UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549
FORM 10-Q10-Q/A

Amendment No. 1
___________________________
x QUARTERLY REPORT PURSUANT TO SECTIONQuarterly Report Pursuant to Section 13 ORor 15(d) OF THE SECURITIES EXCHANGE ACT OFof the Securities Exchange Act of 1934
For the Quarterly Period Ended Septemberquarterly period ended June 30, 2017
ORor
¨ TRANSITION REPORT PURSUANT TO SECTIONTransition Report Pursuant to Section 13 ORor 15(d) OF THE SECURITIES EXCHANGE ACT OFof the Securities Exchange Act of 1934
For the Transition Periodtransition period from  _____ to _____
COMMISSION FILE NUMBER:  Commission File Number:  000-16509
citizenslogoa16.jpg
CITIZENS, INC.
(Exact name of registrant as specified in its charter)
Colorado84-0755371
(State or other jurisdiction of(I.R.S. Employer
incorporation or organization)(I.R.S. Employer Identification No.)
  
2900 Esperanza Crossing, 2nd Floor
Austin, TexasTx78758
(Address of principal executive offices)(Zip Code)
 
(Registrant's telephone number, including area code:) (512) 837-7100
 
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report:)
400 East Anderson Lane, Austin, TXTx 78752

(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o  No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes o  No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See the definition of "large accelerated filer", "accelerated filer,"filer" and "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
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 complyingwithany new or revised financialaccounting standardsprovidedpursuant toSection 13(a)oftheExchangeAct. ¨
  
 
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 2,August 1, 2017,, 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.
 

THIS PAGE INTENTIONALLY LEFT BLANK

EXPLANATORY NOTE

Citizens, Inc. (the “Company”) is filing this Amendment No. 1 on Form 10-Q/A (this “Amendment”) to its Quarterly Report on Form 10-Q for the three months ended June 30, 2017, which was originally filed on August 4, 2017 (the “Original Filing”), to amend and restate Item 4 of Part I, “Controls and Procedures.” In the Original Filing, management concluded, based on its evaluation at the time, that the Company’s disclosure controls and procedures were effective, due to the breadth of the Company’s controls and their overall effectiveness in accumulating and communicating information required to be disclosed in the Company’s reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). During its most recent evaluation of disclosure controls, however, management re-evaluated those conclusions and concluded that, in light of the unremediated material weaknesses disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, the Company’s disclosure controls and procedures as of June 30, 2017 were not effective.

In accordance with Rule 12b-15 under the Exchange Act, this Amendment also amends Part II, Item 6 of the Original Filing to include currently dated certifications from the Company's Chief Executive Officer and Chief Financial Officer, as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002.
Except for the amendments described above, this Amendment does not amend or otherwise update any other information in the Original Filing. This Amendment is not intended to, nor does it, reflect events occurring after the Original Filing, and does not modify or update the disclosures therein in any way other than as required to reflect the changes described above. Information not affected by this Amendment remains unchanged. This Amendment should be read in conjunction with any documents incorporated by reference herein and the Company's other SEC filings subsequent to the Original Filing




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TABLE OF CONTENTS


   Page Number
Part I.Financial Information 
 Item 1.
Financial Statements
Consolidated Statements of Financial Position, September 30, 2017 and December 31, 2016 (Unaudited)
2
Consolidated Statements of Comprehensive Income, Three Months Ended September 30, 2017 and 2016 (Unaudited)
4
Consolidated Statements of Comprehensive Income, Nine Months Ended September 30, 2017 and 2016 (Unaudited)
5
Consolidated Statements of Cash Flows, Nine Months Ended September 30, 2017 and 2016 (Unaudited)
6
Notes to Consolidated Financial Statements (Unaudited)
8
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
30
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
53
   
 Item 4.
Controls and Procedures
542
    
Part II.Other Information 
    
 Item 1.
Legal Proceedings
55
Item 1A.
Risk Factors
56
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
70
Item 3.
Defaults Upon Senior Securities
70
Item 4.
Mine Safety Disclosures
70
Item 5.
Other Information
70
Item 6.
Exhibits
712


PART I.  FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Financial Position
(In thousands)
(Unaudited)
    
    
 September 30, 2017 December 31, 2016
Assets   
Investments:   
Fixed maturities available-for-sale, at fair value (cost:  $920,700 and $860,473 in 2017 and 2016, respectively)$955,244
 881,668
Fixed maturities held-to-maturity, at amortized cost (fair value:  $244,064 and $252,545 in 2017 and 2016, respectively)236,353
 247,004
Equity securities available-for-sale, at fair value (cost:  $15,479 and $17,765 in 2017 and 2016, respectively)16,146
 18,159
Mortgage loans on real estate197
 232
Policy loans71,215
 66,672
Real estate held for investment (less $1,158 and $1,083 accumulated depreciation in 2017 and 2016, respectively)5,843
 5,919
Real estate held for sale (less $1,008 accumulated depreciation in 2016)—
 1,939
Other long-term investments37
 38
Short-term investments—
 508
Total investments1,285,035
 1,222,139
Cash and cash equivalents45,000
 35,510
Accrued investment income18,243
 17,903
Reinsurance recoverable3,917
 3,862
Deferred policy acquisition costs166,567
 167,790
Cost of customer relationships acquired18,012
 19,415
Goodwill17,255
 17,255
Other intangible assets963
 966
Deferred tax asset74,974
 76,869
Property and equipment, net8,396
 7,890
Due premiums, net (less $1,399 and $1,600 allowance for doubtful accounts in 2017 and 2016, respectively)10,905
 12,852
Prepaid expenses938
 299
Other assets1,069
 918
Total assets$1,651,274
 1,583,668

(Continued)

See accompanying notes to consolidated financial statements.

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Financial Position
(In thousands, except share amounts)
(Unaudited)
    
    
 September 30, 2017 December 31, 2016
Liabilities and Stockholders' Equity   
Liabilities:   
Policy liabilities:   
Future policy benefit reserves:   
Life insurance$1,110,486
 1,060,297
Annuities72,825
 69,003
Accident and health978
 1,022
Dividend accumulations23,016
 20,897
Premiums paid in advance52,516
 48,198
Policy claims payable8,066
 9,538
Other policyholders' funds8,398
 7,744
Total policy liabilities1,276,285
 1,216,699
Commissions payable2,343
 3,540
Federal income tax payable83,802
 81,270
Payable for securities in process of settlement3,735
 3,061
Other liabilities20,888
 29,998
Total liabilities1,387,053
 1,334,568
Commitments and contingencies (Note 8)

 

Stockholders' equity: 
  
Class A, no par value, 100,000,000 shares authorized, 52,215,852 shares issued and outstanding in 2017 and 2016, including shares in treasury of 3,135,738 in 2017 and 2016259,383
 259,383
Class B, no par value, 2,000,000 shares authorized, 1,001,714 shares issued and outstanding in 2017 and 20163,184
 3,184
Accumulated deficit(10,171) (16,248)
Accumulated other comprehensive income: 
  
Unrealized gains on securities, net of tax22,836
 13,792
Treasury stock, at cost(11,011) (11,011)
Total stockholders' equity264,221
 249,100
Total liabilities and stockholders' equity$1,651,274
 1,583,668


See accompanying notes to consolidated financial statements.


CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Comprehensive Income
Three Months Ended September 30,
(In thousands, except per share amounts)
(Unaudited)
 2017 2016
Revenues:   
Premiums:     
Life insurance  $48,644
   47,513
Accident and health insurance  360
   385
Property insurance  1,243
   1,274
Net investment income  13,828
   12,320
Realized investment gains (losses), net  (404)   46
Other income  660
   203
Total revenues  64,331
   61,741
Benefits and expenses:   
    
Insurance benefits paid or provided:       
Claims and surrenders  21,454
   21,014
Increase in future policy benefit reserves  19,597
   18,997
Policyholders' dividends  1,613
   1,620
Total insurance benefits paid or provided  42,664
   41,631
Commissions  10,801
   10,852
Other general expenses  7,254
   4,992
Capitalization of deferred policy acquisition costs  (7,756)   (7,890)
Amortization of deferred policy acquisition costs  7,623
   6,908
Amortization of cost of customer relationships acquired  635
   641
Total benefits and expenses  61,221
   57,134
Income before federal income tax  3,110
   4,607
Federal income tax expense (benefit)  (339)   1,845
Net income  3,449
   2,762
Per Share Amounts:   
  
  
Basic earnings per share of Class A common stock$0.07
  
 0.06
  
Basic earnings per share of Class B common stock0.03
  
 0.03
  
Diluted earnings per share of Class A common stock0.07
  
 0.06
  
Diluted earnings per share of Class B common stock0.03
  
 0.03
  
Other comprehensive income:   
  
  
Unrealized gains (losses) on available-for-sale securities: 
  
  
  
Unrealized holding gains (losses) arising during period 
 3,875
  
 (1,261)
Reclassification adjustment for gains (losses) included in net income 
 370
  
 (47)
Unrealized gains (losses) on available-for-sale securities, net 
 4,245
  
 (1,308)
Income tax expense (benefit) on unrealized gains (losses) on available-for-sale securities 
 1,486
  
 (458)
Other comprehensive income (loss) 
 2,759
  
 (850)
Comprehensive income 
 $6,208
  
 1,912
        



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

 2017 2016
Revenues:     
Premiums:       
Life insurance  $138,603
   137,637
Accident and health insurance  1,033
   1,170
Property insurance  3,731
   3,811
Net investment income  39,640
   36,051
Realized investment gains (losses), net  742
   (1,776)
Other income  1,015
   610
Total revenues  184,764
   177,503
Benefits and expenses:   
    
Insurance benefits paid or provided:   
    
Claims and surrenders  62,130
   60,988
Increase in future policy benefit reserves  51,953
   52,095
Policyholders' dividends  4,418
   4,985
Total insurance benefits paid or provided  118,501
   118,068
Commissions  30,620
   31,097
Other general expenses  26,765
   22,732
Capitalization of deferred policy acquisition costs  (21,540)   (22,257)
Amortization of deferred policy acquisition costs  22,640
   20,418
Amortization of cost of customer relationships acquired  1,629
   1,588
Total benefits and expenses  178,615
   171,646
Income before federal income tax  6,149
   5,857
Federal income tax expense  72
   4,004
Net income  6,077
   1,853
Per Share Amounts:   
  
  
Basic earnings per share of Class A common stock$0.12
  
 0.04
  
Basic earnings per share of Class B common stock0.06
  
 0.02
  
Diluted earnings per share of Class A common stock0.12
  
 0.04
  
Diluted earnings per share of Class B common stock0.06
  
 0.02
  
Other comprehensive income: 
  
  
  
Unrealized gains on available-for-sale securities: 
  
  
  
Unrealized holding gains arising during period 
 13,585
  
 26,446
Reclassification adjustment for losses included in net income 
 329
  
 1,769
Unrealized gains on available-for-sale securities, net 
 13,914
  
 28,215
Income tax expense on unrealized gains on available-for-sale securities 
 4,870
  
 9,875
Other comprehensive income 
 9,044
  
 18,340
Comprehensive income 
 $15,121
  
 20,193

See accompanying notes to consolidated financial statements.

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Cash Flows
Nine Months Ended September 30,
(In thousands)
(Unaudited)
 2017 2016
Cash flows from operating activities:   
Net income$6,077
 1,853
Adjustments to reconcile net income to net cash provided by operating activities: 
  
Realized (gains) losses on sale of investments and other assets(742) 1,776
Net deferred policy acquisition costs1,100
 (1,833)
Amortization of cost of customer relationships acquired1,629
 1,588
Depreciation763
 600
Amortization of premiums and discounts on investments12,398
 10,709
Deferred federal income tax benefit(2,975) (6,616)
Change in: 
  
Accrued investment income(340) (1,333)
Reinsurance recoverable(55) 484
Due premiums1,947
 882
Future policy benefit reserves51,876
 51,559
Other policyholders' liabilities5,619
 3,241
Federal income tax payable2,532
 7,254
Commissions payable and other liabilities(10,307) (317)
Other, net(663) (670)
Net cash provided by operating activities68,859
 69,177
Cash flows from investing activities: 
  
Sale of fixed maturities, available-for-sale508
 —
Maturities and calls of fixed maturities, available-for-sale65,456
 44,301
Maturities and calls of fixed maturities, held-to-maturity7,685
 9,790
Purchase of fixed maturities, available-for-sale(135,538) (165,539)
Purchase of fixed maturities, held-to-maturity—
 (5,507)
Sale of equity securities, available-for-sale1,940
 403
Calls of equity securities, available-for-sale450
 422
Principal payments on mortgage loans35
 357
Increase in policy loans, net(4,543) (4,548)
Sale of other long-term investments and real estate3,040
 1
Purchase of other long-term investments—
 (36)
Sale of property and equipment41
 59
Purchase of property and equipment(1,223) (978)
Maturity of short-term investments500
 250
Purchase of short-term investments—
 (522)
Net cash used in investing activities(61,649) (121,547)
    

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
Nine Months Ended September 30,
(In thousands)
(Unaudited)
 2017 2016
Cash flows from financing activities:   
Annuity deposits$7,240
 6,243
Annuity withdrawals(4,960) (4,438)
Net cash provided by financing activities2,280
 1,805
Net increase (decrease) in cash and cash equivalents9,490
 (50,565)
Cash and cash equivalents at beginning of year35,510
 82,827
Cash and cash equivalents at end of period$45,000
 32,262
Supplemental disclosures of operating activities: 
  
Cash paid during the period for income taxes, net$515
 2,234

Supplemental Disclosures of Non-Cash Activities:
None.

See accompanying notes to consolidated financial statements.


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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2017
(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"), Security Plan Life Insurance Company ("SPLIC"), Security Plan Fire Insurance Company ("SPFIC"), Citizens National Life Insurance Company ("CNLIC"), Magnolia Guaranty Life Insurance Company ("MGLIC"), Computing Technology, Inc. ("CTI"), Insurance Investors, Inc. ("III") and CICA Life Ltd.  Citizens and its wholly-owned subsidiaries are collectively referred to as "the Company," "we," "us" or "our."

The consolidated statement of financial position as of September 30, 2017, and the consolidated statements of comprehensive income for the three and nine months ended September 30, 2017 and 2016 and cash flows for the nine-month periods ended September 30, 2017 and 2016, 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 September 30, 2017 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, 2016.  Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period.

We provide primarily life insurance and a small amount of health insurance policies through our insurance subsidiaries:  CICA, SPLIC, MGLIC and CNLIC.  Until the end of 2016, CICA and CNLIC issued ordinary whole-life policies, credit life and disability, burial insurance, pre-need policies, and accident and health related policies, throughout the Midwest and southern United States.  Beginning January 1, 2017, CICA and CNLIC ceased selling products domestically as the products failed to qualify for the favorable U.S. federal income tax treatment afforded by Section 7702 of the Internal Revenue Code ("IRC") of 1986. The Company is developing Section 7702 compliant products and will resume sales domestically once the products receive regulatory approval. CICA primarily issues ordinary whole-life and endowment policies to non-U.S. residents.  SPLIC offers final expense and home service life insurance in Louisiana, Arkansas and Mississippi, and SPFIC, a wholly-owned subsidiary of SPLIC, writes a limited amount of property insurance in Louisiana. MGLIC provides industrial life policies through independent funeral homes in Mississippi.

CTI provides data processing systems and services, as well as furniture and equipment, to the Company.  III provided aviation transportation to the Company, until the corporate plane was sold in the third quarter of 2017. As III's sole purpose was to provide aviation transportation to the Company, we plan to dissolve III and merge it into Citizens. CICA Life Ltd. is a newly established Bermuda entity with no operations to date.

Reclassifications

Certain amounts presented in the prior year have been reclassified to conform to the current presentation. No individual amounts were material.

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.


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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 2017
(Unaudited)

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.

Significant Accounting Policies

For a description of significant accounting policies, see Note 1 of the notes to consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2016, which should be read in conjunction with these accompanying consolidated financial statements.

(2) Accounting Pronouncements

Accounting Standards Recently Adopted

None.

Accounting Standards Not Yet Adopted

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides a five-step process to achieve that core principle. ASU 2014-09 requires disclosures enabling users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Additionally, qualitative and quantitative disclosures are required about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, using one of two retrospective application methods. We have evaluated the effect the guidance will have on our consolidated financial statements. We do not expect that any portion of our revenue will be affected by the new standard, primarily as the new guidance does not apply to revenue from insurance contracts and our non-insurance subsidiaries do not receive revenues from customers.

The FASB’s new lease accounting standard, ASU 2016-02, Leases (Topic 842), was issued on February 25, 2016. The ASU will require organizations that lease assets, referred to as “lessees”, to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. The ASU also will require 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 financial statements. The accounting by organizations that own the assets leased by the lessee, also known as lessor accounting, will remain largely unchanged from current GAAP. However, the ASU contains some targeted improvements that are intended to align, where necessary, lessor accounting with the lessee accounting model and with the updated revenue recognition guidance issued in 2014. The ASU on leases will take effect for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is assessing the impact of this new standard, but currently the Company does not anticipate the new standard to have a significant effect on the Company's consolidated financial statements.

In June 2016, the FASB issued ASU 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 amendments in this ASU require 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

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 2017
(Unaudited)

manner similar to current 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 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 GAAP prohibits reflecting those improvements in current-period earnings. For public business entities, the amendments in this ASU are 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, but it is not expected to have a significant impact on the Company's financial statements compared with the previous guidance, except for potential reversals of previous credit losses which were not allowed under prior guidance.

