8-K 2018-08-22 Other Events
8-K 2018-08-16 Officers
8-K 2018-06-11 Officers, Exhibits
8-K 2018-06-05 Shareholder Vote, Exhibits
8-K 2018-05-29 Other Events, Exhibits
8-K 2018-04-25 Other Events
8-K 2018-01-22 Officers, Exhibits
TOT Total 138,050
NVR NVR 11,880
SID National Steel 4,870
CHGG Chegg 4,300
DX Dynex Capital 440
NLRT Nogales Resources 0
UBLI Yinghong Guangda Technology 0
LHO Lasalle Hotel Properties 0
PKTX Protokinetix 0
IORG Intreorg Systems 0
CIA 2019-03-31
Part I. Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 cia-201933110qex311.htm
EX-31.2 cia-201933110qex312.htm
EX-32.1 cia-201933110qex321.htm
EX-32.2 cia-201933110qex322.htm

Citizens Earnings 2019-03-31

CIA 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 cia-201933110q.htm 10-Q Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549
FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2019
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
citizenslogoa30.jpg
CITIZENS, INC.
(Exact name of registrant as specified in its charter)
Colorado
84-0755371
(State or other jurisdiction of
(I.R.S. Employer
 incorporation or organization)
Identification No.)
 
 
2900 Esperanza Crossing, 2nd Floor
 
Austin, Texas
78758
(Address of principal executive offices)
(Zip Code)
 
 
(512) 837-7100
N/A
(Registrant's telephone number, including area code:)
(Former name, former address and former fiscal year, if changed since last report:)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o  No
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). x Yes o  No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act:
 
Large accelerated
filer ¨
Accelerated
filer x
Non-accelerated
filer ¨
Smaller reporting
company ¨
Emerging growth
company ¨
 
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No
Securities registered pursuant to Section 12(b) of the Act
 
Class A Common Stock
CIA 
New York Stock Exchange
(Title of Each Class)
(Trading Symbol(s))
(Name of Each Exchange on Which Registered)
As of April 29, 2019, the Registrant had 52,364,993 shares of Class A common stock, no par value, outstanding and 1,001,714 shares of Class B common stock, no par value, outstanding.






























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citizenslogoa30.jpg

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)
 
 
 
 
 
 
 
 
 
March 31, 2019
 
December 31, 2018
Assets
(Unaudited)
 
 
Investments:
 
 
 
Fixed maturities available-for-sale, at fair value (cost: $1,259,353 and $1,223,747 in 2019 and 2018, respectively)
$
1,295,514

 
1,231,039

Equity securities, at fair value
15,672

 
15,068

Mortgage loans on real estate
185

 
186

Policy loans
81,474

 
80,825

Real estate held for investment (less $1,309 and $1,284 accumulated depreciation in 2019 and 2018, respectively)
5,693

 
5,718

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

 
1,483

Other long-term investments
22

 
22

Short-term investments
7,914

 
7,865

Total investments
1,406,474

 
1,342,206

Cash and cash equivalents
34,093

 
45,492

Accrued investment income
18,155

 
18,467

Reinsurance recoverable
3,587

 
3,664

Deferred policy acquisition costs
154,076

 
155,747

Cost of customer relationships acquired
14,697

 
15,225

Goodwill
12,624

 
12,624

Other intangible assets
955

 
956

Property and equipment, net
7,046

 
5,943

Due premiums, net (less $1,663 and $1,990 allowance for doubtful accounts in 2019 and 2018, respectively)
11,083

 
13,325

Prepaid expenses
823

 
284

Other assets
1,943

 
1,628

Total assets
$
1,665,556

 
1,615,561


(Continued)

See accompanying notes to consolidated financial statements.


2


CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Financial Position
(In thousands, except share amounts)
 
 
 
 
 
 
 
 
 
March 31, 2019
 
December 31, 2018
Liabilities and Stockholders' Equity
(Unaudited)
 
 
Liabilities:
 
 
 
Policy liabilities:
 
 
 
Future policy benefit reserves:
 
 
 
Life insurance
$
1,191,545

 
1,179,946

Annuities
76,500

 
76,377

Accident and health
938

 
944

Dividend accumulations
26,984

 
26,250

Premiums paid in advance
43,448

 
48,553

Policy claims payable
8,174

 
7,614

Other policyholders' funds
15,767

 
10,760

Total policy liabilities
1,363,356

 
1,350,444

Commissions payable
1,922

 
1,901

Current federal income tax payable
46,952

 
41,281

Deferred federal income tax liability
7,873

 
5,709

Payable for securities in process of settlement
4,884

 

Other liabilities
28,675

 
28,493

Total liabilities
1,453,662

 
1,427,828

Commitments and contingencies (Note 7)


 


Stockholders' equity:
 

 
 

Class A, no par value, 100,000,000 shares authorized, 52,364,993 and 52,215,852 shares issued and outstanding in 2019 and 2018, respectively, including shares in treasury of 3,135,738 in 2019 and 2018
260,876

 
259,793

Class B, no par value, 2,000,000 shares authorized, 1,001,714 shares issued and outstanding in 2019 and 2018
3,184

 
3,184

Accumulated deficit
(73,401
)
 
(69,599
)
Accumulated other comprehensive income:
 

 
 

Unrealized gains on securities, net of tax
32,246

 
5,366

Treasury stock, at cost
(11,011
)
 
(11,011
)
Total stockholders' equity
211,894

 
187,733

Total liabilities and stockholders' equity
$
1,665,556

 
1,615,561



See accompanying notes to consolidated financial statements.




3


CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Comprehensive Income
Three Months Ended March 31,
(In thousands, except per share amounts)
(Unaudited)

 
2019
 
2018
Revenues:
 
 
 
 
 
Premiums:
 
 
 
 
 
 
 
Life insurance
 
 
$
40,980

 
 
 
42,529

Accident and health insurance
 
 
323

 
 
 
291

Property insurance
 
 
1,161

 
 
 
1,209

Net investment income
 
 
13,796

 
 
 
13,771

Realized investment gains (losses), net
 
 
5,961

 
 
 
(575
)
Other income
 
 
185

 
 
 
208

Total revenues
 
 
62,406

 
 
 
57,433

Benefits and expenses:
 
 
 

 
 
 
 

Insurance benefits paid or provided:
 
 
 

 
 
 
 

Claims and surrenders
 
 
23,033

 
 
 
21,151

Increase in future policy benefit reserves
 
 
12,299

 
 
 
14,608

Policyholders' dividends
 
 
1,182

 
 
 
1,307

Total insurance benefits paid or provided
 
 
36,514

 
 
 
37,066

Commissions
 
 
7,884

 
 
 
8,959

Other general expenses
 
 
14,132

 
 
 
6,507

Capitalization of deferred policy acquisition costs
 
 
(4,828
)
 
 
 
(5,963
)
Amortization of deferred policy acquisition costs
 
 
6,277

 
 
 
7,606

Amortization of cost of customer relationships acquired
 
 
419

 
 
 
679

Total benefits and expenses
 
 
60,398

 
 
 
54,854

Income before federal income tax
 
 
2,008

 
 
 
2,579

Federal income tax expense
 
 
5,810

 
 
 
2,542

Net income (loss)
 
 
(3,802
)
 
 
 
37

Per Share Amounts:
 
 
 

 
 

 
 

Basic and diluted earnings (losses) per share of Class A common stock
$
(0.08
)
 
 

 

 
 

Basic and diluted earnings (losses) per share of Class B common stock
(0.04
)
 
 

 

 
 

Other comprehensive income (loss):
 

 
 

 
 
 
 

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

 
 

 
 

 
 

Unrealized holding gains (losses) arising during period
 

 
28,801

 
 

 
(18,098
)
Reclassification adjustment for losses included in net income
 

 
104

 


 
259

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

 
28,905

 
 

 
(17,839
)
Income tax expense (benefit) on unrealized gains (losses) on available-for-sale debt securities
 

 
2,025

 
 

 
(3,735
)
Other comprehensive income (loss)
 

 
26,880

 
 

 
(14,104
)
Total comprehensive income (loss)
 

 
$
23,078

 
 

 
(14,067
)


See accompanying notes to consolidated financial statements.


4


CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Three Months Ended March 31, 2019 and 2018
(In thousands)
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
Common Stock
 
Accumulated
deficit
 
Accumulated other comprehensive income (loss)
 
Treasury
stock
 
Total
Stockholders'
equity
 
Class A
 
Class B
 
 
 
 
Balance at December 31, 2017
$
259,383

 
3,184

 
(54,375
)
 
26,332

 
(11,011
)
 
223,513

Accounting standards adopted January 1, 2018

 

 
(4,162
)
 
4,162

 

 

Balance at January 1, 2018
259,383

 
3,184

 
(58,537
)
 
30,494

 
(11,011
)
 
223,513

 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive loss:
 

 
 

 
 

 
 

 
 

 
 

Net income

 

 
37

 

 

 
37

Unrealized investment losses, net

 

 

 
(14,104
)
 

 
(14,104
)
Total comprehensive loss

 

 
37

 
(14,104
)
 

 
(14,067
)
Balance at March 31, 2018
$
259,383

 
3,184

 
(58,500
)
 
16,390

 
(11,011
)
 
209,446

 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2018
$
259,793

 
3,184

 
(69,599
)
 
5,366

 
(11,011
)
 
187,733

Comprehensive income:
 

 
 

 
 

 
 

 
 

 
 

Net loss

 

 
(3,802
)
 

 

 
(3,802
)
Unrealized investment gains, net

 

 

 
26,880

 

 
26,880

Total comprehensive income

 

 
(3,802
)
 
26,880

 

 
23,078

Stock-based compensation
1,083

 

 

 

 

 
1,083

Balance at March 31, 2019
$
260,876

 
3,184

 
(73,401
)
 
32,246

 
(11,011
)
 
211,894



See accompanying notes to consolidated financial statements.