In January 2017, the FASB issued Accounting Standards Update ("ASU") No. 2017-04, Simplifying the Test for Goodwill Impairment. An entity will no longer perform a hypothetical purchase price allocation to measure impairment, eliminating step 2 of the goodwill impairment test. Instead, impairment will be measured using the difference of the carrying amount to the fair value of the reporting unit. The ASU is effective prospectively for annual and interim periods in fiscal year beginning after December 15, 2019, but early adoption is permitted for goodwill impairment tests with measurement dates after January 1, 2017. The Company is not planning on early adoption of this ASU and has not yet quantified any potential impact of the ASU on the Company's consolidated financial statements.

In March 2017, the FASB issued Accounting Standards Update ("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 to reduce volatility in earnings by eliminating reporting large realized losses when debt securities are called. For public business entities, the amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.

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.

(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.


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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 2017
(Unaudited)

The Company has no reportable differences between segments and consolidated operations.
 Three Months Ended
 September 30, 2017
 Life
Insurance		 Home
Service
Insurance		 Other
Non-Insurance
Enterprises		 Consolidated
 (In thousands)
Revenues:       
Premiums$38,472
 11,775
 —
 50,247
Net investment income10,051
 3,355
 422
 13,828
Realized investment losses, net(355) (49) —
 (404)
Other income561
 —
 99
 660
Total revenue48,729
 15,081
 521
 64,331
Benefits and expenses:   
  
  
Insurance benefits paid or provided: 
  
  
  
Claims and surrenders15,700
 5,754
 —
 21,454
Increase in future policy benefit reserves18,045
 1,552
 —
 19,597
Policyholders' dividends1,602
 11
 —
 1,613
Total insurance benefits paid or provided35,347
 7,317
 —
 42,664
Commissions6,892
 3,909
 —
 10,801
Other general expenses2,200
 4,025
 1,029
 7,254
Capitalization of deferred policy acquisition costs(6,242) (1,514) —
 (7,756)
Amortization of deferred policy acquisition costs6,431
 1,192
 —
 7,623
Amortization of cost of customer relationships acquired118
 517
 —
 635
Total benefits and expenses44,746
 15,446
 1,029
 61,221
Income (loss) before income tax expense$3,983
 (365) (508) 3,110

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 2017
(Unaudited)

 Nine Months Ended
 September 30, 2017
 
Life
Insurance
 
Home
Service
Insurance
 
Other
Non-Insurance
Enterprises
 Consolidated
 (In thousands)
Revenues:       
Premiums$107,995
 35,372
 —
 143,367
Net investment income28,678
 9,864
 1,098
 39,640
Realized investment gains (losses), net(419) 1,161
 —
 742
Other income856
 2
 157
 1,015
Total revenue137,110
 46,399
 1,255
 184,764
Benefits and expenses:   
  
  
Insurance benefits paid or provided: 
  
  
  
Claims and surrenders45,218
 16,912
 —
 62,130
Increase in future policy benefit reserves47,818
 4,135
 —
 51,953
Policyholders' dividends4,387
 31
 —
 4,418
Total insurance benefits paid or provided97,423
 21,078
 —
 118,501
Commissions18,765
 11,855
 —
 30,620
Other general expenses10,399
 13,182
 3,184
 26,765
Capitalization of deferred policy acquisition costs(16,843) (4,697) —
 (21,540)
Amortization of deferred policy acquisition costs19,350
 3,290
 —
 22,640
Amortization of cost of customer relationships acquired434
 1,195
 —
 1,629
Total benefits and expenses129,528
 45,903
 3,184
 178,615
Income (loss) before income tax expense$7,582
 496
 (1,929) 6,149

12
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 2017
(Unaudited)

 Three Months Ended
 September 30, 2016
 Life
Insurance		 Home
Service
Insurance		 Other
Non-Insurance
Enterprises		 Consolidated
 (In thousands)
Revenues:       
Premiums$37,572
 11,600
 —
 49,172
Net investment income8,473
 3,467
 380
 12,320
Realized investment gains, net—
 46
 —
 46
Other income166
 2
 35
 203
Total revenue46,211
 15,115
 415
 61,741
Benefits and expenses: 
  
  
  
Insurance benefits paid or provided: 
  
  
  
Claims and surrenders14,980
 6,034
 —
 21,014
Increase in future policy benefit reserves18,009
 988
 —
 18,997
Policyholders' dividends1,604
 16
 —
 1,620
Total insurance benefits paid or provided34,593
 7,038
 —
 41,631
Commissions6,973
 3,879
 —
 10,852
Other general expenses990
 3,610
 392
 4,992
Capitalization of deferred policy acquisition costs(6,346) (1,544) —
 (7,890)
Amortization of deferred policy acquisition costs5,889
 1,019
 —
 6,908
Amortization of cost of customer relationships acquired119
 522
 —
 641
Total benefits and expenses42,218
 14,524
 392
 57,134
Income before income tax expense$3,993
 591
 23
 4,607

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 2017
(Unaudited)

 Nine Months Ended
 September 30, 2016
 
Life
Insurance
 
Home
Service
Insurance
 
Other
Non-Insurance
Enterprises
 Consolidated
 (In thousands)
Revenues:       
Premiums$107,531
 35,087
 —
 142,618
Net investment income24,534
 10,386
 1,131
 36,051
Realized investment losses, net(660) (1,116) —
 (1,776)
Other income537
 5
 68
 610
Total revenue131,942
 44,362
 1,199
 177,503
Benefits and expenses: 
  
  
  
Insurance benefits paid or provided: 
  
  
  
Claims and surrenders43,601
 17,387
 —
 60,988
Increase in future policy benefit reserves48,525
 3,570
 —
 52,095
Policyholders' dividends4,942
 43
 —
 4,985
Total insurance benefits paid or provided97,068
 21,000
 —
 118,068
Commissions19,544
 11,553
 —
 31,097
Other general expenses9,115
 11,357
 2,260
 22,732
Capitalization of deferred policy acquisition costs(17,764) (4,493) —
 (22,257)
Amortization of deferred policy acquisition costs17,807
 2,611
 —
 20,418
Amortization of cost of customer relationships acquired419
 1,169
 —
 1,588
Total benefits and expenses126,189
 43,197
 2,260
 171,646
Income (loss) before income tax expense$5,753
 1,165
 (1,061) 5,857


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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 2017
(Unaudited)

(4) Earnings Per Share

The following tables set forth the computation of basic and diluted earnings per share.
 Three Months Ended
 September 30, 2017 September 30, 2016
 (In thousands,
except per share amounts)
Basic and diluted earnings per share:   
Numerator:   
 Net income$3,449
 2,762
 Net income allocated to Class A common stock3,415
 2,734
 Net income allocated to Class B common stock34
 28
 Net income$3,449
 2,762
Denominator:   
 Weighted average shares of Class A outstanding - basic49,080
 49,080
 Weighted average shares of Class A outstanding - diluted49,080
 49,080
 Weighted average shares of Class B outstanding - basic and diluted1,002
 1,002
Basic earnings per share of Class A common stock$0.07
 0.06
Basic earnings per share of Class B common stock0.03
 0.03
Diluted earnings per share of Class A common stock0.07
 0.06
Diluted earnings per share of Class B common stock0.03
 0.03
 Nine Months Ended
 September 30, 2017 September 30, 2016
 
(In thousands,
except per share amounts)
Basic and diluted earnings per share:   
Numerator:   
 Net income$6,077
 1,853
 Net income allocated to Class A common stock$6,016
 1,834
 Net income allocated to Class B common stock61
 19
 Net income$6,077
 1,853
Denominator:   
 Weighted average shares of Class A outstanding - basic49,080
 49,080
 Weighted average shares of Class A outstanding - diluted49,080
 49,080
 Weighted average shares of Class B outstanding - basic and diluted1,002
 1,002
Basic earnings per share of Class A common stock$0.12
 0.04
Basic earnings per share of Class B common stock0.06
 0.02
Diluted earnings per share of Class A common stock0.12
 0.04
Diluted earnings per share of Class B common stock0.06
 0.02


15
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 2017
(Unaudited)

(5) Investments

The Company invests primarily in fixed maturity securities, which totaled 89.6% of total cash, cash equivalents and investments at September 30, 2017.
 September 30, 2017 December 31, 2016
 
Carrying
Value
 
% of Total
Carrying Value
 
Carrying
Value
 
% of Total
Carrying Value
 (In thousands)   (In thousands)  
Fixed maturity securities$1,191,597
 89.6
 $1,128,672
 89.7
Equity securities16,146
 1.2
 18,159
 1.6
Mortgage loans197
 —
 232
 —
Policy loans71,215
 5.4
 66,672
 5.3
Real estate and other long-term investments5,880
 0.4
 7,896
 0.6
Short-term investments—
 —
 508
 —
Cash and cash equivalents45,000
 3.4
 35,510
 2.8
Total cash, cash equivalents and investments$1,330,035
 100.0
 $1,257,649
 100.0


16
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 2017
(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, 2017
 
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 (In thousands)
Fixed maturities:       
Available-for-sale:       
U.S. Treasury securities$9,878
 2,124
 —
 12,002
U.S. Government-sponsored enterprises3,576
 943
 —
 4,519
States and political subdivisions555,890
 17,991
 1,886
 571,995
Foreign governments103
 21
 —
 124
Corporate349,291
 17,273
 2,066
 364,498
Residential mortgage-backed1,962
 146
 2
 2,106
Total available-for-sale securities920,700
 38,498
 3,954
 955,244
Held-to-maturity securities: 
  
  
  
States and political subdivisions215,414
 8,076
 632
 222,858
Corporate20,939
 989
 722
 21,206
Total held-to-maturity securities236,353
 9,065
 1,354
 244,064
Total fixed maturities$1,157,053
 47,563
 5,308
 1,199,308
        
Equity securities: 
  
  
  
Stock mutual funds$2,867
 301
 —
 3,168
Bond mutual funds12,071
 458
 134
 12,395
Common stock22
 1
 —
 23
Redeemable preferred stock519
 41
 —
 560
Total equity securities$15,479
 801
 134
 16,146


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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 2017
(Unaudited)

 December 31, 2016
 
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 (In thousands)
Fixed maturities:       
Available-for-sale securities:       
U.S. Treasury securities$9,929
 2,261
 —
 12,190
U.S. Government-sponsored enterprises7,639
 863
 —
 8,502
States and political subdivisions563,279
 15,017
 5,022
 573,274
Foreign governments103
 23
 —
 126
Corporate277,226
 12,095
 4,222
 285,099
Commercial mortgage-backed50
 1
 —
 51
Residential mortgage-backed2,247
 181
 2
 2,426
Total available-for-sale securities860,473
 30,441
 9,246
 881,668
Held-to-maturity securities: 
  
  
  
U.S. Government-sponsored enterprises2,003
 28
 —
 2,031
States and political subdivisions223,966
 6,916
 1,599
 229,283
Corporate21,035
 888
 692
 21,231
Total held-to-maturity securities247,004
 7,832
 2,291
 252,545
Total fixed maturity securities$1,107,477
 38,273
 11,537
 1,134,213
        
Equity securities: 
  
  
  
Stock mutual funds$2,867
 79
 —
 2,946
Bond mutual funds14,040
 265
 108
 14,197
Common stock39
 3
 17
 25
Redeemable preferred stock819
 174
 2
 991
Total equity securities$17,765
 521
 127
 18,159
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 other-than-temporary impairments have occurred is based on a case-by-case evaluation of underlying reasons for the decline in fair value.  The Company determines other-than-temporary impairment by reviewing relevant evidence related to the specific security issuer as well as the Company's intent to sell the security, or if it is more likely than not that the Company would be required to sell a security before recovery of its amortized cost.

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

18
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 2017
(Unaudited)

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.

Other-than-temporary impairment ("OTTI") on one equity security totaling $17,000 was recognized during the nine months ended September 30, 2017 and OTTI of $2.3 million was recognized during the nine months ended September 30, 2016 related to one available-for-sale fixed maturity security and several mutual funds. No OTTI was recorded for either the three months ended September 30, 2017 or September 30, 2016.


19
Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 2017
(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, 2017
 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$101,119
 910
 77
 25,467
 976
 29
 126,586
 1,886
 106
Corporate86,326
 1,287
 54
 5,543
 779
 9
 91,869
 2,066
 63
Residential mortgage-backed41
 —
 1
 161
 2
 4
 202
 2
 5
Total available-for-sale securities187,486
 2,197
 132
 31,171
 1,757
 42
 218,657
 3,954
 174
Held-to-maturity securities: 
  
  
  
  
  
  
  
  
States and political subdivisions17,239
 93
 26
 2,736
 539
 4
 19,975
 632
 30
Corporate—
 —
 —
 2,111
 722
 2
 2,111
 722
 2
Total held-to-maturity securities17,239
 93
 26
 4,847
 1,261
 6
 22,086
 1,354
 32
Total fixed maturities$204,725
 2,290
 158
 36,018
 3,018
 48
 240,743
 5,308
 206
Equity securities: 
  
  
  
  
  
  
  
  
Bond mutual funds$8,297
 134
 4
 —
 —
 —
 8,297
 134
 4
Common stocks1
 —
 1
 —
 —
 —
 1
 —
 1
 $8,298
 134
 5
 —
 —
 —
 8,298
 134
 5

As of September 30, 2017, the Company had 42 available-for-sale fixed maturity securities and 6 held-to-maturity fixed maturity securities that were in an unrealized loss position for greater than 12 months. There were no equity securities in an unrealized loss position for greater than 12 months as of September 30, 2017.


20
Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 2017
(Unaudited)

 December 31, 2016
 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$202,788
 3,513
 184
 8,018
 1,509
 8
 210,806
 5,022
 192
Corporate91,527
 3,578
 70
 6,102
 644
 8
 97,629
 4,222
 78
Residential mortgage-backed116
 1
 4
 105
 1
 2
 221
 2
 6
Total available-for-sale securities294,431
 7,092
 258
 14,225
 2,154
 18
 308,656
 9,246
 276
Held-to-maturity securities: 
    
  
  
  
  
  
  
States and political subdivisions43,659
 1,562
 47
 509
 37
 1
 44,168
 1,599
 48
Corporate3,587
 12
 3
 2,171
 680
 2
 5,758
 692
 5
Total held-to-maturity securities47,246
 1,574
 50
 2,680
 717
 3
 49,926
 2,291
 53
Total fixed maturities$341,677
 8,666
 308
 16,905
 2,871
 21
 358,582
 11,537
 329
Equity securities:                 
Bond mutual funds$10,160
 108
 2
 —
 —
 —
 10,160
 108
 2
Common stock—
 —
 —
 —
 17
 1
 —
 17
 1
Redeemable preferred stocks201
 2
 2
 —
 —
 —
 201
 2
 2
Total equities$10,361
 110
 4
 —
 17
 1
 10,361
 127
 5
We have reviewed these securities in an unrealized loss position for the periods ended September 30, 2017 and December 31, 2016 and determined that no other-than-temporary impairment 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.


21
Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 2017
(Unaudited)

The amortized cost and fair value of fixed maturity securities at September 30, 2017 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. Securities not due at a single maturity date have been reflected based upon final stated maturity.
 September 30, 2017
 
Amortized
Cost
 
Fair
Value
 (In thousands)
Available-for-sale securities:   
Due in one year or less$47,490
 47,913
Due after one year through five years92,764
 96,733
Due after five years through ten years117,822
 125,611
Due after ten years662,624
 684,987
Total available-for-sale securities920,700
 955,244
Held-to-maturity securities: 
  
Due in one year or less20,245
 20,446
Due after one year through five years44,884
 46,472
Due after five years through ten years46,584
 48,740
Due after ten years124,640
 128,406
Total held-to-maturity securities236,353
 244,064
Total fixed maturities$1,157,053
 1,199,308

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 Nine Months Ended Three Months Ended Nine Months Ended
 September 30, September 30, September 30, September 30,
 2017 2016 2017 2016 2017 2016 2017 2016
 (In thousands)
Proceeds$—
 —
 508
 —
 —
 —
 1,940
 403
Gross realized gains$—
 —
 6
 —
 —
 —
 —
 40
Gross realized losses$—
 —
 —
 —
 —
 —
 30
 36

There were no sales of available-for-sale securities for the three month period ended September 30, 2017 or 2016. There were no securities sold from the held-to-maturity portfolio for the three and nine months ended September 30, 2017 or 2016. Realized investment losses recorded for the three month period ending September 30, 2017 were due to fixed maturity call activity.


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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 2017
(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.  There were no securities in this category at September 30, 2017.