5


CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Cash Flows
Three Months Ended March 31,
(In thousands)
(Unaudited)
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net income (loss)
$
(3,802
)
 
37

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

 
 

Realized (gains) losses on sale of investments and other assets
(5,961
)
 
575

Net deferred policy acquisition costs
1,449

 
1,643

Amortization of cost of customer relationships acquired
419

 
679

Depreciation
396

 
437

Amortization of premiums and discounts on investments
4,043

 
4,155

Stock-based compensation
1,460

 

Deferred federal income tax benefit
140

 
(1,793
)
Change in:
 

 
 

Accrued investment income
312

 
310

Reinsurance recoverable
77

 
(65
)
Due premiums
2,242

 
1,870

Future policy benefit reserves
12,217

 
14,757

Other policyholders' liabilities
1,195

 
2,352

Federal income tax payable
5,671

 
4,335

Commissions payable and other liabilities
204

 
(6,872
)
Other, net
(2,139
)
 
(429
)
Net cash provided by operating activities
17,923

 
21,991

Cash flows from investing activities:
 

 
 

Purchase of fixed maturities, available-for-sale
(74,209
)
 
(43,914
)
Sale of fixed maturities, available-for-sale
7,659

 

Maturities and calls of fixed maturities, available-for-sale
31,631

 
16,501

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

 
2,295

Principal payments on mortgage loans
2

 
2

Increase in policy loans, net
(650
)
 
(1,901
)
Sale of other long-term investments and real estate
6,996

 
1

Sale of property and equipment
18

 

Purchase of property and equipment
(257
)
 
(61
)
Net cash used in investing activities
(28,810
)
 
(27,077
)
 
 
 
 
See accompanying notes to consolidated financial statements.


6


CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
Three Months Ended March 31,
(In thousands)
(Unaudited)
 
2019
 
2018
Cash flows from financing activities:
 
 
 
Annuity deposits
$
1,541

 
1,775

Annuity withdrawals
(1,676
)
 
(1,506
)
Other
(377
)
 

Net cash provided by (used in) financing activities
(512
)
 
269

Net decrease in cash and cash equivalents
(11,399
)
 
(4,817
)
Cash and cash equivalents at beginning of year
45,492

 
46,064

Cash and cash equivalents at end of period
$
34,093

 
41,247



Supplemental Disclosures of Noncash Investing and Financing Activities:

During the three months ended March 31, 2019, various fixed maturity issuers exchanged securities with book values of $8.8 million for securities of equal value. There were none during the three months ended March 31, 2018.

The Company had net unsettled security trades of $4.9 million at March 31, 2019 and none at March 31, 2018.



See accompanying notes to consolidated financial statements.



7

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2019
(Unaudited)


(1) Financial Statements

Basis of Presentation and Consolidation

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

The consolidated statements of financial position as of March 31, 2019, the consolidated statements of comprehensive income for the three months ended March 31, 2019 and March 31, 2018 and the consolidated statements of stockholders' equity and cash flows for the three months ended March 31, 2019 and March 31, 2018 have been prepared by the Company without audit.  In the opinion of management, all normal and recurring adjustments to present fairly the financial position, results of operations, and changes in cash flows at March 31, 2019 and for comparative periods have been made.  The consolidated financial statements have been prepared in accordance with United States Generally Accepted Accounting Principles ("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q adopted by the Securities and Exchange Commission ("SEC").  Accordingly, the consolidated financial statements do not include all the information and footnotes required for complete financial statements and should be read in conjunction with the Company’s consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2018.  Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period.

We provide primarily life insurance and a small amount of health insurance policies through our insurance subsidiaries - CICA, CICA Ltd., SPLIC, MGLIC and CNLIC.  CICA Ltd. primarily issues endowment and ordinary whole-life policies to non-U.S. residents. SPLIC offers final expense and home service life insurance in Louisiana, Arkansas and Mississippi, and SPFIC, a wholly-owned subsidiary of SPLIC, writes a limited amount of property insurance in Louisiana. MGLIC provides industrial life policies through independent funeral homes in Mississippi.

CTI provides data processing systems and services to the Company.
 
Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

Significant estimates include those used in the evaluation of other-than-temporary impairments on debt and equity securities, actuarially determined assets and liabilities and assumptions, tests of goodwill impairment, valuation allowance on deferred tax assets, valuation of uncertain tax positions and contingencies relating to litigation and regulatory matters.  Certain of these estimates are particularly sensitive to market conditions, and deterioration and/or volatility in the worldwide debt or equity markets could have a material impact on the consolidated financial statements.



8

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
March 31, 2019
(Unaudited)

Significant Accounting Policies

For a description of significant accounting policies, see Note 1. Summary of Significant Accounting Policies in the notes to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018, which should be read in conjunction with these accompanying consolidated financial statements.

(2) Accounting Pronouncements

Accounting Standards Recently Adopted

In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-02, Leases (Topic 842). The ASU requires organizations that lease assets, referred to as "lessees," to recognize on the consolidated statement of financial position the rights and obligations created by those leases. The ASU also requires disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative requirements, providing additional information about the amounts recorded in the consolidated financial statements. The ASU on leases became effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.

The Company has several lease agreements, such as district office locations related to our Home Service Insurance segment. The Company adopted this standard effective January 1, 2019 and recognizes these lease agreements on the consolidated statements of financial position as a right-of-use asset and a corresponding lease liability. See Note 9. Leases for further discussions.

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

In June 2018, the FASB issued ASU No. 2018-07, Compensation - Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting. This ASU is intended to simplify aspects of share-based compensation issued to non-employees by making the guidance consistent with the accounting for employee share-based compensation. This ASU is effective for annual periods beginning after December 15, 2018 and interim periods within those annual periods, with early adoption permitted. We adopted the provisions of this ASU in the first quarter of 2019. This guidance did not have a material impact on our consolidated financial statements.

Accounting Standards Not Yet Adopted

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326), with the main objective to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The ASU requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. The income statement reflects the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. Credit losses on available-for-sale debt securities should be measured in a manner similar to current U.S. GAAP; however, the credit losses are recorded through an allowance for credit losses rather than as a write-down. This approach is an improvement to current U.S. GAAP because an entity will be able to record reversals of credit losses (in situations in which the estimate of credit losses declines) in current period net income, which in turn should align the income statement recognition of credit losses with the reporting period in which changes occur. Current U.S. GAAP prohibits reflecting


9

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
March 31, 2019
(Unaudited)

those improvements in current-period earnings. For public business entities, the amendments in this ASU will be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is evaluating the impact this guidance will have on our consolidated financial statements. This guidance could have a material impact on the Company's consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-12, Financial Services-Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts. This ASU amends four key areas of the accounting and impacts disclosures for long-duration insurance and investment contracts:

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

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

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

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

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

For calendar-year public companies, the changes will be effective on January 1, 2021. The Company is evaluating the impact this guidance will have on our consolidated financial statements. This new guidance is expected to have a material impact on our consolidated financial statements.

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

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

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



10

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
March 31, 2019
(Unaudited)

(3) Segment Information

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

The accounting policies of the segments and Other Non-Insurance Enterprises are presented in accordance with U.S. GAAP and are the same as those used in the preparation of the consolidated financial statements.  The Company evaluates profit and loss performance based on U.S. GAAP income before federal income taxes for its two reportable segments.

The Company's Other Non-Insurance Enterprises are the only reportable difference between segments and consolidated operations.
 
 
 
 
 
 
 
 
 
Three Months Ended
 
March 31, 2019
 
Life
Insurance
 
Home
Service
Insurance
 
Other
Non-Insurance
Enterprises
 
Consolidated
 
(In thousands)
Revenues:
 
 
 
 
 
 
 
Premiums
$
30,914

 
11,550

 

 
42,464

Net investment income
10,169

 
3,086

 
541

 
13,796

Realized investment gains, net
5,457

 
484

 
20

 
5,961

Other income
183

 
1

 
1

 
185

Total revenue
46,723

 
15,121

 
562

 
62,406

Benefits and expenses:
 
 
 

 
 

 
 

Insurance benefits paid or provided:
 

 
 

 
 

 
 

Claims and surrenders
17,162

 
5,871

 

 
23,033

Increase in future policy benefit reserves
11,313

 
986

 

 
12,299

Policyholders' dividends
1,172

 
10

 

 
1,182

Total insurance benefits paid or provided
29,647

 
6,867

 

 
36,514

Commissions
4,373

 
3,511

 

 
7,884

Other general expenses
6,205

 
5,070

 
2,857

 
14,132

Capitalization of deferred policy acquisition costs
(3,702
)
 
(1,126
)
 

 
(4,828
)
Amortization of deferred policy acquisition costs
5,441

 
836

 

 
6,277

Amortization of cost of customer relationships acquired
122

 
297

 

 
419

Total benefits and expenses
42,086

 
15,455

 
2,857

 
60,398

Income (loss) before federal income tax expense
$
4,637

 
(334
)
 
(2,295
)
 
2,008


 
 
 
 
 
 
 
 



11

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
March 31, 2019
(Unaudited)

 
Three Months Ended
 
March 31, 2018
 
Life
Insurance
 
Home
Service
Insurance
 
Other
Non-Insurance
Enterprises
 
Consolidated
 
(In thousands)
Revenues:
 
 
 
 
 
 
 
Premiums
$
32,360

 
11,669

 

 
44,029

Net investment income
10,130

 
3,302

 
339

 
13,771

Realized investment losses, net
(185
)
 
(352
)
 
(38
)
 
(575
)
Other income (loss)
209

 
(1
)
 

 
208

Total revenue
42,514

 
14,618

 
301

 
57,433

Benefits and expenses:
 

 
 

 
 

 
 

Insurance benefits paid or provided:
 

 
 

 
 

 
 

Claims and surrenders
15,291

 
5,860

 

 
21,151

Increase in future policy benefit reserves
13,582

 
1,026

 

 
14,608

Policyholders' dividends
1,297

 
10

 

 
1,307

Total insurance benefits paid or provided
30,170

 
6,896

 

 
37,066

Commissions
5,228

 
3,731

 

 
8,959

Other general expenses(1)
(884
)
 