23
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 2017
(Unaudited)

The following tables set forth our assets that are measured at fair value on a recurring basis as of the dates indicated.
 September 30, 2017
Available-for-sale investmentsLevel 1 Level 2 Level 3 
Total
Fair Value
 (In thousands)
Financial assets:       
Fixed maturities:       
U.S. Treasury and U.S. Government-sponsored enterprises$12,002
 4,519
 —
 16,521
States and political subdivisions—
 571,995
 —
 571,995
Corporate—
 364,498
 —
 364,498
Residential mortgage-backed—
 2,106
 —
 2,106
Foreign governments—
 124
 —
 124
Total fixed maturities12,002
 943,242
 —
 955,244
Equity securities: 
  
  
  
Stock mutual funds3,168
 —
 —
 3,168
Bond mutual funds12,395
 —
 —
 12,395
Common stock23
 —
 —
 23
Redeemable preferred stock560
 —
 —
 560
Total equity securities16,146
 —
 —
 16,146
Total financial assets$28,148
 943,242
 —
 971,390

 December 31, 2016
Available-for-sale investmentsLevel 1 Level 2 Level 3 
Total
Fair Value
 (In thousands)
Financial assets:       
Fixed maturities:       
U.S. Treasury and U.S. Government-sponsored enterprises$12,190
 8,502
 —
 20,692
States and political subdivisions—
 573,274
 —
 573,274
Corporate—
 285,099
 —
 285,099
Commercial mortgage-backed—
 —
 51
 51
Residential mortgage-backed—
 2,426
 —
 2,426
Foreign governments—
 126
 —
 126
Total fixed maturities12,190
 869,427
 51
 881,668
Equity securities: 
  
  
  
Stock mutual funds2,946
 —
 —
 2,946
Bond mutual funds14,197
 —
 —
 14,197
Common stock25
 —
 —
 25
Redeemable preferred stock991
 —
 —
 991
Total equity securities18,159
 —
 —
 18,159
Total financial assets$30,349
 869,427
 51
 899,827

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 2017
(Unaudited)

Financial Instruments Valuation

Fixed maturity securities, available-for-sale.  At September 30, 2017, our fixed maturity securities, valued using a third-party pricing source, totaled $943.2 million for Level 2 assets and comprised 97.1% 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 September 30, 2017. For the nine months ended September 30, 2017, 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,
2017		 December 31,
2016
 (In thousands)
    
Balance at beginning of period$51
 145
Total realized and unrealized gains (losses)

 

Included in net income—
 —
Included in other comprehensive income—
 (4)
Principal paydowns(51) (90)
Transfer in and (out) of Level 3—
 —
Balance at end of period$—
 51

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.

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.


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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 2017
(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, 2017 December 31, 2016
 Carrying Value Fair Value Carrying Value Fair Value
 (In thousands)
Financial assets:       
Fixed maturities, held-to-maturity$236,353
 244,064
 247,004
 252,545
Mortgage loans197
 229
 232
 269
Policy loans71,215
 71,215
 66,672
 66,672
Short-term investments—
 —
 508
 508
Cash and cash equivalents45,000
 45,000
 35,510
 35,510
Financial liabilities: 
  
  
  
Annuity - investment contracts54,470
 52,711
 50,952
 52,173

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 properties.  Weighted average interest rates for these loans were approximately 6.56% at September 30, 2017 and 6.80% at December 31, 2016. At September 30, 2017, maturities ranged from 1 to 25 years.  Management estimated the fair value using an annual interest rate of 6.25% at September 30, 2017.  Our mortgage loans are considered Level 3 assets in the fair value hierarchy.

Policy loans had a weighted average annual interest rate of 7.71% as of September 30, 2017 and December 31, 2016, 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, 2017 using discounted cash flows based upon spot rates ranging from 1.49% to 3.51% 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.


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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 2017
(Unaudited)

(7) Short Duration Contracts

Special Property Insurance (Allied and Fire)

The Company's short duration contracts consist of credit life and credit disability in the Life segment and property insurance in the Home Service segment. The following table presents information on changes in the liability for credit life, credit disability, and property policy and contract claims for the periods ended September 30, 2017 and September 30, 2016.

 September 30, September 30,
 2017 2016
    
Policy claims payable at January 1$543
 514
Less:  reinsurance recoverable—
 —
Net balance at January 1543
 514
Add claims incurred, related to: 
  
Current year1,435
 1,642
Prior years(11) (110)
 1,424
 1,532
Deduct claims paid, related to: 
  
Current year1,106
 1,243
Prior years407
 269
 1,513
 1,512
Net balance September 30454
 534
Plus:  reinsurance recoverable—
 —
Policy claims payable, September 30$454
 534

(8) Commitments and Contingencies

Qualification of Life Products

As of December 31, 2014, we determined 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. This tax code section allows for qualifying products sold to clients to have favorable tax treatment such as the product's inside build up is not taxable. Because these policies were sold with the intention that they would qualify for this favorable tax treatment, holders of these policies and the Company may now be subject to additional tax liabilities. The policies at issue were sold most substantially to non-U.S. citizens residing abroad and to a lesser extent domestically. Based upon a review of the options available to the Company, we have determined we will not remediate our endowments and life products under IRC 7702 we have sold to non-U.S. citizens. We do intend to remediate the domestic products we have sold to U.S. citizens. In addition, as part of our continuing review, we determined in July 2015 that certain annuity contracts do not contain qualifying language under IRC 72(s) as intended that would have provided for favorable tax treatment of the annuities. This issue affects both our domestic and international contract holders. The Company has continued to refine the understanding of the tax failures as previously reported by preparing an individual policy calculation and has reflected the related exposure for the current reporting period as noted below. Failure of these policies to qualify under IRC Sections 7702 and 72(s) has resulted in additional liabilities and expenses as described below. The products have been and continue to be appropriately reported under U.S. GAAP for financial reporting.

The failure of these policies to qualify under Sections 7702 and 72(s) results in an estimated liability as of September 30, 2017 of $10.7 million, after tax, related to projected IRS toll charges and fees reported in other general expenses of $10.4 million and reserves increases to bring policies into compliance totaling $0.3 million. The range of financial estimates relative to this issue is $5.6 million to $34.0 million, after tax. This estimated range includes projected toll charges and fees payable to the IRS, as well as estimated increased payout obligations to current and former holders of non-compliant domestic life insurance policies expected

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 2017
(Unaudited)

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 taxable benefits under non-compliant policies. Given the range of potential outcomes and the significant variables assumed in establishing our estimates, actual amounts incurred may exceed our reserve and also 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 liability 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 recorded additional general expenses of $1.6 million in the first nine months of 2017 related to our 7702 and 72(s) issues. Additional costs will be incurred in 2017 associated with these issues. We believe these costs could be an additional $0.75 million to $1.25 million, 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.

Unclaimed Property Contingencies

The Company was informed in 2012 by the Louisiana Department of Treasury, Arkansas Auditor of State and the Texas State Comptroller, 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.

The external audit 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.  The Company believes additional escheatment of funds in Arkansas or Texas will not be material to our financial condition or results of operations. However, additional escheatment of funds in Louisiana, which may subsequently be deemed abandoned under the Louisiana Department of Treasury’s audit, could be substantial for SPLIC if the Louisiana Department of Treasury chooses to disregard recent court decisions regarding unclaimed property litigation in favor of the insurance industry. At this time, the Company is not able to estimate any of these possible amounts.

Litigation

From time to time we are subject to legal and regulatory actions relating to our business. We defend all claims vigorously.  As a result, we incur defense costs, including attorneys' fees, other direct litigation costs and the expenditure of management time that otherwise would be devoted to our business.  

(9) Income Taxes

The effective tax rate was (10.9)% and 40.0% for the three months and 1.2% and 68.4% for the nine months ended September 30, 2017 and 2016, respectively. Additionally there were $1.0 million of tax benefit and $1.8 million tax expense related to an uncertain tax position in the nine months ended September 30, 2017 and September 30, 2016, respectively. The effective tax rate is affected by our tax compliance issues, as IRS toll charge penalties are not tax deductible and can move up or down depending on the net adjustment to our best estimate liability. In addition, we report the interest component of our uncertain tax positions in income tax expense, which can move up or down depending on the tax compliance issues as well as statute expirations. Absent the effect on our effective tax rate of our tax compliance issues, in most periods where our effective tax rate is lower than the statutory tax rate of 35%, the difference is primarily due to tax-exempt state and local bond income which reduce the effective tax rate. For the nine months ended September 30, 2017, our effective tax rate was significantly lower than the nine months ended September 30, 2016, as the Company recorded a net reduction in the overall IRS toll charge penalties and a tax benefit on the Company's uncertain tax position interest accrual compared to a net increase for these items in the nine months ended September 30, 2016.


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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
September 30, 2017
(Unaudited)

(10) Benefit Plans

The Company has an employer-sponsored 401(k) plan available to all eligible employees. This is an additional benefit offered to employees, which supplements the defined contribution profit-sharing plan.  Employees with one year of service can participate in the plan.  Contributions are made by employees and the Company provides a matching contribution based upon the employee's level of contribution. The Company's expense related to the 401(k) plan totaled $184,000 and $574,000 for the three and nine months ended September 30, 2017, respectively, and $75,000 and $367,000 for the same periods in 2016.

(11) 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, 2017.   See our Annual Report on Form 10-K for the year ended December 31, 2016 for a comprehensive discussion of related party transactions.

In the first quarter of 2017, Citizens made a $5.0 million capital contribution to CICA Life. In the third quarter of 2017, Citizens contributed $250,000 to CICA Life Ltd. to capitalize a newly formed Bermuda entity, SPLIC contributed $250,000 in capital to MGLIC, and SPLIC declared a dividend payable to CICA of $395,000 which will be paid in October of 2017.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
September 30, 2017

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

FORWARD-LOOKING STATEMENTS

Certain statements contained in this report are not statements of historical fact and constitute forward-looking statements within the meaning of the federal securities laws, 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. 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 the application, interpretation or enforcement of foreign insurance laws that impact our business, which derives the majority of its revenues from residents of foreign countries;
Potential changes in amounts reserved for in connection with the noncompliance of a portion of our insurance policies with Sections 7702 under the Internal Revenue Code, the failure of certain annuity contracts to qualify under Section 72(s) of the Internal Revenue Code and the anticipated timing of our filings with the IRS to address these matters;
The outcome of our international business model review and strategic initiatives;
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 or regulatory oversight, 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 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. Generally Accepted Accounting Principles ("U.S. GAAP"), policies or practices;
Changes in leadership among our board and senior management team.
Our success at managing risks involved in the foregoing; and
The risk factors discussed in "Part II-Item 1A-Risk Factors" of this report.

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.


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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
September 30, 2017

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 report.

Overview

Citizens, Inc. (“Citizens” or the "Company") is an insurance holding company incorporated in Colorado 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, 2017, we had approximately $1.7 billion of total assets and approximately $4.5 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 sold to foreign residents, located 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, Mountain West 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 and funeral homes.

We were formed in 1969 and historically, our Company has experienced growth through acquisitions in the domestic market and through organic market expansion in the international market.  We strive to generate bottom line returns using knowledge of our niche markets and our well-established distribution channels.

Recent Developments

In September of 2017, following the conclusion of an auditor selection process led by the Company's Audit Committee, the Company formally engaged Deloitte & Touche LLP to serve as its independent registered public accounting firm for the year ending December 31, 2017.

In addition, in the third quarter of 2017, the Company's Audit Committee engaged the audit firm of BDO USA, LLP to perform internal audit services for the Company and assist with management's assessment of internal controls.

Strategic Initiatives

The Company's Board of Directors and new executive management team are assessing the Company's domestic and international business models and business strategies with the assistance and support of external consultants and advisors.  Specifically, we are evaluating the Company's international business model and are considering potential options, the current economic and regulatory environment and sustainable business objectives.  Incorporated in our overall business model review are analyses of (1) new products and our profitability; (2) a potential restructuring of our international business and operations; (3) potential upgrades to our technology systems and operations with a strategic focus on our future business needs and cyber risk; and (4) final additions to our executive management team and equity compensation incentives for our employees.

We have made significant progress in filling vacancies and recruiting additional talented, experienced executives to our management team in 2017, including the addition of a Chief Operating Officer, a Chief Accounting Officer, a Chief Actuary and a Chief Marketing Officer. We are currently recruiting a Chief Information Officer. We are also adding talent at various levels to build expertise within the Company.

On September 12, 2017, the Company announced the appointment of David S. Jorgensen as General Manager for International Operations of CICA Life Ltd. (Bermuda). Prior to his appointment Mr. Jorgensen served as Vice President, Chief Financial Officer

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September 30, 2017

and Treasurer of Citizens Inc. Through CICA Life Ltd., we expect to expand our international footprint and implement strategic changes to the Company's current international business model.

The following pages describe the operations of our three business segments:  Life Insurance, Home Service and Other Non-Insurance Enterprises.  Revenues derived from any single customer did not exceed 10% of consolidated revenues in any of the last three years.

Current Financial Highlights

Financial highlights for the three and nine month periods ended September 30, 2017, compared to the same periods in 2016 were:

Insurance premiums increased slightly for the three and nine month periods ended September 30, 2017 to $50.2 million and $143.4 million from $49.2 million and $142.6 million for the corresponding periods in 2016, an increase of 2.2% and 0.5% driven by an increase in renewal premiums in our Life segment, in addition to a slight increase in first year premiums in both our Life and Home Service segments.
Net investment income increased 12.2% and 10.0% for the three and nine month periods ended September 30, 2017, compared to the corresponding periods in 2016, primarily due to a growing asset base from strong cash flows from our insurance operations.  The average yield on the consolidated portfolio as of the nine months ended September 30, 2017 increased to an annualized rate of 4.31% up from 4.29% for the same period in 2016.  
A realized gain of $1.1 million was recorded for the nine month period ended September 30, 2017 related to the sale of an office building in Little Rock, Arkansas in the first quarter of 2017. The Company recorded a small other-than-temporary impairment on a common stock in 2017. Other-than-temporary impairments were recorded for the nine month period ended September 30, 2016 totaling $2.3 million, respectively, related to mutual fund impairments in the second quarter of 2016 and one available-for-sale fixed maturity security impairment in the first quarter of 2016.
Claims and surrenders expense increased 2.1% and 1.9% for the three and nine month periods ended September 30, 2017, compared to corresponding periods in 2016.
General expenses increased 45.3% and 17.7% for the three and nine month periods ended September 30, 2017, respectively, compared to the corresponding periods in 2016, due primarily to additional audit fees related to the 2016 audit, higher legal and consulting fees and higher permanent and temporary salaries, offset by a decrease in our 7702/72(s) tax compliance best estimate liability.


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September 30, 2017

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,
 2017 2016
 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$219,592,550
 3,988
 $55,063
 $248,234,181
 4,416
 $56,212
Home Service141,400,866
 20,795
 6,800
 137,691,263
 20,847
 6,605

Note:  All discussions below compare or state results for the three and nine-month periods ended September 30, 2017 compared to the three and nine-month periods ended September 30, 2016.

Consolidated Results of Operations

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

Revenues

Revenues are generated primarily by insurance premiums and investment income on invested assets.
 Three Months Ended Nine Months Ended
 September 30, September 30,
 2017 2016 2017 2016
 (In thousands)
Revenues:       
Premiums:       
Life insurance$48,644
 47,513
 138,603
 137,637
Accident and health insurance360
 385
 1,033
 1,170
Property insurance1,243
 1,274
 3,731
 3,811
Net investment income13,828
 12,320
 39,640
 36,051
Realized investment gains (losses), net(404) 46
 742
 (1,776)
Other income660
 203
 1,015
 610
Total revenues$64,331
 61,741
 184,764
 177,503


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September 30, 2017

Premium Income.  Premium income derived from life, accident and health, and property insurance sales increased 2.2% and 0.5% for the three and nine month periods ended September 30, 2017 compared to the same periods ended September 30, 2016. The increase is driven primarily by an increase in renewal premiums in our Life Segment in addition to slight increases in first year premiums in both our Life and Home Service segments.

Net investment income performance is summarized as follows.
 September 30, December 31, September 30,
 2017 2016 2016
 (In thousands, except for %)
Net investment income, annualized$52,853
 48,560
 48,068
Average invested assets, at amortized cost1,225,187
 1,133,705
 1,120,356
Annualized yield on average invested assets4.31% 4.28% 4.29%

The annualized yield has remained relatively consistent as a change in portfolio mix has somewhat mitigated the impact of reinvestment in the current low rate environment.   

Investment income from debt securities accounted for approximately 88.0% of total investment income for the nine months ended September 30, 2017.  
 Three Months Ended Nine Months Ended
 September 30, September 30,
 2017 2016 2017 2016
 (In thousands)
Gross investment income:       
Fixed maturity securities$12,466
 10,984
 35,879
 32,432
Equity securities154
 247
 521
 635
Mortgage loans3
 3
 8
 20
Policy loans1,454
 1,353
 4,242
 3,903
Long-term investments—
 77
 66
 229
Other investment income20
 40
 44
 70
Total investment income14,097
 12,704
 40,760
 37,289
Investment expenses(269) (384) (1,120) (1,238)
Net investment income$13,828
 12,320
 39,640
 36,051

The consolidated invested asset portfolio has increased approximately 5.1% from year end 2016 to September 30, 2017 with investments in the fixed maturity securities portfolio accounting for the most significant increase in investment income. In addition, the increase in policy loans, which represents policyholders utilizing their accumulated policy cash value, contributed to the increase in investment income.

Realized Investment Gains (Losses), Net.  Realized losses in the three months ended September 30, 2017 were related to losses on calls of securities in the current period. A realized gain was recorded for the nine month period ended September 30, 2017 resulting from a $1.1 million gain on the sale of an office building in Little Rock, Arkansas in the first quarter of 2017. One small other-than-temporary impairment was recorded on a common stock in 2017. Other-than-temporary impairments were recorded for the nine month period ended September 30, 2016 totaling $2.3 million related to mutual fund impairments in the second quarter of 2016 and one available-for-sale fixed maturity security impairment in the first quarter of 2016. No other-than-temporary impairments were recorded for the three month period ended September 30, 2017 or 2016.