5,544

 
1,847

 
6,507

Capitalization of deferred policy acquisition costs
(4,640
)
 
(1,323
)
 

 
(5,963
)
Amortization of deferred policy acquisition costs
6,540

 
1,066

 

 
7,606

Amortization of cost of customer relationships acquired
152

 
527

 

 
679

Total benefits and expenses
36,566

 
16,441

 
1,847

 
54,854

Income (loss) before federal income tax expense
$
5,948

 
(1,823
)
 
(1,546
)
 
2,579

(1) During the three months ended March 31, 2018, the Company reduced its estimate of the liability accrued for policies that are not in compliance with Section 7702 of the Internal Revenue Code from $12.3 million to $5.1 million, as we continue to refine our estimates. The decrease is primarily related to the Life Insurance segment, which when offset by the impact of increased compliance costs, resulted in a negative amount reported for other general expenses for the Life Insurance segment for the three months ended March 31, 2018. For further information, refer to disclosures under the "Qualification of Life Products" heading within Note 7 in the Company's notes to consolidated financial statements.



12

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
March 31, 2019
(Unaudited)

(4) Earnings Per Share

The following tables set forth the computation of basic and diluted earnings per share.
 
 
 
 
 
Three Months Ended

March 31, 2019
 
March 31, 2018
 
(In thousands,
except per share amounts)
Basic and diluted earnings per share:
 
 
 
Numerator:
 
 
 
Net income (loss)
$
(3,802
)
 
37

Net income (loss) allocated to Class A common stock
$
(3,764
)
 
37

Net income (loss) allocated to Class B common stock
(38
)
 

Net income (loss)
$
(3,802
)
 
37

Denominator:
 
 
 
Weighted average shares of Class A outstanding - basic
49,229

 
49,080

Weighted average shares of Class A outstanding - diluted
49,267

 
49,080

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

 
1,002

Basic and diluted earnings (loss) per share of Class A common stock
$
(0.08
)
 

Basic and diluted earnings (loss) per share of Class B common stock
(0.04
)
 


(5) Investments

The Company invests primarily in fixed maturity securities, which totaled 90.0% of total cash, cash equivalents and investments at March 31, 2019. The Company's cash, cash equivalents and investments are listed below.
 
March 31, 2019
 
December 31, 2018
 
Carrying
Value
 
% of Total
Carrying Value
 
Carrying
Value
 
% of Total
Carrying Value
 
(In thousands)
 
 
 
(In thousands)
 
 
Fixed maturity securities
$
1,295,514

 
90.0

 
$
1,231,039

 
88.7
Equity securities
15,672

 
1.1

 
15,068

 
1.1
Mortgage loans
185

 

 
186

 
Policy loans
81,474

 
5.7

 
80,825

 
5.8
Real estate and other long-term investments
5,715

 
0.4

 
7,223

 
0.5
Short-term investments
7,914

 
0.4

 
7,865

 
0.6
Cash and cash equivalents
34,093

 
2.4

 
45,492

 
3.3
Total cash, cash equivalents and investments
$
1,440,567

 
100.0

 
$
1,387,698

 
100.0



13

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
March 31, 2019
(Unaudited)


The following tables represent the cost or amortized cost, gross unrealized gains and losses and fair value for fixed maturities as of the periods indicated.
 
March 31, 2019
 
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
(In thousands)
Fixed maturities:
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
U.S. Treasury securities
$
9,841

 
1,492

 

 
11,333

U.S. Government-sponsored enterprises
3,534

 
846

 

 
4,380

States and political subdivisions
686,141

 
12,434

 
460

 
698,115

Corporate
438,608

 
18,344

 
2,518

 
454,434

Commercial mortgage-backed
887

 

 

 
887

Residential mortgage-backed
115,463

 
6,021

 
3

 
121,481

Asset-backed
4,763

 
3

 
1

 
4,765

Foreign governments
116

 
3

 

 
119

Total fixed maturities
$
1,259,353

 
39,143

 
2,982

 
1,295,514


 
December 31, 2018
 
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
(In thousands)
Fixed maturities:
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
U.S. Treasury securities
$
9,864

 
1,410

 

 
11,274

U.S. Government-sponsored enterprises
3,540

 
740

 

 
4,280

States and political subdivisions
713,991

 
7,614

 
1,490

 
720,115

Corporate
384,817

 
6,725

 
9,746

 
381,796

Commercial mortgage-backed
39,694

 
386

 
66

 
40,014

Residential mortgage-backed
66,960

 
1,726

 
2

 
68,684

Asset-backed
4,764


1


8


4,757

Foreign governments
117

 
2

 

 
119

Total fixed maturities
$
1,223,747

 
18,604

 
11,312

 
1,231,039

 


14

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
March 31, 2019
(Unaudited)

Most of the Company's equity securities are diversified stock and bond mutual funds.
 
 
March 31, 2019
 
December 31, 2018
 
Fair Value
 
Fair Value
 
(In thousands)
Equity securities:
 
 
 
Stock mutual funds
$
3,091

 
2,906

Bond mutual funds
12,143

 
11,774

Common stock
133

 
94

Non-redeemable preferred stock
305

 
294

Total equity securities
$
15,672

 
15,068


Valuation of Investments in Fixed Maturity and Equity Securities

Available-for-sale securities are reported in the consolidated financial statements at fair value. Equity securities are measured at fair value with the change in fair value recorded through net income. The Company recognized net realized gains of $602,000 and net realized losses of $302,000 on equity securities held for the three months ended March 31, 2019 and 2018, respectively.

The Company monitors all debt securities on an on-going basis relative to changes in credit ratings, market prices, earnings trends and financial performance, in addition to specific region or industry reviews.  The assessment of whether other-than-temporary impairments ("OTTI") have occurred is based on a case-by-case evaluation of underlying reasons for the decline in fair value.  The Company determines OTTI 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 OTTI has occurred, the amount of the OTTI recognized in earnings depends on whether the Company intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis.  If the Company intends to sell the security or it is more likely that the Company will be required to sell the security before recovery of its amortized cost basis, the OTTI is recognized in earnings equal to the entire difference between the investment's amortized 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 OTTI 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 OTTI related to the credit loss is recognized in earnings.  The amount of the total OTTI related to other factors is recognized in other comprehensive income, net of applicable taxes.  The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.  The new amortized cost basis is not adjusted for subsequent recoveries in fair value.

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


15

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
March 31, 2019
(Unaudited)

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.

No bond impairments were recognized for the three months ended March 31, 2019.  OTTI of $225,000 was recognized on one bond issuer for the three months ended March 31, 2018.

The following tables present the fair values and gross unrealized losses of fixed maturity securities that have remained in a continuous unrealized loss position for the periods indicated.
 
March 31, 2019
 
Less than 12 months
 
Greater than 12 months
 
Total
 
Fair
Value
 
Unrealized
Losses
 
# of
Securities
 
Fair
Value
 
Unrealized
Losses
 
# of
Securities
 
Fair
Value
 
Unrealized
Losses
 
# of
Securities
 
(In thousands, except for # of securities)
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
States and political subdivisions
$
67,893

 
75

 
60

 
51,053

 
385

 
70

 
118,946

 
460

 
130

Corporate
53,090

 
1,747

 
42

 
19,818

 
771

 
24

 
72,908

 
2,518

 
66

Residential mortgage-backed

 

 

 
96

 
3

 
5

 
96

 
3

 
5

Asset-backed
2,001

 
1

 
2

 

 

 

 
2,001

 
1

 
2

Total available-for-sale securities
$
122,984

 
1,823

 
104

 
70,967

 
1,159

 
99

 
193,951

 
2,982

 
203


 
December 31, 2018
 
Less than 12 months
 
Greater than 12 months
 
Total
 
Fair
Value
 
Unrealized
Losses
 
# of
Securities
 
Fair
Value
 
Unrealized
Losses
 
# of
Securities
 
Fair
Value
 
Unrealized
Losses
 
# of
Securities
 
(In thousands, except for # of securities)
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
States and political subdivisions
$
227,132

 
883

 
233

 
33,891

 
607

 
46

 
261,023

 
1,490

 
279

Corporate
230,030

 
8,770

 
191

 
9,936

 
976

 
8

 
239,966

 
9,746

 
199

Commercial mortgage-backed
14,992

 
66

 
11

 

 

 

 
14,992

 
66

 
11

Residential mortgage-backed
18

 

 
3

 
98

 
2

 
4

 
116

 
2

 
7

Asset-backed
3,747

 
8

 
4

 

 

 

 
3,747

 
8

 
4

Total fixed maturities
$
475,919

 
9,727

 
442

 
43,925

 
1,585

 
58

 
519,844

 
11,312

 
500

 
We have reviewed these securities in an unrealized loss position for the periods ended March 31, 2019 and December 31, 2018 and determined that no OTTI exists that have not been recognized 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 other-than-temporary impairments being recorded.

The amortized cost and fair value of fixed maturity securities at March 31, 2019 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


16

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
March 31, 2019
(Unaudited)

with or without call or prepayment penalties. Securities not due at a single maturity date have been reflected based upon final stated maturity.
 
March 31, 2019
 
Amortized
Cost
 
Fair
Value
 
(In thousands)
Fixed maturity securities:
 
 
 
Due in one year or less
$
79,036

 
79,178

Due after one year through five years
131,849

 
134,746

Due after five years through ten years
215,686

 
222,226

Due after ten years
832,782

 
859,364

Total fixed maturity securities
$
1,259,353

 
1,295,514


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.  
 
Fixed Maturities, Available-for-Sale
 
Equity Securities
 
Three Months Ended
 
Three Months Ended
 
March 31,
 
March 31,
 
2019
 
2018
 
2019
 
2018
 
(In thousands)
 
 
 
 
 
 
 
 
Proceeds
$
7,659

 

 

 

Gross realized gains
$
2

 

 

 

Gross realized losses
$
183

 

 

 


There were sales of ten available-for-sale fixed maturity securities for the three months ended March 31, 2019. No available-for-sale fixed maturity securities were sold during the three months ended March 31, 2018. No equity securities were sold during the three months ended March 31, 2019 and 2018.