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Benefits and Expenses
 Three Months Ended Nine Months Ended
 September 30, September 30,
 2017 2016 2017 2016
 (In thousands)
Benefits and expenses:       
Insurance benefits paid or provided:       
Claims and surrenders$21,454
 21,014
 62,130
 60,988
Increase in future policy benefit reserves19,597
 18,997
 51,953
 52,095
Policyholders' dividends1,613
 1,620
 4,418
 4,985
Total insurance benefits paid or provided42,664
 41,631
 118,501
 118,068
Commissions10,801
 10,852
 30,620
 31,097
Other general expenses7,254
 4,992
 26,765
 22,732
Capitalization of deferred policy acquisition costs(7,756) (7,890) (21,540) (22,257)
Amortization of deferred policy acquisition costs7,623
 6,908
 22,640
 20,418
Amortization of cost of customer relationships  acquired635
 641
 1,629
 1,588
Total benefits and expenses$61,221
 57,134
 178,615
 171,646
Claims and Surrenders.  A detail of claims and surrender benefits is provided below.
 Three Months Ended Nine Months Ended
 September 30, September 30,
 2017 2016 2017 2016
 (In thousands)
Death claims$6,128
 5,795
 17,441
 17,775
Surrender benefits9,448
 8,488
 27,933
 25,432
Endowments3,969
 4,170
 11,148
 11,862
Matured endowments654
 1,149
 1,888
 2,178
Property claims373
 593
 1,373
 1,477
Accident and health benefits108
 158
 196
 327
Other policy benefits774
 661
 2,151
 1,937
Total claims and surrenders$21,454
 21,014
 62,130
 60,988

Death claims increased 5.7% and decreased 1.9% for the three and nine months ended September 30, 2017 compared to the same periods in 2016. Mortality experience is closely monitored by the Company and the activity is within expected levels.
Surrenders increased 11.3% and increased 9.8% for the three and nine months ended September 30, 2017 compared to 2016 primarily due to activity in the life insurance segment. This increased surrender activity is in the later durations after the surrender charges are reduced or for periods in which the surrender charges have concluded. This is due to a maturing book of business.

Increase in Future Policy Benefit Reserves.  The change in future policy benefit reserves for the three and nine months ended September 30, 2017, compared to the same period in 2016, increased for the three months ended due to a reserve adjustment recorded of approximately $400,000, before tax, related to a reserve review on our Home Service purchased block of business and decreased for the nine months ended in 2017 due to the changes in surrenders noted above, as premiums have remained relatively consistent between periods.

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Policyholders' Dividends.  Policyholders' dividends decreased related to our life segment for both the three and nine months ended September 30, 2017, as we adjusted our dividend rates for later durations in our policies beginning in 2016 and we are seeing a decrease in dividends as policies mature.

Commissions.  Commission expense is directly related to new and renewal insurance premium fluctuations and production levels. Commission expense for the three and nine months ended September 30, 2017 fluctuated directly in relation to the increase in first year and renewal premiums compared to premium levels for the three and nine months ended September 30, 2016.  

Other General Expenses. Expenses increased for the three and nine months ended September 30, 2017 due primarily to additional audit fees related to the 2016 audit, higher legal and consulting fees and higher permanent and temporary salaries, somewhat offset by a decrease in our 7702/72(s) tax compliance best estimate liability.

Capitalized and Amortized Deferred Policy Acquisition Costs.  Costs capitalized 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 and nine months ended September 30, 2017, compared to the same periods in 2016 was the result of a decline in first year premium production in the current period, which decreased capitalized amounts.  Commissions paid on renewal premiums are significantly lower than those paid on first year business.

Amortization for the nine months ended September 30, 2017, increased compared to the same period in 2016 due to higher surrender activity in 2017. Amortization of deferred policy acquisition costs is impacted by persistency and may fluctuate from year to year.

Federal Income Tax. The effective tax rate was (10.9)% and 40.0% for the three months and 1.2% and 68.4% for the nine months ended September 30, 2017 and 2016, respectively. Additionally there is $1.0 million of tax benefit and $1.8 million tax expense related to an uncertain tax position in the nine months ended September 30, 2017 and September 30, 2016, 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, as well as impacts from our tax compliance issues and uncertain tax positions.  See Note 9 - 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 before income taxes.
 Three Months Ended Nine Months Ended
 September 30, September 30,
 2017 2016 2017 2016
 (In thousands)
Life Insurance$3,983
 3,993
 7,582
 5,753
Home Service Insurance(365) 591
 496
 1,165
Other Non-Insurance Enterprises(508) 23
 (1,929) (1,061)
Income before federal income tax$3,110
 4,607
 6,149
 5,857

Life Insurance

Our Life Insurance segment issues ordinary whole life insurance in the United States and in U.S. Dollar-denominated amounts to foreign residents.  These contracts are designed to provide a fixed amount of insurance coverage over the life of the insured and can utilize rider benefits to provide additional increasing or decreasing coverage and annuity benefits to enhance

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accumulations.  Additionally, endowment contracts are issued by the Company, which are principally accumulation contracts that incorporate an element of life insurance protection.  For the majority of our business, we retain the first $100,000 of risk on any one life, reinsuring the remainder of the risk.  We operate this segment through our CICA and CNLIC insurance subsidiaries.

International Sales

We focus our sales of U.S. Dollar-denominated ordinary whole life insurance and endowment policies to residents in Latin America and the Pacific Rim.  We have 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
persistency experience and mortality rates that are comparable to 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 a more secure economic environment (i.e., the United States); 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, the owner becomes entitled to 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 the Citizens, Inc. Stock Investment Plan, registered under the Securities Act of 1933 (the "Securities Act"), and administered in the United States by Computershare, our plan administrator and transfer agent.


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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,
 2017 2016 2017 2016
 (In thousands)
Country       
Colombia$7,390
 7,276
 20,635
 20,643
Venezuela6,744
 7,833
 20,602
 22,690
Taiwan4,408
 3,868
 13,673
 12,682
Ecuador4,359
 3,925
 12,104
 11,170
Argentina3,216
 2,542
 7,772
 6,932
Other Non-U.S.11,222
 10,990
 29,988
 30,183
Total$37,339
 36,434
 104,774
 104,300
We continue to report strong first year and renewal premiums in our top producing countries as noted above; however, this business is dependent on our clients having access to U.S. dollars. Our international business and premium collections could be impacted by our inability to comply with current or future foreign laws or regulations applicable to the Company or our independent consultants in the countries from which we accept applications as well as by marketing or operational changes made by the Company to comply with those laws or regulations. Our international business may also be affected by economic or other events in foreign countries in which our policies are marketed. Venezuela, for example, is continuing to experience civil unrest due to local demonstrations against crime, corruption and soaring inflation and conditions have recently worsened due to political unrest and deteriorating economic conditions. As shown above, direct premiums from Venezuela have already begun to decline, and we expect that overall premiums from Venezuela will continue to decline if the deteriorating political and economic environment continues to adversely impact our ability to make sales and collect premiums. See "Item 1A. Risk Factors" for additional information.

Domestic Sales

The majority of our inforce business in the domestic life insurance segment results from blocks of business of insurance companies that we have acquired over the past 17 years. We have aspired to serve middle income households through the sale of cash accumulation ordinary whole life insurance products, however over the past few years, new product sales have been very modest while existing policies have been running off at a greater pace, which has compressed the block of insurance in force. Beginning January 1, 2017, CICA and CNLIC ceased selling products domestically as the products failed to qualify for the favorable U.S. federal income tax treatment afforded by IRC Section 7702. The Company is developing Section 7702 compliant products and will resume sales domestically once the products receive regulatory approval.


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September 30, 2017

The following table sets forth our direct premiums by state for the periods indicated.
 Three Months Ended Nine Months Ended
 September 30, September 30,
 2017 2016 2017 2016
 (In thousands)
State       
Texas$529
 538
 1,501
 1,639
Indiana289
 300
 923
 928
Florida241
 204
 502
 440
Missouri87
 92
 306
 319
Kentucky64
 92
 219
 284
Other States512
 533
 1,528
 1,394
Total$1,722
 1,759
 4,979
 5,004

We report premiums based upon the current residence of our policyholders and therefore the increase in premiums received from Florida are related to policyholders moving into that state and updating their state of residence. 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 the majority of our accident and health insurance business to an unaffiliated insurance company under a coinsurance agreement.


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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,
 2017 2016 2017 2016
 (In thousands)
Revenue:       
Premiums$38,472
 37,572
 107,995
 107,531
Net investment income10,051
 8,473
 28,678
 24,534
Realized investment losses, net(355) —
 (419) (660)
Other income561
 166
 856
 537
Total revenue48,729
 46,211
 137,110
 131,942
Benefits and expenses:       
Insurance benefits paid or provided:       
Claims and surrenders15,700
 14,980
 45,218
 43,601
Increase in future policy benefit reserves18,045
 18,009
 47,818
 48,525
Policyholders' dividends1,602
 1,604
 4,387
 4,942
Total insurance benefits paid or provided35,347
 34,593
 97,423
 97,068
Commissions6,892
 6,973
 18,765
 19,544
Other general expenses2,200
 990
 10,399
 9,115
Capitalization of deferred policy acquisition costs(6,242) (6,346) (16,843) (17,764)
Amortization of deferred policy acquisition costs6,431
 5,889
 19,350
 17,807
Amortization of cost of customer relationships acquired118
 119
 434
 419
Total benefits and expenses44,746
 42,218
 129,528
 126,189
Income (loss) before income tax expense$3,983
 3,993
 7,582
 5,753

Premiums.  Premium revenues increased for the three and nine month periods ended September 30, 2017, compared to the same periods in 2016 due primarily to an increase in renewal international business. Higher renewal business is typically positive for the Company indicating strong persistency as this block of insurance ages. First year premium revenues have declined for the nine months ended September 30, 2017, primarily as a result of the decrease in applications received from Venezuela as noted previously. Sales internationally have continued to be driven by our endowment to age sixty-five and the twenty-year endowment products which have been the top performers in the last several years.

Life insurance premium breakout is detailed below.
 Three Months Ended Nine Months Ended
 September 30, September 30,
 2017 2016 2017 2016
 (In thousands)
Premiums:       
First year$4,800
 4,785
 12,815
 13,544
Renewal33,672
 32,787
 95,180
 93,987
Total premiums$38,472
 37,572
 107,995
 107,531


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Net Investment Income.  Net investment income increased primarily due to the growth in average invested assets.
 Nine Months Ended Year Ended Nine Months Ended
 September 30, December 31, September 30,
 2017 2016 2016
 (In thousands, except for %)
Net investment income, annualized$38,228
 33,350
 32,712
Average invested assets, at amortized cost882,034
 779,592
 756,730
Annualized yield on average invested assets4.33% 4.28% 4.32%

Realized Investment Losses, Net.  Realized investment losses recorded for the three and nine month periods ended September 30, 2017 were primarily due to fixed maturity call activity. Other-than-temporary impairments were recorded for the nine month period ended September 30, 2016 totaling $959,000 related to one available-for-sale fixed maturity impairment in the first quarter of 2016.
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,
 2017 2016 2017 2016
 (In thousands)
Death claims$1,755
 1,407
 4,576
 4,666
Surrender benefits8,611
 7,587
 25,721
 23,049
Endowment benefits3,963
 4,168
 11,129
 11,852
Matured endowments531
 1,050
 1,487
 1,821
Accident and health benefits70
 112
 167
 290
Other policy benefits770
 656
 2,138
 1,923
Total claims and surrenders$15,700
 14,980
 45,218
 43,601

Death claims expense was unfavorable for the three months ended September 30, 2017 compared with the same period in 2016. However, the claims reported for the nine months ended September 30, 2017, were lower compared to the same period in 2016. Mortality experience is closely monitored by the Company as a key performance indicator and these amounts were within expected levels.
Surrenders increased in the three and nine month periods ended September 30, 2017 by 13.5% and 11.6% compared to 2016. The majority of policy surrender benefits paid is attributable to our international business and is in the later durations after the surrender charges are reduced or for periods in which the surrender charges have concluded. This is due to a maturing book of business.
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 vary with new sales and persistency of the business.
Matured endowments decreased for the three and nine month periods ended September 30, 2017, compared to 2016, as fewer policies reached maturity in the current periods.
Other policy benefits resulted primarily from interest paid on premium deposits and policy benefit accumulations.

Increase in Future Policy Benefit Reserves.   The change in policy benefit reserves decreased for the nine months ended September 30, 2017 compared to the same period in 2016, while increasing in the three months ended September 30, 2017 primarily impacted by the surrender activity noted above.


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Policyholders' Dividends. Policyholders' dividends decreased for both the three and nine months ended September 30, 2017, as we adjusted our dividend rates for later durations in our policies beginning in 2016 and we are seeing a decrease in dividends as policies mature and new sales are not generating the same expense level.
Commissions.  Commission expense decreased for the three and nine months ended September 30, 2017, compared to the same period in 2016.  This expense fluctuates directly with new premium revenues and commission rates paid are higher on first year premium sales, which were down for the three and nine months ended September 30, 2017, compared to the same period in 2016.  Renewal premiums for the three and nine months, for which we pay commissions at lower rates, were up from the prior year.

Other General Expenses.  These expenses are allocated by segment, based upon an annual expense study performed by the Company. Expenses were up for the three and nine months ended September 30, 2017, compared to the same period in 2016 due primarily to additional audit fees related to the 2016 audit, higher legal and consulting fees and higher permanent and temporary salaries. This increase is offset by a decrease in our 7702/72(s) tax compliance best estimate liability of approximately $1.6 million and $3.7 million for the three and nine months ended September 30, 2017.

Capitalization of Deferred Policy Acquisition Costs ("DAC").  Capitalized costs fluctuate in direct relation to commissions, decreasing for the three and nine months ended September 30, 2017, based upon first year and renewal premiums and commissions paid compared to 2016.  

Amortization of Deferred Policy Acquisition Costs.  Amortization for the three and nine months ended September 30, 2017 increased and was impacted by higher surrenders in 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 insurance market through our subsidiaries Security Plan Life Insurance Company ("SPLIC"), Magnolia Guaranty Life Insurance Company ("MGLIC") 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,
 2017 2016 2017 2016
 (In thousands)
State       
Louisiana$10,774
 10,673
 32,160
 31,991
Mississippi591
 549
 1,854
 1,919
Arkansas387
 399
 1,299
 1,192
Other States236
 193
 680
 635
Total$11,988
 11,814
 35,993
 35,737


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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.

We provide final expense ordinary life insurance and annuity products primarily to middle and lower income individuals in Louisiana, Mississippi and Arkansas.  

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,
 2017 2016 2017 2016
 (In thousands)
Revenue:       
Premiums$11,775
 11,600
 35,372
 35,087
Net investment income3,355
 3,467
 9,864
 10,386
Realized investment gains (losses), net(49) 46
 1,161
 (1,116)
Other income—
 2
 2
 5
Total revenue15,081
 15,115
 46,399
 44,362
Benefits and expenses:       
Insurance benefits paid or provided:       
Claims and surrenders5,754
 6,034
 16,912
 17,387
Increase in future policy benefit reserves1,552
 988
 4,135
 3,570
Policyholders' dividends11
 16
 31
 43
Total insurance benefits paid or provided7,317
 7,038
 21,078
 21,000
Commissions3,909
 3,879
 11,855
 11,553
Other general expenses4,025
 3,610
 13,182
 11,357
Capitalization of deferred policy acquisition costs(1,514) (1,544) (4,697) (4,493)
Amortization of deferred policy acquisition costs1,192
 1,019
 3,290
 2,611
Amortization of cost of customer relationships acquired517
 522
 1,195
 1,169
Total benefits and expenses15,446
 14,524
 45,903
 43,197
Income (loss) before income tax expense$(365) 591
 496
 1,165

Premiums.  Premiums were up slightly for the three and nine month periods ended September 30, 2017, compared to 2016. For the nine month period ended September 30, 2017, first year premiums were up 2.2% and renewal premiums were up 0.6%.


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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,
 2017 2016 2016
 (In thousands, except for %)
Net investment income, annualized$13,149
 13,705
 13,848
Average invested assets, at amortized cost289,928
 294,132
 302,871
Annualized yield on average invested assets4.54% 4.66% 4.57%
Realized Investment Gains (Losses), Net.  During the three months ended September 30, 2017 net losses were recorded related to issuer calls on bond investments. A realized gain was recorded for the nine month period ended September 30, 2017 of $1.1 million related to our first quarter 2017 sale of an office building in Little Rock, Arkansas. Other-than-temporary impairments were recorded for the nine month period ended September 30, 2016 totaling $1.3 million related to one available-for-sale fixed maturity security in the first quarter and four mutual fund impairments in the second quarter of 2016.

Claims and Surrenders.  Claims and surrenders decreased for the three and nine months ended September 30, 2017, compared to the same periods in 2016, based upon reported claims compared to the prior year, but were within expected ranges.
 Three Months Ended Nine Months Ended
 September 30, September 30,
 2017 2016 2017 2016
 (In thousands)
Death claims$4,373
 4,387
 12,865
 13,109
Surrender benefits837
 902
 2,212
 2,383
Endowment benefits6
 2
 19
 10
Matured endowments123
 99
 401
 357
Property claims373
 593
 1,373
 1,477
Accident and health benefits38
 46
 29
 37
Other policy benefits4
 5
 13
 14
Total claims and surrenders$5,754
 6,034
 16,912
 17,387

Death claims expense fluctuates based upon reported claims. We experienced a smaller number of reported claims in the three and nine months ended September 30, 2017. Mortality experience is closely monitored by the Company as a key performance indicator and amounts were within expected levels.
Surrender benefits decreased slightly for the three and nine months ended September 30, 2017 compared to the same period in 2016.
Property claims decreased for the three and nine months ended September 30, 2017 as we experienced less weather-related claims in the first nine months of 2017.

Increase in Future Policy Benefit Reserves.  The change in future policy benefit reserves for the three and nine months ended September 30, 2017, increased due to a reserve adjustment recorded of approximately $400,000, before tax, in the current period related to a reserve review on a purchased block of business.
Commissions.  Commission expense increased for the three and nine months ended September 30, 2017, compared to the same period in 2016, consistent with premium collections.