(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, which are carried at fair value. We also report our equity securities at fair value with changes in fair value reported through the consolidated statements of comprehensive income.



17

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
March 31, 2019
(Unaudited)

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.  There were no securities in this category at March 31, 2019.



18

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
March 31, 2019
(Unaudited)

The following tables set forth our assets that are measured at fair value on a recurring basis as of the dates indicated.
 
March 31, 2019
Financial Assets
Level 1
 
Level 2
 
Level 3
 
Total
Fair Value
 
(In thousands)
Fixed maturities available-for-sale
 
 
 
 
 
 
 
U.S. Treasury and U.S. Government-sponsored enterprises
$
11,333

 
4,380

 

 
15,713

States and political subdivisions

 
698,115

 

 
698,115

Corporate
50

 
454,384

 

 
454,434

Commercial mortgage-backed

 
887

 

 
887

Residential mortgage-backed

 
121,481

 

 
121,481

Asset-backed

 
4,765

 

 
4,765

Foreign governments

 
119

 

 
119

Total fixed maturities available-for-sale
11,383

 
1,284,131

 

 
1,295,514

 
 
 
 
 
 
 
 
Equity securities
 

 
 

 
 

 
 

Stock mutual funds
3,091

 

 

 
3,091

Bond mutual funds
12,143

 

 

 
12,143

Common stock
133

 

 

 
133

Non-redeemable preferred stock
305

 

 

 
305

Total equity securities
15,672

 

 

 
15,672

Total financial assets
$
27,055

 
1,284,131

 

 
1,311,186




19

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
March 31, 2019
(Unaudited)

 
December 31, 2018
Financial Assets
Level 1
 
Level 2
 
Level 3
 
Total
Fair Value
 
(In thousands)
Fixed maturities available-for-sale
 
 
 
 
 
 
 
U.S. Treasury and U.S. Government-sponsored enterprises
$
11,274

 
4,280

 

 
15,554

States and political subdivisions

 
720,115

 

 
720,115

Corporate
47

 
381,749

 

 
381,796

Commercial mortgage-backed

 
40,014

 

 
40,014

Residential mortgage-backed

 
68,684

 

 
68,684

Asset-backed

 
4,757

 

 
4,757

Foreign governments

 
119

 

 
119

Total fixed maturities available-for-sale
11,321

 
1,219,718

 

 
1,231,039

 
 
 
 
 
 
 
 
Equity securities
 

 
 

 
 

 
 

Stock mutual funds
2,906

 

 

 
2,906

Bond mutual funds
11,774

 

 

 
11,774

Common stock
94

 

 

 
94

Non-redeemable preferred stock
294

 

 

 
294

Total equity securities
15,068

 

 

 
15,068

Total financial assets
$
26,389

 
1,219,718

 

 
1,246,107

 
Financial Instruments Valuation

Fixed maturity securities, available-for-sale.  At March 31, 2019, our fixed maturity securities, valued using a third-party pricing source, totaled $1.3 billion for Level 2 assets and comprised 97.9% 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 annually relative to the third-party pricing models and review model parameters for reasonableness.  There were no Level 3 assets at March 31, 2019. For the three months ended March 31, 2019, 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. There were no transfers between Levels 1 and 2 securities during the three months ended March 31, 2019.

Equity securities.  Our equity securities are classified as Level 1 assets as their fair values are based upon quoted market prices.

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 3 during the three months ended March 31, 2019.

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.



20

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
March 31, 2019
(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:
 
March 31, 2019
 
December 31, 2018
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
 
(In thousands)
Financial assets:
 
 
 
 
 
 
 
Mortgage loans
$
185

 
221

 
186

 
222

Policy loans
81,474

 
81,474

 
80,825

 
80,825

Short-term investments
7,914

 
7,914

 
7,865

 
7,865

Cash and cash equivalents
34,093

 
34,093

 
45,492

 
45,492

Financial liabilities:
 

 
 

 
 

 
 

Annuity - investment contracts
55,821

 
55,109

 
56,658

 
55,977


Mortgage loans are secured principally by residential properties.  Weighted average interest rates for these loans were approximately 6.6% at March 31, 2019 and December 31, 2018. At March 31, 2019, maturities ranged from 19 to 23 years.  Management estimated the fair value using an annual interest rate of 6.25% at March 31, 2019.  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 March 31, 2019 and December 31, 2018, 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 corresponds 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 inforce, 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 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 March 31, 2019 using discounted cash flows based upon spot rates ranging from 2.38% to 3.56% 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

Qualification of Life Products

We have previously reported that a portion of the life insurance policies issued by our subsidiary insurance companies failed to qualify for the favorable U.S. federal income tax treatment afforded by Section 7702 of the Internal Revenue Code ("IRC") of 1986. Further, we have determined that the structure of our policies sold to non-U.S. citizens, which were novated to CICA Ltd. effective July 1, 2018, may have inadvertently generated U.S. source income over time. Based upon a review of the options available to address these issues, we intend to remediate domestic life and annuity policies to U.S. citizens to comply with the IRC. For the novated policies sold to non-U.S. citizens, we expect to settle any past liabilities with the Internal Revenue Service ("IRS"). The Company has continued to refine its estimate of the exposure and expenses related to these tax issues, as described below for the current reporting period. The products have been and continue to be appropriately reported as life insurance under U.S. GAAP for financial reporting.