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Other General Expenses.  Expenses are allocated by segment based upon an annual expense study performed by the Company. The expenses increased between 2017 and 2016 due primarily to additional audit fees related to the 2016 audit.

Capitalization of Deferred Policy Acquisition Costs ("DAC").  Capitalized costs increased for the nine months ended September 30, 2017, as commission expense increased during the period.  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 September 30, 2017 increased compared to the corresponding period in 2016 and remained generally in line with this segment experienced persistency.

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. The segment loss reported for the three and nine months of 2017 and 2016 is typical since the elimination of intercompany revenue is its primary source of revenue.

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 each entity's respective boards of directors.  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.


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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, 2017 December 31, 2016
 
Carrying
Value
 
% of Total
Carrying Value
 
Carrying
Value
 
% of Total
Carrying Value
 (In thousands)   (In thousands)  
Marketable debt securities:       
U.S. Treasury and U.S. Government-sponsored enterprises$16,521
 1.2 $22,695
 1.8
States and political subdivisions787,409
 59.2 797,240
 63.4
Corporate385,437
 29.0 306,134
 24.3
Mortgage-backed (1)2,106
 0.2 2,477
 0.2
Foreign governments124
 — 126
 —
Total fixed maturity securities1,191,597
 89.6 1,128,672
 89.7
Short-term investments—
 — 508
 —
Cash and cash equivalents45,000
 3.4 35,510
 2.8
Other investments: 
    
  
Policy loans71,215
 5.4 66,672
 5.3
Equity securities16,146
 1.2 18,159
 1.5
Mortgage loans197
 — 232
 —
Real estate held for investment5,843
 0.4 5,919
 0.5
Real estate held for sale—
 — 1,939
 0.2
Other long-term investments37
 — 38
 —
Total cash, cash equivalents and investments$1,330,035
 100.0 $1,257,649
 100.0
(1) Includes $1.9 million and $2.2 million of U.S. Government-sponsored enterprises at September 30, 2017 and December 31, 2016, respectively.

Cash and cash equivalents increased as of September 30, 2017 due to timing of cash inflows and investment of cash into marketable securities.

The held-to-maturity portfolio as of September 30, 2017 represented 19.8% of the total fixed maturity securities owned based upon carrying values, with the remaining 80.2% 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.

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, 2017 and December 31, 2016.
 September 30, 2017 December 31, 2016
 
Carrying
Value
 
% of Total
Carrying Value
 
Carrying
Value
 
% of Total
Carrying Value
 (In thousands)   (In thousands)  
AAA$94,510
 7.9 $88,853
 7.9
AA501,593
 42.1 554,211
 49.1
A310,639
 26.1 238,350
 21.1
BBB254,988
 21.4 215,499
 19.1
BB and other29,867
 2.5 31,759
 2.8
Totals$1,191,597
 100.0 $1,128,672
 100.0


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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
September 30, 2017

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, 2017.  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, 2017, 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.

Municipal securities shown including third party guarantees
 September 30, 2017
 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$59,502
 57,439
 32,771
 32,196
 —
 —
 92,273
 89,635
 11.6
AA170,256
 165,008
 273,224
 265,301
 23,918
 22,965
 467,398
 453,274
 58.8
A26,551
 26,156
 157,799
 151,415
 12,516
 11,828
 196,866
 189,399
 24.6
BBB7,488
 7,616
 22,530
 22,189
 2,004
 2,015
 32,022
 31,820
 4.1
BB and other3,348
 3,719
 2,946
 3,457
 —
 —
 6,294
 7,176
 0.9
Total$267,145
 259,938
 489,270
 474,558
 38,438
 36,808
 794,853
 771,304
 100.0
Municipal securities shown excluding third party guarantees
 September 30, 2017
 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$39,389
 38,288
 11,722
 11,720
 —
 —
 51,111
 50,008
 6.5
AA144,583
 140,227
 223,788
 217,343
 16,815
 15,865
 385,186
 373,435
 48.4
A40,552
 39,205
 160,060
 153,553
 12,976
 12,266
 213,588
 205,024
 26.6
BBB12,292
 12,246
 44,042
 43,153
 —
 —
 56,334
 55,399
 7.2
BB and other30,329
 29,972
 49,658
 48,789
 8,647
 8,677
 88,634
 87,438
 11.3
Total$267,145
 259,938
 489,270
 474,558
 38,438
 36,808
 794,853
 771,304
 100.0


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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
September 30, 2017

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

Fair Value Amortized
Cost		 % of Total
Fair Value
 (In thousands)  
Utilities$160,854
 154,352
 20.2%
Education113,352
 109,661
 14.3%
General Obligations86,947
 84,627
 10.9%

The Company's exposure of municipal holdings is spread across many states, with Texas and Florida as the two states with the largest municipal holdings as of September 30, 2017. The Company holds 22.8% of its municipal security holdings in Texas issuers and 11.9% in Florida issuers based on fair value. There were no other states or individual issuer holdings that represented or exceeded 10% of the total municipal portfolio as of September 30, 2017. The tables below represent the exposure the Company holds in these two states.
 September 30, 2017
 General Obligation Special Revenue Other Total
 Fair
Value		 Amortized
Cost		 Fair
Value		 Amortized
Cost		 Fair
Value		 Amortized
Cost		 Fair
Value		 Amortized
Cost
 (In thousands)
Texas securities including third party guarantees 
  
  
  
  
  
  
  
AAA$57,444
 55,442
 15,017
 14,568
 —
 —
 72,461
 70,010
AA52,563
 51,644
 30,753
 29,773
 —
 —
 83,316
 81,417
A200
 199
 16,402
 15,781
 —
 —
 16,602
 15,980
BBB—
 —
 7,101
 6,640
 —
 —
 7,101
 6,640
BB and other—
 —
 1,577
 2,097
 —
 —
 1,577
 2,097
Total$110,207
 107,285
 70,850
 68,859
 —
 —
 181,057
 176,144
Texas securities excluding third party guarantees 
  
  
  
  
  
  
  
AAA$33,529
 33,084
 996
 994
 —
 —
 34,525
 34,078
AA67,509
 65,344
 30,570
 29,504
 —
 —
 98,079
 94,848
A7,880
 7,653
 22,907
 21,994
 —
 —
 30,787
 29,647
BBB200
 199
 10,311
 9,821
 —
 —
 10,511
 10,020
BB and other1,089
 1,005
 6,066
 6,546
 —
 —
 7,155
 7,551
Total$110,207
 107,285
 70,850
 68,859
 —
 —
 181,057
 176,144

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
September 30, 2017

 September 30, 2017
 General Obligation Special Revenue Other Total
 Fair
Value		 Amortized
Cost		 Fair
Value		 Amortized
Cost		 Fair
Value		 Amortized
Cost		 Fair
Value		 Amortized
Cost
 (In thousands)
Florida securities including third party guarantees               
AAA$530
 513
 3,704
 3,586
 —
 —
 4,234
 4,099
AA—
 —
 60,200
 58,928
 3,766
 3,798
 63,966
 62,726
A—
 —
 13,609
 13,248
 12,516
 11,828
 26,125
 25,076
BBB—
 —
 —
 —
 —
 —
 —
 —
BB and other—
 —
 483
 477
 —
 —
 483
 477
Total$530
 513
 77,996
 76,239
 16,282
 15,626
 94,808
 92,378
                
Florida securities excluding third party guarantees               
AAA$—
 —
 1,057
 1,037
 —
 —
 1,057
 1,037
AA530
 513
 43,434
 42,498
 3,766
 3,799
 47,730
 46,810
A—
 —
 27,284
 26,765
 10,991
 10,302
 38,275
 37,067
BBB—
 —
 1,831
 1,705
 —
 —
 1,831
 1,705
BB and other—
 —
 4,390
 4,234
 1,525
 1,525
 5,915
 5,759
Total$530
 513
 77,996
 76,239
 16,282
 15,626
 94,808
 92,378


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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
September 30, 2017

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, 2017, total holdings of municipal securities in Louisiana represented 4.4% of all municipal holdings based upon fair value.  
 September 30, 2017
 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               
AAA$—
 —
 —
 —
 —
 —
 —
 —
AA7,040
 6,809
 15,575
 15,044
 —
 —
 22,615
 21,853
A5,310
 5,145
 6,623
 6,471
 —
 —
 11,933
 11,616
BBB—
 —
 376
 375
 —
 —
 376
 375
BB and other—
 —
 362
 358
 —
 —
 362
 358
Total$12,350
 11,954
 22,936
 22,248
 —
 —
 35,286
 34,202
Louisiana securities excluding third party guarantees               
AAA$—
 —
 —
 —
 —
 —
 —
—
—
AA9,597
 9,256
 11,688
 11,352
 —
 —
 21,285
 20,608
A2,242
 2,174
 7,774
 7,567
 —
 —
 10,016
 9,741
BBB—
 —
 1,048
 1,004
 —
 —
 1,048
 1,004
BB and other511
 524
 2,426
 2,325
 —
 —
 2,937
 2,849
Total$12,350
 11,954
 22,936
 22,248
 —
 —
 35,286
 34,202

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 other-than-temporary 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.


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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
September 30, 2017

The Company recognized other-than-temporary impairments of $17,000 for the nine months ended September 30, 2017 for one equity security that was in an unrealized loss position for greater than one year. The Company recognized an other-than-temporary impairment of $2.3 million for the nine months ended September 30, 2016.

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 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 to provide cash flow and did not do so during the first nine months of 2017.  Our investments as of September 30, 2017, consist of 74.3% 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, have been largely consistent with our assumptions in asset liability management, our associated cash outflows have, historically, 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 historically have been sufficient to meet current needs.  Cash flows from operating activities were $68.9 million and $69.2 million for the nine months ended September 30, 2017 and 2016, 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 activities totaled $61.6 million and $121.5 million for the nine months ended September 30, 2017 and 2016, respectively. The investing activities fluctuate from period to period due to timing of securities activities such as calls and maturities and reinvestment of those funds. 

In 2015, we determined that a portion of the life insurance and annuity policies issued by our subsidiary insurance companies failed to qualify for the favorable U.S. federal income tax treatment afforded by Sections 7702 and 72(s) of the Internal Revenue Code ("IRC") of 1986. As of September 30, 2017, we have established a liability reserve of $10.7 million, net of tax, for probable liabilities and expenses associated with this tax compliance matter, which represents management’s estimate and we have disclosed an estimated range related to probable liabilities and expenses of $5.6 million to $34.0 million, net of tax. This estimate and range includes projected toll charges and fees payable to the IRS, as well as estimated increased payout obligations to current and former holders of non-compliant domestic life insurance policies expected to result from remediation of those policies. 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 taxable benefits under non-compliant policies. Given the range of potential outcomes and the significant variables assumed in establishing our estimates, actual amounts incurred may exceed our reserve and also could exceed the high end of our estimated range of liabilities and expenses.

In May 2017, we submitted an offer under Rev Proc 2008-40 to enter into closing agreements with the IRS covering certain CICA and CNLIC domestic life insurance contracts.  A voluntary, taxpayer-initiated closing agreement under this IRS revenue procedure generally addresses situations where a taxpayer has inadvertently failed to meet the requirements of Internal Revenue Code section 7702, which defines life insurance for federal tax purposes. A voluntary closing agreement allows taxpayers to come forward to the IRS with self-identified violations or deficiencies and work with the IRS towards a mutual resolution to correct the violations or deficiencies. The consideration offered by CICA and CNLIC under the proposed closing agreements totaled approximately $124,000 and $4,000, respectively.  The consideration that will be required under the final closing agreements could be different

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September 30, 2017

and will depend on how the IRS responds to the closing agreements offer. We expect to file other offers for additional closing agreements with the IRS for the SPLIC and MGLIC life insurance businesses, the CICA international life insurance business and our annuity business in 2018.

This tax compliance issue impacts our policyholders and their tax liabilities relative to these products that fail 7702 and 72(s) for those that will not be remediated. The exposure related to future sales or products in force is unknown at this time. Policyholders could decide to surrender their policies due to this issue which would subsequently result in higher cash outflows due to an increase in surrender activity.

Dividends are declared and paid from time to time from the insurance affiliates as determined by their respective boards.
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. Capital balances could be impacted by this tax compliance issue for the insurance companies affected. The holding company would anticipate funding the life companies as needed to keep capital amounts within required levels.

All insurance subsidiaries were above the RBC minimums at September 30, 2017.  
Contractual Obligations and Off-balance Sheet Arrangements

There have been no material changes in contractual obligations from those reported in the Company's Annual Report on Form 10-K for the year ended December 31, 2016.  The Company does not have off-balance sheet arrangements at September 30, 2017.  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 restrictions.  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.

In the first quarter of 2017, Citizens made a $5.0 million capital contribution to CICA Life. In the third quarter of 2017, Citizens contributed $250,000 to CICA Life Ltd. to capitalize a newly formed Bermuda entity, SPLIC contributed $250,000 in capital to MGLIC, and SPLIC declared a dividend payable to CICA of $395,000 which will be paid in October of 2017.

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, 2017 and 2016. 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

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September 30, 2017

Operations in our Annual Report on Form 10-K for the year ended December 31, 2016 continue to describe the significant judgments and estimates used in the preparation of our consolidated financial statements.

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, 2017 December 31, 2016
 Amortized
Cost		 Fair
Value		 Net
Unrealized
Gains		 Amortized
Cost		 Fair
Value		 Net
Unrealized
Gains
 (In thousands)
Fixed maturities, available-for-sale$920,700
 955,244
 34,544
 860,473
 881,668
 21,195
Fixed maturities, held-to-maturity236,353
 244,064
 7,711
 247,004
 252,545
 5,541
Total fixed maturities$1,157,053
 1,199,308
 42,255
 1,107,477

1,134,213
 26,736
Total equity securities$15,479
 16,146
 667
 17,765
 18,159
 394

Market Risk Related to Interest Rates

Our exposure to interest rate changes results from our significant holdings of fixed maturity investments, which comprised 92.7% of our investment portfolio based on carrying value as of September 30, 2017.  These investments are mainly exposed to changes in U.S. Treasury rates.  Our fixed maturity 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, 2017 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 decreased to 2.33% during the nine months ended September 30, 2017, from 2.45% at December 31, 2016.  Net unrealized gains on fixed maturity securities totaled $42.3 million at September 30, 2017, compared to $26.7 million at December 31, 2016.

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.


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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
September 30, 2017

There are no fixed maturities or other investments classified as trading instruments.  Approximately 79.6% of fixed maturities were held in available-for-sale and 20.4% in held-to-maturity based upon fair value at September 30, 2017.  At September 30, 2017 and December 31, 2016, 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 1.3% of our total investments at September 30, 2017, with 96.4% 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.PART I.  FINANCIAL INFORMATION

Item 4. CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosures.

Our management, including our principal executive officer and principal financial officer, evaluated the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Exchange Act as of SeptemberJune 30, 2017. Based on such evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective due to the material weaknesses in internal control over financial reporting that were reported in the Company's Annual Report on Form 10-K for the year ended December 31, 2016 (“2016 Annual Report”), which remain unremediated as of SeptemberJune 30, 2017.

In the 2016 Annual Report, management concluded, based on its evaluation at the time, that our disclosure controls and procedures were ineffective due to the existence of the material weaknesses in internal control over financial reporting as of December 31, 2016. For the quarters ended March 31, 2017 and June 30, 2017, however, management concluded that its disclosure controls and procedures were effective, notwithstanding the material weaknesses, due to the breadth of the Company’s controls and their overall effectiveness in accumulating and communicating information required to be disclosed in the Company’s Exchange Act reports, including its proxy statement and current reports on Form 8-K. In connection with its most recent evaluation, however, management re-evaluated those conclusions and concluded that, in light of the unremediated material weaknesses disclosed in the 2016 Annual Report, our disclosure controls and procedures as of March 31, 2017 and June 30, 2017, as reported in our Quarterly Reports on Form 10-Q for the quarters then ended, were not effective as of those dates.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

During the three months ended SeptemberJune 30, 2017, 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) that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.




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STATUS OF REMEDIATION OF MATERIAL WEAKNESSES

While we have made meaningful progress on strengthening our internal controls relative to the previously identified material weaknesses, material weaknesses continue to exist. Management, with oversight from our principal executive officer and principal financial officer, has identified and initiated actions that, once fully implemented and operating for a sufficient period of time, are designed to remediate the material weaknesses. identified. The Company is in the Company’s 2016 Annual Report. Specifically, the Company has begun to execute the following actions to remediate the Company’s material weaknesses relating to ineffective data validation in connection with spreadsheet and system generated reports, ineffective management review controls and inadequate staff competency and expertise on complex tax and actuarial matters:

Hired experienced executives in key management roles to strengthen the Company's expertise in and executionprocess of its actuarial, accounting and operation functions, including a Chief Actuary, Chief Accounting Officer, and Director of Audit Quality Control and refocused personnel to strengthen management review controls over third party provided data,
Formed an internal control task force consisting of our Chief Financial Officer, Chief Operating Officer, and Director of Audit Quality Control to actively direct, manage and implement our control improvements and material weakness remediation plans,
Enhanced our internal control program and remediation efforts by co-sourcing our internal audit function to BDO USA LLP (“BDO”), an experienced, nationally recognized audit firm. Specifically BDO continues to assist the internal control task force in improving the enterprise risk assessment, control documentation, assessing and testing controls, and to develop and deliver company-wide internal control training to deepen our employees’ understanding of their role in relation to our overall control environment.
Replaced our third-party tax professionals with experienced tax team from Ernst & Young, LLP to improve our tax reporting process; and
Added an information technology (“IT”) executive who will focus on enhancing our general IT controls and required remediation or control improvements.

We continue to monitor and enhance our control environment and will make further changes as appropriate. We believe the remediation steps outlined above have improved and will continue to improve the effectiveness of our internal control over financial reporting. We will test the ongoing operating effectiveness of all new controls subsequent to implementation and considerremediating the material weaknesses remediated after the applicable remedial controls operate effectively for a sufficient period of time.identified in our 2016Annual Report.

PART II.  OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

On or about March 16, 2017, Juan Gamboa filed a putative class action lawsuit against the Company and five of its current and former directors and executive officers in the United States District Court, Western District of Texas. The lawsuit alleges the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by making false and/or misleading statements, as well as failing to disclose material adverse facts about the Company’s business, operations and prospects.  The complaint seeks an award of damages in an unspecified amount on behalf of a putative class consisting of persons who purchased the Company’s common stock between March 11, 2015 and March 8, 2017, inclusive.  The Company believes that the lawsuit is without merit, and it intends to vigorously defend against all claims asserted.  At this time, the Company is unable to reasonably determine the outcome of this litigation.

In the normal course of business, the Company is subject to various legal and regulatory actions which are immaterial to the Company's financial statements. For more information about the risks related to litigation and regulatory actions, please see the risk factor titled “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.” in Item 1A. Risk Factors.


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Item 1A. RISK FACTORS

Investing in our Company involves certain risks.Set forth below are certain risks with respect to our Company.  Readers should carefully review these risks, together with the other information contained in this report.  The risks and uncertainties we have described in this report are not the only ones we face.  Additional risks and uncertainties not presently known to us, or that we currently deem not material, may also adversely affect our business.  Any of the risks discussed in this report or that are presently unknown or not material, if they were to actually occur, could result in a significant adverse impact on our business, operating results, prospects or financial condition.  References in the risk factors below to "we," "us," "our," "Citizens" and like terms relate to Citizens, Inc. and its subsidiaries on a U.S. GAAP consolidated financial statement basis, unless specifically identified otherwise. We operate our subsidiaries as separate and distinct entities with respect to corporate formalities.  

Risks Relating to Our Business

The majority of our sales derive from residents of foreign countries and are subject to risks associated with political instability, currency control laws and foreign insurance laws. A significant loss of sales in these foreign markets could have a material adverse effect on our results of operations and financial condition.

The majority of our direct premiums, approximately 72% in 2017, are from foreign countries, primarily those in Latin America and the Pacific Rim.  These sales are made through independent consultants who are located in these foreign countries. Many of these countries have a history of political instability, including regime changes, political uprisings, currency fluctuations and anti-democratic or anti-U.S. policies. There is a risk that political instability in these countries could have a material adverse effect on the ability of people living in these countries to purchase our insurance policies or our ability to sell our policies in those countries through our independent consultants or otherwise. Our Company’s future sales and financial results depend upon avoiding significant regulatory restraints on receiving insurance policy applications and premiums from, and issuing insurance policies to, residents outside of the United States.

Currency control laws or other currency exchange restrictions in foreign countries could materially adversely affect our revenues by imposing restrictions on asset transfers outside of a country where our insureds reside. Difficulties in transferring funds from or converting currencies to U.S. dollars in certain countries could prevent our insureds in those countries from purchasing or paying premiums on our policies. There can be no assurance that such restrictions will not be imposed and that our revenues, results of operations and financial condition will not be materially adversely affected if they do occur.
We also face risks associated with the application of foreign laws to our sales of policies to residents in foreign countries. Generally, all foreign countries in which we offer insurance products require a license or other authority to conduct insurance business in that country. Some of these countries also require that local regulatory authorities approve the terms of any insurance product sold to residents of that country. We have never sought to qualify to do business in any foreign country and have never submitted the insurance policies that we issue to residents of foreign countries for approval by any foreign or domestic insurance regulatory agency. Traditionally, we have sought to address risks associated with the potential application of foreign laws to our sales of insurance policies in our foreign markets by, among other things, not locating any of our offices or assets in foreign countries, selling policies only through independent consultants rather than our own employees, requiring that all applications for insurance be submitted to and accepted only in our offices in the U.S., and requiring that policy premiums be paid to us only in U.S. Dollars.  We rely on our independent consultants to comply with laws applicable to them in marketing our insurance products in their respective countries.

We have undertaken a comprehensive compliance review of risks associated with the potential application of foreign laws to our sales of insurance policies in foreign countries. The application of foreign laws to our sales of insurance policies in foreign countries varies by country. There is a lack of uniform regulation, lack of clarity in certain regulations and lack of legal precedent addressing circumstances similar to ours. The preliminary results of our compliance review have confirmed the previously disclosed risks related to foreign insurance laws associated with our current business model, at least in certain foreign countries. There are risks that a foreign government could determine under its existing laws that its residents may not purchase life insurance from us unless we become qualified to do business in that country or unless our policies purchased by its residents receive prior approval from its insurance regulators. There also is a risk that foreign regulators may become more aggressive in enforcing any perceived violations of their laws and seek to impose monetary fines, criminal penalties, and/or order us to cease our sales in that jurisdiction. There is no assurance that, if a foreign country were to deem our sales of policies in that country to require that we qualify to do business in that country or submit our policies for approval by that country’s regulatory authorities, we would be able to, or would conclude that it is advisable to, comply with those requirements.  Any determination by a foreign country that we or our policy

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sales are subject to regulation under their laws, or any actions by a foreign country to enforce such laws more aggressively, could therefore have a material adverse effect on our ability to sell policies in that country and, in turn, on our results of operations and financial condition. Depending on the ultimate outcome of our compliance review, we may explore alternatives to our current business model in one or more jurisdictions, including withdrawing from a particular market.

Any disruption to the marketing and sale of our policies to residents of a foreign country, resulting from the action of foreign regulatory authorities or otherwise, could have a material adverse effect on our results of operations and financial condition.

Our operating results and financial condition may be affected if the liabilities actually incurred differ, or if our estimates of those liabilities change, from the amounts we have reserved for in connection with the noncompliance of a portion of our life insurance policies with Section 7702 of the Internal Revenue Code and the failure of certain annuity contracts to qualify under Section 72(s) of the Internal Revenue Code.

We previously announced that we determined that a portion of the life and annuity insurance policies issued by our subsidiary insurance companies failed to qualify for the favorable U.S. federal income tax treatment afforded by Sections 7702 and 72(s) of the Internal Revenue Code ("IRC") of 1986. To the extent that these policies had unreported income build-up, we may be liable to the IRS for failure to withhold taxes or to notify policyholders of their obligation to pay taxes directly to the IRS. We have undertaken an analysis of our potential liability to the IRS arising from this matter, as well as other expenses we may incur to remediate (i.e., conform to the requirements of the IRS) certain previously issued domestic life insurance and annuity policies and to address any missed reporting for policies issued to non-U.S. citizens and have established a best estimate reserve of $10.7 million, net of tax as of September 30, 2017, for probable liabilities and expenses. The probability weighted range of financial estimates relative to this issue is $5.6 million to $34.0 million, net of tax. This estimated range includes projected toll charges and fees payable to the IRS, as well as estimated increased payout obligations to current and former holders of non-compliant domestic life insurance policies expected to result from remediation of those policies. 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, the methodology applicable to the calculation of taxable benefits under non-compliant policies and the amount of time and resources we will require from external advisors who are assisting us with resolving these issues. Given the range of potential outcomes and the significant variables assumed in establishing our estimates, actual amounts incurred may exceed our reserve and also could exceed the high end of our estimated range of liabilities and expenses. To the extent the amount reserved 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 operations may be materially adversely affected.

On May 17, 2017, we submitted an offer to enter into Closing Agreements with the IRS covering the CICA and CNLIC domestic life insurance business. 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 expect to file Closing Agreements with the IRS for the SPLIC and MGLIC life insurance business and for the CICA international business and our annuity business in 2018.

We face financial and capital market risks in our operations.

As an insurance holding company with significant investment exposure, we face material financial and capital markets risk in our operations.  Due to the low interest rate environment in recent years, we experienced significant call activity on our fixed income portfolio that decreased our investment yields compared to prior years.  We also have recorded other-than-temporary impairments in the past several years due to credit related market declines and equity market volatility.

Economic uncertainty has recently been exacerbated by the increased potential for default by one or more European sovereign debt issuers, the potential partial or complete dissolution of the Eurozone and its common currency, Brexit, potential changes in U.S. international trade policies and agreements and the negative impact of such events on global financial institutions and capital markets generally.  Actions or inactions of European governments may impact these actual or perceived risks. Future actions or inactions of the United States government, including a shutdown of the federal government, could increase the actual or perceived risk that the U.S. may not ultimately pay its obligations when due and may disrupt financial markets.


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Changes in market interest rates may significantly affect our profitability.

Some of our products, principally traditional whole life insurance with annuity riders, expose us to the risk that changes in interest rates will reduce our "spread," or the difference between the amounts we are required to pay under our contracts to policyholders and the rate of return we are able to earn on our investments intended to support obligations under the contracts.  Our spread is an integral component of our net income.

If interest rates decrease or remain at low levels, we may be forced to reinvest proceeds from investments that have matured, prepaid, been sold, or called at lower yields, reducing our investment margin.  Our fixed income bond portfolio is exposed to interest rate risk as a significant portion of the portfolio is callable.  Lowering interest crediting rates can help offset decreases in investment margins on some of our products.  However, our ability to lower these rates could be limited by competition or contractually guaranteed minimum rates, and may not match the timing or magnitude of changes in asset yields.

An increase in interest rates will increase the net unrealized loss position of our investment portfolio and may subject us to disintermediation risk. Disintermediation risk is the risk that in a change from a low interest rate period to a significantly higher and increasing interest rate period, policyholders may surrender their policies or make early withdrawals in order to increase their returns, requiring us to liquidate investments in an unrealized loss position (i.e. the market value less the carrying value of the investments). This risk is discussed further in the two risk factors below.

Due to the sustained low interest rate environment, we re-priced certain products at the end of 2016 that result in lower potential investment returns for our customers, which is a key pricing assumption. This price increase could result in a decrease in sales that may negatively impact our revenues and profitability.

Our investment portfolio is subject to various risks that may result in realized investment losses. In particular, decreases in the fair value of fixed maturities may significantly reduce the value of our investments, and as a result, our financial condition may suffer.

We are subject to credit risk in our investment portfolio. Defaults by third parties in the payment or performance of their obligations under these securities could reduce our investment income and realized investment gains or result in the recognition of investment losses. The value of our investments may be materially adversely affected by increases in interest rates, downgrades in the bonds included in our portfolio and by other factors that may result in the recognition of other-than-temporary impairments. Each of these events may cause us to reduce the carrying value of our investment portfolio.

In particular, at September 30, 2017, fixed maturities represented $1.2 billion, or 92.7% of our total investments of $1.3 billion. The fair value of fixed maturities and the related investment income fluctuates depending on general economic and market conditions. The fair value of these investments generally increases or decreases in an inverse relationship with fluctuations in interest rates, while net investment income realized by us will generally increase or decrease in line with changes in market interest rates. In addition, actual net investment income and/or cash flows from investments that carry prepayment risk, such as mortgage-backed and other asset-backed securities, may differ from those anticipated at the time of investment as a result of interest rate fluctuations. An investment has prepayment risk when there is a risk that the timing of cash flows resulting from the repayment of principal might occur earlier than anticipated because of declining interest rates or later than anticipated because of rising interest rates. The impact of value fluctuations affects our consolidated financial statements, as a large portion of our fixed maturities are classified as available-for- sale, with changes in fair value reflected in our stockholders' equity (accumulated other comprehensive income or loss). No similar adjustment is made for liabilities to reflect a change in interest rates. Therefore, interest rate fluctuations and economic conditions could adversely affect our stockholders' equity, total comprehensive income and/or cash flows. Although at September 30, 2017, approximately 97.5% of our fixed maturities were investment grade with 76.1% rated A or above, all of our fixed maturities are subject to credit risk. If any of the issuers of our fixed maturities suffer financial setbacks, the ratings on the fixed maturities could be downgraded (with a concurrent decrease in fair value) and, in a worst-case scenario, the issuer could default on its financial obligations. If the issuer defaults, we could have realized losses associated with the impairment of the securities.

Valuation of our investments and the determination of whether a decline in the fair value of our invested assets is other-than-temporary are based on estimates that may prove to be incorrect.

U.S. GAAP requires that when the fair value of any of our invested assets declines and the decline is deemed to be other-than-temporary, we recognize a loss in either other comprehensive income or in our statement of income based on certain criteria in

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the period for which the determination is made. The determination of the fair value of certain invested assets, particularly those that do not trade on a regular basis, requires an assessment of available data and the use of assumptions and estimates. Once it is determined that the fair value of an asset is below its carrying value, we must determine whether the decline in fair value is other-than-temporary, which is based on subjective factors and involves a variety of assumptions and estimates.

There are risks and uncertainties associated with determining whether declines in market value are other-than-temporary. These include significant changes in general economic conditions and business markets, trends in certain industry segments, interest rate fluctuations, rating agency actions, changes in significant accounting estimates and assumptions and legislative actions. In the case of mortgage- and asset-backed securities, there is added uncertainty as to the performance of the underlying collateral assets. To the extent that we are incorrect in our determination of the fair value of our investment securities or our determination that a decline in their value is other-than-temporary, we may realize losses that never actually materialize or may fail to recognize losses within the appropriate reporting period.

Gross unrealized losses on fixed maturity and equity securities may be realized or result in future impairments, resulting in a reduction in our net income.

Fixed maturity and equity securities classified as available-for-sale are reported at fair value.  Unrealized gains and losses on available-for-sale securities are recognized as a component of other comprehensive income (loss) and are, therefore, excluded from our net income.  Our total gross unrealized losses on our available-for-sale securities portfolio at September 30, 2017 were $4.1 million.  The accumulated change in estimated fair value of these securities is recognized in net income when the gain or loss is realized upon sale of the security or in the event that the decline in estimated fair value is determined to be other-than-temporary and an impairment charge to earnings is taken.  Realized losses or impairments may have a material adverse effect on our net income in a particular quarterly or annual period.

Our actual claims losses may exceed our reserves for claims, and we may be required to establish additional reserves, which in turn may adversely impact our results of operations and financial condition.

We maintain reserves to cover our estimated exposure for claims relating to our issued insurance policies.  Reserves, whether calculated under U.S. generally accepted accounting principles or statutory accounting practices prescribed by various state insurance regulators, do not represent an exact calculation of exposure, but instead represent our best estimates, generally involving actuarial projections, of what we expect claims will be based on mortality assumptions that are determined by various regulatory authorities.  Many reserve assumptions are not directly quantifiable, particularly on a prospective basis.  In addition, when we acquire other domestic life insurance companies, our assessment of the adequacy of acquired policy liabilities is subject to our estimates and assumptions.  Reserve estimates are refined as experience develops, and adjustments to reserves are reflected in our statements of operations for the period in which such estimates are updated.  Because establishing reserves is an inherently uncertain process involving estimates of future losses, future developments may require us to increase policy benefit reserves, which may have a material adverse effect on our results of operations and financial condition in the periods in which such increases occur.

Unanticipated increases in early policyholder withdrawals or surrenders could negatively impact liquidity.

A primary liquidity concern is the risk of unanticipated or extraordinary early policyholder withdrawals or surrenders. Our insurance policies include provisions, such as surrender charges, that help limit and discourage early withdrawals, and we track and manage liabilities and attempt to align our investment portfolio to maintain sufficient liquidity to support anticipated withdrawal demands. However, early withdrawal and surrender levels may differ from anticipated levels for a variety of reasons, including changes in economic conditions, changes in policyholder behavior or financial needs, changes in relationships with our independent consultants, changes in our claims-paying ability, or increases in surrenders among policies that have been in force for more than fifteen years and are no longer subject to surrender charges. Any of these occurrences could adversely affect our liquidity, profitability and financial condition.

While we own a significant amount of liquid assets, a certain portion of investment assets are relatively illiquid. If we experience unanticipated early withdrawal or surrender activity, we could exhaust all other sources of liquidity and be forced to obtain additional financing or liquidate assets, perhaps on unfavorable terms. The availability of additional financing will depend on a variety of factors, such as market conditions, the availability of credit in general or more specifically in the insurance industry, the strength or weakness of the capital markets, the volume of trading activities, our credit capacity, and the perception of our long- or short-term financial prospects if we incur large realized or unrealized investment losses or if the level of business activity declines due

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to a market downturn. If we are forced to dispose of assets on unfavorable terms, it could have an adverse effect on our liquidity, results of operations and financial condition.

Catastrophes may adversely impact liabilities for policyholder claims and reinsurance availability.

Our insurance operations are exposed to the risk of catastrophic events. The extent of losses from a catastrophe is a function of both the total amount of insured exposure in the area affected by the event and the severity of the event. Most catastrophes are restricted to small geographic areas; however, hurricanes, earthquakes, tsunamis and man-made catastrophes may produce significant damage or loss of life in larger areas, especially those that are heavily populated. Claims resulting from catastrophic events could cause substantial volatility in our financial results for any fiscal quarter or year and could materially reduce our profitability or harm our financial condition. In addition, catastrophic events could harm the financial condition of issuers of obligations we hold in our investment portfolio, resulting in impairments to these obligations, and the financial condition of our reinsurers, thereby increasing the probability of default on reinsurance recoveries. Large-scale catastrophes may also reduce the overall level of economic activity in affected countries, which could hurt our business and the value of our investments or our ability to sell new policies.