21

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
March 31, 2019
(Unaudited)

These tax issues result in an estimated liability as of March 31, 2019 and December 31, 2018 of $10.0 million, after tax, related to projected IRS settlement amounts of $9.1 million and reserve increases totaling $0.9 million to bring policies into compliance. The probability weighted range of financial estimates relative to this issue is $6.0 million to $52.5 million, after tax. This estimated range includes projected taxes and interest and penalties payable to the IRS, as well as estimated increased payout obligations to current holders of non-compliant domestic life insurance policies expected to result from remediation of those policies. The estimated liability and the estimated range will be updated as we continue to refine our estimates.

The amount of our liabilities and expenses depends on a number of uncertainties, including the number of prior tax years for which we may be liable to the IRS, the number of domestic life insurance policies we will be required to remediate, and the methodology applicable to the calculation of the tax liabilities for policies. Given the range of potential outcomes and the significant variables assumed in establishing our estimates, actual amounts incurred may exceed our reserve and could exceed the high end of our estimated range of liabilities and expenses. To the extent the amount reserved by the Company is insufficient to meet the actual amount of our liabilities and expenses, or if our estimates of those liabilities and expenses change in the future, our financial condition and results of operation may be materially adversely affected. Management believes that based upon current information we have recorded the best estimate liability to date.

Accruals for loss contingencies are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. The process of determining our best estimate and the estimated range was a complex undertaking including insight from external consultants and involved management’s judgment based upon a variety of factors known at the time. We expect to incur additional costs ranging from $0.6 million to $0.9 million related to performing this analysis, but due to the uncertainty of actions, we cannot reasonably estimate these costs with any reliability. Actual amounts incurred may exceed this estimate and will be recorded as they become probable and can be reasonably estimated.

On May 17, 2017, we submitted an offer to enter into Closing Agreements with the IRS covering the CICA and CNLIC domestic life insurance businesses. The toll charges calculated and enumerated in the Closing Agreements totaled $124,000 and $4,000 for the CICA and CNLIC domestic life insurance businesses, respectively. We have not yet received any correspondence from the IRS related to our submissions.

Litigation and Regulatory Actions

From time to time we are subject to legal and regulatory actions relating to our business. We may incur defense costs, including attorneys' fees, and other direct litigation costs associated with defending claims. If we suffer an adverse judgment as a result of litigation claims, it could have a material adverse effect on our business, results of operations and financial condition.

(8) Income Taxes

CICA Ltd., a wholly owned subsidiary of Citizens, is considered a controlled foreign corporation for federal tax purposes. As a result, the insurance activity of CICA Ltd. is subject to Subpart F of the IRC and is included in Citizens’ taxable income. As of March 31, 2019, the Subpart F income inclusion generated $0.7 million of federal income tax expense.



22

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
March 31, 2019
(Unaudited)

Our provision for income taxes may not have the customary relationship of taxes to income. A reconciliation between the U.S. corporate income tax rate and the effective income tax rate is as follows:

 
Three Months Ended March 31,
 
2019
 
2018
 
Amount
 
%
 
Amount
 
%
 
(In thousands, except for %)
Expected tax expense (benefit)
$
422

 
21.0
%
 
$
542

 
21.0
 %
Foreign income tax rate differential
85

 
4.2
%
 

 
 %
Annualized effective tax rate adjustment
3,319

 
165.3
%
 
2,882

 
111.7
 %
Effect of uncertain tax position
1,192

 
59.4
%
 
702

 
27.2
 %
Nondeductible costs to remediate tax compliance issue

 
%
 
(1,543
)
 
(59.8
)%
CICA Ltd. Subpart F income
711

 
35.3
%
 

 
 %
Other
81

 
4.1
%
 
(41
)
 
(1.6
)%
Total federal income tax expense
$
5,810

 
289.3
%
 
$
2,542

 
98.5
 %

A reconciliation of federal income tax expense above is computed by applying the federal income tax rate of 21% in 2019 and 2018 to income before federal income tax expense.

Income tax expense consists of:

 
Three Months Ended
 
March 31,
 
2019
 
2018
 
(In thousands)
Current
$
5,671

 
4,335

Deferred
139

 
(1,793
)
Total federal income tax expense
$
5,810

 
2,542




23

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
March 31, 2019
(Unaudited)

The components of deferred federal income taxes are as follows:

 
March 31, 2019
 
December 31, 2018
 
(In thousands)
Deferred tax assets:
 
 
 
Future policy benefit reserves
$
2,835

 
2,795

Net operating and capital loss carryforwards
193

 
191

Accrued expenses
22

 
30

Investments
2,106

 
1,841

Deferred intercompany loss
4,999

 
5,190

Other
60

 
309

Total gross deferred tax assets
$
10,215