Our life insurance operations are exposed to the risk of catastrophic mortality, such as a pandemic or other event that causes a large number of deaths, especially if concentrated in our top foreign markets. A significant pandemic could have a major impact on the global economy or the economies of particular countries or regions, including travel, trade, tourism, the health system, food supply, consumption, overall economic output and, eventually, on the financial markets. In addition, a pandemic that affected our employees, our policyholders, our independent consultants or other companies with which we do business could disrupt our business operations. The effectiveness of external parties, including governmental and non-governmental organizations, in combating the spread and severity of such a pandemic could have a material impact on the losses experienced by us. These events could cause a material adverse effect on our results of operations in any period and, depending on their severity, could also materially and adversely affect our financial condition.

We may be required to accelerate the amortization of deferred acquisition costs and the costs of customer relationships acquired, which would increase our expenses and adversely affect our results of operations and financial condition.

At September 30, 2017, we had $166.6 million of deferred policy acquisition costs, or DAC.  DAC represents costs that vary with and are primarily related to the successful sale and issuance of our insurance policies and are deferred and amortized over the estimated life of the related insurance policies.  These costs include commissions in excess of ultimate renewal commissions, solicitation and printing costs, sales material costs and some support costs, such as underwriting and contract and policy issuance expenses.  Under U.S. GAAP, DAC is amortized to income over the lives of the underlying policies, in relation to the premium-paying period of the policies.

In addition, when we acquire a block of insurance policies, we assign a portion of the purchase price to the right to receive future net cash flows from existing insurance and investment contracts and policies.  This intangible asset, called the cost of customer relationships acquired, or CCRA, represents the actuarially estimated present value of future cash flows from the acquired policies.  At September 30, 2017, we had $18.0 million of CCRA.  We amortize the value of this intangible asset in a manner similar to the amortization of DAC.

Our recoverability of DAC and CCRA generally depends upon anticipated profits from investments, surrender and other policy charges, mortality, morbidity, persistency and maintenance expense margins.  For example, if our insurance policy lapse and surrender rates were to exceed the assumptions upon which we priced our insurance policies, or if actual persistency proves to be less than our persistency assumptions, especially in the early years of a policy, we might be required to accelerate the amortization of expenses we deferred in connection with the acquisition of the policy.  We regularly review the quality of our DAC and CCRA to determine if they are recoverable from future income.  If these costs are not recoverable, the amount that is not recoverable is charged to expenses in the financial period in which we make this determination.

Unfavorable experience with regard to expected expenses, investment returns, surrender and other policy charges, mortality, morbidity, lapses or persistency may cause us to increase the amortization of DAC or CCRA, or both, or to record a current period expense to increase benefit reserves, any of which could have a material adverse effect on our results of operations and financial condition.


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We may be required to recognize an impairment on the value of our goodwill, which would increase our expenses and materially adversely affect our results of operations and financial condition.

Goodwill represents the excess of the amount paid by us to acquire various life insurance companies over the fair value of their net assets at the date of the acquisition.  Under U.S. GAAP, we test the carrying value of goodwill for impairment at least annually at the "reporting unit" level, which is either an operating segment or a business that is one level below the operating segment.  Goodwill is impaired if its carrying value exceeds its implied fair value.  This may occur for various reasons, including changes in actual or expected earnings or cash flows of a reporting unit, generation of earnings by a reporting unit at a lower rate than similar businesses or declines in market prices for publicly traded businesses similar to our reporting units.  If any portion of our goodwill becomes impaired, we would be required to recognize the amount of the impairment as a current-period expense, which could have a material adverse effect on our results of operations and financial condition.  Goodwill in our consolidated financial statements was $17.3 million as of September 30, 2017.

Due to changes in certain accounting standards issued by the Financial Accounting Standards Board (“FASB”) which become effective for the first fiscal year beginning after December 15, 2019 (subject to early adoption), all or a portion of the 4.6 million in goodwill value of our Home Services segment may become impaired. The impairment methodology within the FASB Accounting Standards Codification ("ASC") Topic 350, Intangibles-Goodwill and Other ("ASC 350") follows a quantitative two step process. In the first step of the goodwill impairment test, the fair value of a reporting unit is compared to its carrying value. If the carrying value of a reporting unit exceeds its fair value, the second step of the impairment test is performed for purposes of measuring the impairment.

In the second step, the Company performs a hypothetical purchase price allocation to measure impairment. If the hypothetical purchase price allocation of the reporting unit is lower than the goodwill value, an impairment loss is recognized in an amount equal to that difference.

Management’s determination of the fair value of each reporting unit incorporates multiple inputs including discounted cash flow calculations based on assumptions that market participants would make in valuing the reporting unit. Other assumptions can include levels of economic capital, future business growth, and earnings projections.

In 2016, the Company's Home Service Segment failed the first step and thus the second impairment step had to be performed. The Company's Home Service Segment passed step two, so the goodwill value for the Home Service Segment was not impaired.

On January 26, 2017, the FASB issued Accounting Standards Update ("ASU") No. 2017-04, Simplifying the Test for Goodwill Impairment. An entity will no longer perform a hypothetical purchase price allocation to measure impairment, eliminating step two. Instead, impairment will be measured using the difference of the carrying amount to the fair value of the reporting unit. The ASU is effective prospectively for annual and interim periods in fiscal year beginning after December 15, 2019, but early adoption is permitted for goodwill impairment tests with measurement dates after January 1, 2017.

With the elimination of step two, there is risk that in the Home Service Segment all or a portion of the goodwill value could be impaired upon adoption of the ASU.

Our conversion to a new actuarial valuation system is not yet complete and contains known uncertainties that could result in identification of additional errors in our financial reporting.

As discussed in Note 1 - "Correction of Immaterial Errors and Reclassification of Certain Amounts to the Consolidated Financial Statements" to our December 31, 2016 consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2016, the Company is in the process of converting its actuarial valuation from a third party service provider to an actuarial valuation modeling software system purchased from a vendor. In connection with our ongoing actuarial valuation conversion, certain legacy system errors were discovered.

As part of this conversion, the Company could identify additional differences that will be evaluated for financial reporting purposes. The conversion to the new system is expected to be completed in 2018.


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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.

From time to time we are, and have been, subject to a variety of legal and regulatory actions and investigations relating to our business operations, including, but not limited to:

•disputes over insurance coverage or claims adjudication;
•regulatory compliance with state laws, including insurance and securities regulations;
regulatory compliance with U.S. federal securities laws, tax, anti-money laundering, bank secrecy, anti-bribery, anti-corruption and foreign asset control laws, among others;
disputes with our independent marketing firms, independent consultants and employee-agents over compensation, termination of contracts, noncompliance with applicable laws and regulations and related claims;
•disputes regarding our tax liabilities;
•disputes relating to reinsurance and coinsurance agreements; and
•disputes relating to businesses acquired and operated by us.

In the absence of countervailing considerations, we would expect to defend any such claims vigorously.  However, in doing so, we could incur significant defense costs, including attorneys' fees, other direct litigation costs and the expenditure of substantial amounts of management time that otherwise would be devoted to our business.  Further, if we suffer an adverse judgment as a result of any claim, it could have a material adverse effect on our business, results of operations and financial condition.

A number of U.S. jurisdictions have been investigating life insurer practices for compliance with unclaimed property laws. Highly publicized incidents disclosed the practice by certain companies of using data available on the U.S. Social Security Administration's Death Master File or a similar database in order to avoid paying periodic benefits under annuity contracts, but not using the same data base to determine when death benefits were owed. This asymmetric conduct by certain insurers has led a number of jurisdictions to require life insurers to use this same data to identify instances where amounts under life insurance policies and annuity contracts are payable and to locate and pay beneficiaries under such contracts. The National Conference of Insurance Legislators ("NCOIL") has adopted the Model Unclaimed Life Insurance Benefits Act ("Model Act") and several states have adopted legislation that is substantially similar to the Model Act adopted by NCOIL. The Model Act imposes new requirements on insurers to periodically compare their in force life insurance and annuity policies against the Death Master File, investigate any identified matches to confirm the death of the insured and determine whether benefits are due and attempt to locate the beneficiaries or, if no beneficiary can be located, escheat the policy benefit to the respective state government as unclaimed property. The Model Act could result in additional payments to beneficiaries, additional escheatment of funds deemed abandoned under state laws, and/or administrative penalties. It is also possible that life insurers may be subject to claims regarding their business practices as a result given the legal uncertainty in this area. However, court decisions in West Virginia and Florida have upheld the well-established insurance law principal that life insurance policies are not due and payable until the insurance company receives due proof of death, and have further held an insurance company has no duty to search the Death Master File or other databases to determine whether deaths have occurred that have not been reported to the company.

Despite the fact we have no history of the asymmetric conduct in question, we have received notices from the Louisiana Department of Treasury, the Arkansas Auditor of State and the Texas State Comptroller, indicating they intend to audit Citizens, Inc. and certain of its affiliates for compliance with unclaimed property laws.  The audits may result in additional payments to beneficiaries, additional escheatment of funds deemed abandoned under state laws, administrative penalties, interest, and changes to our Company's procedures for the identification and escheatment of abandoned property.  At this time, our Company is not able to estimate any of these possible amounts.

Reinsurers with which we do business could increase their premium rates and may not honor their obligations, leaving us liable for the reinsured coverage.

We reinsure certain risks underwritten by our various insurance subsidiaries.  Market conditions beyond our control determine the availability and cost of the reinsurance protection we purchase.  The high cost of reinsurance or lack of affordable coverage could adversely affect our results of operations and financial condition.

Our reinsurance facilities are generally subject to annual renewal.  We may not be able to maintain our current reinsurance facilities and, even if highly desirable or necessary, we may not be able to obtain replacement reinsurance facilities in adequate amounts or at rates economic to us.  If we are unable to renew our expiring facilities or to obtain new reinsurance facilities, either our net

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exposures would increase or, if we are unwilling or unable to bear an increase in net exposures, we may have to reduce the level of our underwriting commitments.  In addition, our reinsurance facilities may be canceled for new business, pursuant to their terms, upon the occurrence of certain specified events, including a change of control of our Company (generally defined as the acquisition of 10% or more of our voting equity securities) or the failure of our insurance company subsidiaries to maintain the minimum required levels of statutory surplus.  Any of these potential developments could materially adversely affect our revenues, results of operations and financial condition.

In 2016, we reinsured $522.8 million of the face amount of our life insurance policies.  Amounts reinsured in 2016 represented 10.5% of the face amount of direct life insurance in force in that year.  Although the cost of reinsurance is, in some cases, reflected in premium rates, under certain reinsurance agreements, the reinsurer may increase the rate it charges us for reinsurance.  If our cost of reinsurance were to increase, we might not be able to recover these increased costs, and our results of operations and financial condition could be materially adversely affected.  See Note 5 to the Company's Consolidated Financial Statements.

Our international and domestic markets face significant competition. If we are unable to compete effectively in our markets, our business, results of operations and profitability may be adversely affected.

Our international marketing plan focuses on making available U.S. Dollar-denominated life insurance products to individuals residing in more than 30 countries.  New competition could increase the supply of available insurance, which could adversely affect our ability to price our products at attractive profitable rates and thereby adversely affect our revenues, results of operations and financial condition.  Existing barriers to entry in the foreign markets we serve may not be sufficient to impede potential competitors from entering such markets.  In connection with our business with foreign nationals, we experience competition primarily from the following sources, many of which have substantially greater financial, marketing and other resources than we have:

Foreign operated companies with U.S. Dollar-denominated policies.  We face direct competition from companies that operate in the same manner as we operate in our international markets.
Companies foreign to the countries in which their policies are sold but that issue local currency policies.  Another group of our competitors in the international marketplace consists of companies that are foreign to the countries in which their policies are sold but issue life insurance policies denominated in the local currencies of those countries.  Local currency policies provide the benefit of assets located in the country of foreign residents, but entail risks of uncertainty due to local currency fluctuations, as well as the perceived instability and weakness of local currencies.
Locally operated companies with local currency policies.  We compete with companies formed and operated in the country in which our foreign insureds reside.  Generally, these companies are subject to risks of currency fluctuations, and they primarily use mortality tables based on experience of the local population as a whole.  These mortality tables are typically based on significantly shorter life spans than those we use.  As a result, the cost of insurance from these companies tends to be higher than ours. Although these companies typically market their policies to a broader section of the population than do our independent marketing firms and independent consultants, there can be no assurance that these companies will not endeavor to place a greater emphasis on our target market and compete more directly with us.

In the United States, we compete with more than 800 other life insurance companies of various sizes.  The life insurance business in the United States is highly competitive, in part because it is a mature industry that, in recent years, has experienced little to no growth in life insurance sales. Many domestic life insurance companies have substantially greater financial resources, longer business histories, larger sales forces and more diversified lines of insurance coverage than we do.  Competition in the United States has also increased recently because the life insurance industry is consolidating, with larger, more efficient organizations emerging from the consolidation.

In addition, from time to time, companies enter and exit the markets in which we operate, thereby increasing competition at times when there are new entrants.  We may lose business to competitors offering competitive products at lower prices, or for other reasons.

There can be no assurance that we will be able to compete effectively in any of our markets.  If we do not, our business, results of operations and financial condition will be materially adversely affected.


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Sales of our insurance products may be reduced if we are unable to (i) establish and maintain commercial relationships with independent marketing firms and independent consultants, (ii) attract and retain employee agents or (iii) develop and maintain our distribution sources.

We distribute our insurance products through several distribution channels, including independent marketing firms, independent consultants and our employee agents.  These relationships are significant for both our revenues and our profits.  In our life insurance segment, we depend almost exclusively on the services of independent marketing firms and independent consultants.  In our home service insurance segment, we depend on employee agents whose role in our distribution process is integral to developing and maintaining relationships with policyholders.  Significant competition exists among insurers in attracting and maintaining marketers of demonstrated ability.  Some of our competitors may offer better compensation packages for marketing firms, independent consultants and agents and broader arrays of products and have a greater diversity of distribution resources, better brand recognition, more competitive pricing, lower cost structures and greater financial strength or claims paying ratings than we do.  We compete with other insurers for marketing firms, independent consultants and employee agents primarily on the basis of our compensation and support services.  Any reduction in our ability to attract and retain effective sales representatives could materially adversely affect our revenues, results of operations and financial condition.

As of January 1, 2017, we have discontinued sales of all of our domestic life insurance products that are not compliant with Section 7702 of the Internal Revenue Code. We are currently developing compliant products to be sold in the domestic market. We expect 2017 sales to decline due to lack of compliant products to sell and we are unsure of the impact this will have on our domestic distribution sources.

There may be adverse tax, legal or financial consequences if our sales representatives are determined not to be independent contractors.

Our sales representatives are independent contractors who operate their own businesses. Although we believe that we have properly classified our representatives as independent contractors, there is nevertheless a risk that the IRS, a foreign agency, a court or other authority will take the different view that our sales representatives should be treated like employees. Furthermore, the tests governing the determination of whether an individual is considered to be an independent contractor or an employee are typically fact-sensitive and vary from jurisdiction to jurisdiction. Laws and regulations that govern the status and misclassification of independent sales representatives are subject to change or interpretation.

If there is a change in the manner in which our independent contractors are classified or  an adverse determination with respect to some or all of our independent contractors by a court or governmental agency, we could incur significant costs in complying with such laws and regulations, including in respect of tax withholding, social security payments, government and private pension plan contributions and recordkeeping, or we may be required to modify our business model, any of which could have a material adverse effect on our business, financial condition and results of operations. In addition, there is the risk that we may be subject to significant monetary liabilities arising from fines or judgments as a result of any such actual or alleged non-compliance with applicable federal, state, local or foreign laws.

Changes among our board and senior management team, or the failure to fill key vacancies or effectively manage succession, could hinder our operations, marketing and business strategy and adversely impact our results of operations, financial condition or prospects.

Significant changes have occurred recently in our board and executive leadership, including: the retirement in 2015 of our founder, who was our initial Chairman and Chief Executive Officer; the retirement in 2016 of our founder’s son, who succeeded our founder as Chairman and Chief Executive Officer; the resignation in 2016 of a long-serving board member and Audit Committee Chairman; the appointment in 2016 of a new Chairman of the Board; the appointment in 2016 of our former Chief Legal Officer Geoffrey M. Kolander as our Chief Executive Officer; and the appointments in 2017 of a new Chief Financial Officer, Chief Operating Officer, Chief Accounting Officer, Chief Actuary, and Chief Marketing Officer, along with four new independent directors. The effectiveness of new leaders in these roles, and further transition as a result of these changes, could have a significant impact on our results of operations, financial condition and prospects. We rely on our senior executive team comprised of Chief Executive Officer and President Geoffrey M. Kolander, Executive Vice President, Chief Financial Officer and Chief Investments Officer Kay Osbourn, Vice President and Chief Operating Officer, Terry Festervand, Vice President and Chief Accounting Officer, Jeff Conklin, Vice President and Chief Actuary, Greg Broer and Vice President and Chief Marketing Officer, Robert Mauldin to develop and execute our operating and marketing plans and strategy for expanding our business.  We anticipate that their expertise will continue to be of substantial value in connection with our business and compliance strategies.  The loss of the services of any of

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these individuals, or the failure to effectively manage succession or fill key vacancies for an extended period of time, could have a significant adverse effect on our business and prospects.  While we have entered into employment and change of control agreements with our top two executives, there is no assurance that these executives will complete the term of their employment agreements or that the Company will renew the agreements upon expiration. Our ability to retain and effectively incentivize our key executives and our ability to attract directors and new executive talent in the competitive insurance industry may be limited. Further, we do not carry key-man insurance policies on any of their lives.

We are subject to extensive governmental regulation in the United States, which is subject to change and may increase our costs of doing business, restrict the conduct of our business and negatively impact our results of operations, liquidity and financial condition.

We are subject to extensive regulation and supervision in U.S. jurisdictions where we do business, including state insurance regulations and U.S. federal securities, tax, financial services, privacy, anti-money laundering, bank secrecy, anti-corruption and foreign asset control laws.  Insurance company regulation is generally designed to protect the interests of policyholders, with substantially lesser protections to shareholders of the regulated insurance companies.  To that end, all the states in which we do business have insurance regulatory agencies with broad legal powers with respect to licensing companies to transact business; mandating capital and surplus requirements; regulating trade and claims practices; approving policy forms; and restricting companies' ability to enter and exit markets.

The capacity for an insurance company's growth in premiums is partially a function of its required statutory surplus.  Maintaining appropriate levels of statutory surplus, as measured by statutory accounting practices prescribed or permitted by a company's state of domicile, is considered important by all state insurance regulatory authorities.  Failure to maintain required levels of statutory surplus could result in increased regulatory scrutiny and enforcement action by regulatory authorities.

Most insurance regulatory authorities have broad discretion to grant, renew, suspend and revoke licenses and approvals, and could preclude or temporarily suspend us from carrying on some or all of our activities, including acquisitions of other insurance companies, require us to add capital to our insurance company subsidiaries, or fine us.  If we are unable to maintain all required licenses and approvals, or if our insurance business is determined not to comply fully with the wide variety of applicable laws and regulations and their interpretations, including the USA Patriot Act, our revenues, results of operations and financial condition could be materially adversely affected.

Although the U.S. federal government historically has not regulated the insurance business, legislation proposing federal regulation of insurance has been proposed from time to time and the Dodd-Frank Act enacted in 2010 expanded the federal presence in insurance oversight. Its requirements include streamlining the state-based regulation of reinsurance and non-admitted insurance (also known as surplus lines insurance, which is property or casualty insurance written by a company that is not licensed to sell policies of insurance in a given state) and establishing a new Federal Insurance Office within the U.S. Department of the Treasury with powers over all lines of insurance except health insurance, certain long-term care insurance and crop insurance. The Federal Insurance Office is authorized to, among other things, gather data and information to monitor aspects of the insurance industry, identify issues in the regulation of insurers about insurance matters and preempt state insurance measures under certain circumstances. The Dodd-Frank Act calls for numerous studies and significant rulemaking across numerous federal agencies, some of which has been implemented. The rulemaking process going forward may change with the new presidential administration. We are currently unable to determine the ultimate impact of the Dodd-Frank Act on our business, results of operations, liquidity and capital resources.

Our failure to maintain effective information systems could adversely affect our business.

We must maintain and enhance our existing information systems and develop new information systems in order to keep pace with continuing changes in information processing technology, evolving industry and regulatory standards and changing customer preferences.  If we do not maintain adequate systems, we could experience adverse consequences, including products acquired through acquisition, inadequate information on which to base pricing, underwriting and reserve decisions, regulatory problems, failure to meet prompt payment obligations, increases in administrative expenses and loss of customers.

Some of our information technology systems and software are mainframe-based, legacy-type systems that require an ongoing commitment of resources to maintain current standards.  Our systems utilize proprietary code requiring highly skilled personnel.  Due to the unique nature of our proprietary operating environment, we could have difficulty finding personnel with the skills required to provide ongoing system maintenance and development as we seek to keep pace with changes in our products

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and business models, information processing technology, evolving industry and regulatory standards and policyholder needs.  Our success is dependent upon, among other things, maintaining and enhancing the effectiveness of existing systems, as well as continuing to integrate, develop and enhance our information systems to support business processes in a cost-effective manner.

Our failure to maintain effective and efficient information systems, or our failure to efficiently and effectively consolidate our information systems to eliminate redundant or obsolete applications, could have a material adverse effect on our results of operations and financial condition.

Failures of disclosure controls and internal control over financial reporting could materially and adversely affect our business, financial condition and results of operations, impair our ability to timely file reports with the SEC and subject us to litigation and/or regulatory scrutiny and penalties.

We maintain disclosure controls and procedures designed to ensure that we timely report information as specified in SEC rules and regulations. We also maintain a system of internal control over financial reporting. However, these controls may not achieve, and in some cases have not achieved, their intended objectives. Control processes that involve human diligence and compliance, such as our disclosure controls and procedures and internal control over financial reporting, are subject to lapses in judgment and breakdowns. Controls that rely on models may be subject to inadequate design or inaccurate assumptions or estimates.  Controls also can be circumvented by collusion or improper management override of such controls. Because of such limitations, there are risks that material misstatements due to error or fraud may not be prevented or detected, and that information may not be reported on a timely basis. The failure of our controls to be effective could have a material adverse effect on our business, financial condition, results of operations and the market for our common stock, and could subject us to litigation, regulatory scrutiny and/or penalties.

As disclosed in Part II, Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2016, we have identified control deficiencies in our disclosure controls and financial reporting process that constitute material weaknesses and for which remediation is still in process as of September 30, 2017. If we fail to design effective controls, fail to remediate control deficiencies or fail to otherwise maintain effective internal controls over financial reporting in the future, such failures could result in a material misstatement of our annual or quarterly financial statements that would not be prevented or detected on a timely basis and which could cause investors to lose confidence in our financial statements, have a negative effect on the trading price of our common stock, limit our ability to obtain financing if needed or increase the cost of any financing we may obtain.  In addition, these failures may negatively impact our business, financial condition and results of operations, impair our ability to timely file our periodic reports with the SEC, subject us to litigation and regulatory scrutiny and cause us to incur substantial additional costs in future periods relating to the implementation of remedial measures.

Our failure to protect confidential information and privacy could result in the unauthorized disclosure of sensitive or confidential corporate or customer information, damage to our reputation, loss of customers, fines, penalties and adverse effects on our results of operations and financial condition.

Our insurance subsidiaries are subject to privacy regulations.  The actions we take to protect confidential information include among other things: monitoring our record retention plans and policies and any changes in state or federal privacy and compliance requirements; maintaining secure storage facilities for tangible records; and limiting access to electronic information in order to safeguard certain information.

In addition, the Gramm-Leach-Bliley Act requires that we deliver a notice regarding our privacy policy both at the delivery of an insurance policy and annually thereafter.  Certain exceptions are allowed for sharing of information under joint marketing agreements. However, certain state laws may require us to obtain a policyholder's consent before we share information.

We have a written information security program with appropriate administrative, technical and physical safeguards to protect such confidential information.  Cyber security attacks are on the rise throughout the world and while we believe we have taken reasonable steps to secure our customer information we could experience a breach of data. We closely monitor cyber attack attempts on our system, and we are not aware of any material breach of our cybersecurity, administrative, technical and physical safeguards or client data. Nevertheless, it is possible a cyber attack could go undetected and that preventative actions we take to reduce this risk of cyber-incidents and protect our information may be insufficient to prevent cyber attacks or other security breaches.

If we do not comply with privacy regulations and protect confidential information, we could experience adverse consequences, including regulatory sanctions, loss of reputation, litigation exposure, disruptions to our operations or significant technical, legal

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and operating expenses, any of which could have a material adverse effect on our business, results of operations and financial condition.

General economic, financial market and political conditions may materially adversely affect our results of operations and financial condition.

Our results of operations and financial condition may be materially adversely affected from time to time by general economic, financial market and political conditions, both in the United States and in the foreign countries where our policyowners reside.  These conditions include economic cycles such as:  levels of consumer spending; levels of inflation; movements of the financial markets; availability of credit; fluctuations in interest rates, monetary policy or demographics; and legislative and competitive changes.

During periods of economic downturn, our insureds may choose not to purchase our insurance products, may terminate existing policies, permit policies to lapse or may choose to reduce the amount of coverage purchased, any of which could have a material adverse effect on our results of operations and financial condition.  Also, our sales of new insurance policies might decrease.

Our insurance subsidiaries are restricted by applicable laws and regulations in the amounts of fees, dividends and other distributions they may make to us.  The inability of our subsidiaries to make payments to us in sufficient amounts for us to conduct our operations could adversely affect our ability to meet our obligations or expand our business.

As a holding company, our principal asset is the stock of our subsidiaries.  We rely primarily on statutorily permissible payments from our insurance company subsidiaries, principally through service agreements we have with our subsidiaries, to meet our working capital and other corporate expenses.  The ability of our insurance company subsidiaries to make payments to us is subject to regulation by the states in which they are domiciled, and these payments depend primarily on approved service agreements between us and these subsidiaries and, to a lesser extent, the statutory surplus (which is the excess of assets over liabilities as determined under statutory accounting practices prescribed by an insurance company's state of domicile), future statutory earnings (which are earnings as determined in accordance with statutory accounting practices) and regulatory restrictions.

Generally, the net assets of our insurance company subsidiaries available for dividends are limited to either the lesser or greater (depending on the state of domicile) of the subsidiary's net gain from operations during the preceding year and 10% of the subsidiary's net statutory surplus as of the end of the preceding year as determined in accordance with accounting practices prescribed by insurance regulatory authorities.

Except to the extent that we are a creditor with recognized claims against our subsidiaries, claims of our subsidiaries' creditors, including policyholders, have priority with respect to the assets and earnings of the subsidiaries over the claims of our creditors and shareholders.  If any of our subsidiaries becomes insolvent, liquidates or otherwise reorganizes, our creditors and shareholders will have no right to proceed in their own right against the assets of that subsidiary or to cause the liquidation, bankruptcy or winding-up of the subsidiary under applicable liquidation, bankruptcy or winding-up laws.

Adverse capital and credit market conditions may significantly affect our access to debt and equity capital and our cost of capital in seeking to expand our business.

The availability of equity and debt financing to us will depend on a variety of factors such as market conditions, the general availability of credit, the overall availability of credit to the financial services industry, our credit capacity, as well as the possibility that investors or lenders could develop a negative perception of our long- or short-term financial prospects.  Disruptions, uncertainty or volatility in the capital markets may also limit our access to equity capital for us to seek to expand our business.  As such, we may be forced to delay raising debt or equity capital, or bear an unattractive cost of capital, which could adversely affect our ability to seek any acquisitions and negatively impact profitability of an acquisition.

Unexpected losses in future reporting periods may require us to adjust the valuation allowance against our deferred tax assets.

We evaluate our deferred tax asset (“DTA”) quarterly for recoverability based on available evidence.  This process involves management's judgment about assumptions, which are subject to change from period to period due to tax rate changes or variances between our projected operating performance and our actual results.  Ultimately, future adjustments to the DTA valuation allowance, if any, will be determined based upon changes in the expected realization of the net deferred tax assets.  The realization of the deferred tax assets depends on the existence of sufficient taxable income in either the carry back or carry forward periods under applicable tax law.  Due to significant estimates utilized in establishing the valuation allowance and the potential for changes in

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facts and circumstances, it is reasonably possible that we may be required to record a valuation allowance in future reporting periods.  Such an adjustment could have a material adverse effect on our results of operation, financial condition and capital position.

We face a greater risk of money laundering activity associated with sales derived from residents of certain foreign countries.

Some of our top international markets are in countries identified by the U.S. Department of State as jurisdictions of high risk for money laundering. As required by Bank Secrecy Act ("BSA”) regulations applicable to insurance companies, we have developed and implemented an anti-money laundering program that includes policies and procedures for complying with applicable BSA program, reporting and recordkeeping requirements and for deterring, preventing and detecting potential money laundering and other criminal activity (“BSA Program”). Based on a prior internal risk assessment, we have enhanced our BSA Program with additional controls, such as list screening software beyond sanctions screening required by the Office of Foreign Assets Control (“OFAC”), enhanced payment due diligence and transaction controls. However, there can be no assurance that these enhanced controls will entirely mitigate money laundering risk associated with these jurisdictions.

Risks Relating to Our Capital Stock

If our foreign policyholders reduced or ceased participation in our Stock Investment Plan (the “Plan”) or if a securities regulatory authority were to deem the Plan's operation contrary to securities laws, the volume of Class A common stock purchased on the open market through the Plan, and the price of our Class A common stock, could fall.

More than 95% percent of the shares of Class A common stock purchased under the Plan in 2016 were purchased by foreign holders of life insurance policies (or related brokers); the remaining 5% of the shares of Class A common stock purchased under the Plan in 2016 were purchased by approximately 2,123 participants resident in the United States. The Plan is registered with the SEC pursuant to a registration statement under the Securities Act of 1933, but is not registered under the laws of any foreign jurisdiction.  If a foreign securities regulatory authority were to determine the offer and sale of our Class A common stock under the Plan were contrary to applicable laws and regulations of its jurisdiction, such authority may issue or assert a fine, penalty or cease and desist order against us in that foreign jurisdiction. There is a risk our Class A common stock price could be negatively impacted by a decrease in participation in the Plan.  If fewer policyholders elect to participate in the Plan, or our international premium collections were to decrease as a result of regulatory, economic, or marketing impediments, the trading volume of our Class A common stock may decline from its present levels, the demand for our Class A common stock could be negatively impacted and the price of our Class A common stock could fall.


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Control of our Company, through the ownership of our Class B Common Stock, has transferred from our founder to a 501(c)(3) charitable foundation established by our founder, and we cannot determine whether any change in our management, operations, or operating strategies will occur as a result of this ownership change.

Harold E. Riley, our founder, was the beneficial owner of 100% of our Class B common stock, which was held in the name of the Harold E. Riley Trust ("Trust"), of which he had served as Trustee until his death in September 2017.  Our Class A and Class B common stock are identical in all respects, except the Class B common stock elects a simple majority of the Board and receives one-half of any cash dividends paid, on a per share basis, to the Class A shares.  The Class A common stock elects the remainder of the Board.  The Trust documents provided that upon Mr. Riley's death, the Class B common stock was transferred from the Trust to the Harold E. Riley Foundation, a charitable organization established under 501(c)(3) of the Internal Revenue Code (the "Foundation"). Therefore, the Foundation controls our Company.   The Foundation is organized as a public support charity for the benefit of its charitable beneficiaries, Baylor University and Southwestern Baptist Theological Seminary. The Foundation is governed by 11 trustees, five of which were appointed by its sole member, Harold Riley, three of which were appointed by Baylor University and three of which were appointed by Southwestern Baptist Theological Seminary. The trustees appointed by Harold Riley include himself, Dottie Riley and Rick Riley. It is unclear what, if any, change will occur to our board, management, or corporate operating strategies as a result of different ownership of our Class B common stock. A transfer of our Class B common stock from the Trust also may trigger certain “change in control” provisions in the employment agreements of our top two executives. Under each employment agreement, a “change in control" includes, among other things (1) the transfer of at least a majority of the Company’s Class B Common Stock from the Harold E. Riley Trust to an individual other than Harold E. Riley, an entity not beneficially owned by Harold E. Riley or a trust not controlled by Harold E. Riley and (2) the exercise of a power of attorney granted by Harold E. Riley over the Company’s Class B Common Stock. Upon a termination by Citizens without cause or the executive’s voluntary termination with Good Reason, in each case other than within the ninety (90) day period prior to the consummation of a change in control or within one (1) year following a change in control, each executive is entitled to certain cash payments and benefits.

There are a substantial number of our shares of Class A common stock issued to our executive officers and directors which are eligible for future sale in the public market.  The sale of these shares could cause the market price of our Class A common stock to fall.

There were 49,080,114 shares of our Class A common stock issued and outstanding as of December 31, 2016.  Our executive officers and directors owned approximately 2,480,354 shares of our Class A common stock as of December 31, 2016, representing approximately 5.1% of our then outstanding Class A common stock.  Almost all of these shares have been registered for public resale and generally may be sold freely.  In the event of a sale of some or all of these shares or the perceived sale of these shares, the market price of our Class A common stock could fall substantially.

The price of our Class A common stock may be volatile and may be affected by market conditions beyond our control.

Our Class A common stock price has historically fluctuated and is likely to fluctuate in the future and could decline materially because of the volatility of the stock market in general, decreased participation in the Plan referred to above or a variety of other factors, many of which are beyond our control, including: quarterly or annual variations in actual or anticipated results of our operations; interest rate fluctuations; changes in financial estimates by securities analysts; competition and other factors affecting the life insurance business generally; and conditions in the U.S. and world economies.

Our international markets, and the specific manner in which we conduct our business in those jurisdictions, may be subject to negative publicity in social media or other channels, which may negatively impact the market price of our Class A common stock.

We interface with and distribute our products to residents of foreign countries that may be subject to the risks disclosed in our Item 1A. Risk Factor under the heading, “The majority of our sales derive from residents of foreign countries and are subject to risks associated with widespread political instability, currency control laws and foreign insurance laws. A significant loss of sales in these foreign markets could have a material adverse effect on our results of operations and financial condition". Venezuela is one such example. Accordingly, from time to time, bloggers or other social media outlets relevant to investors may focus attention on our exposure to these countries and the negative circumstances surrounding their governments, thereby subjecting us to periodic negative publicity.  Negative publicity on investor blogs or through other media channels could impact trading in our stock and ultimately cause the market price of our Class A common stock to fall.


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Our articles of incorporation and bylaws, as well as applicable state insurance laws, may discourage takeovers and business combinations that our shareholders might consider to be in their best interests.

Our articles of incorporation and bylaws, as well as various state insurance laws, may delay, deter, render more difficult or prevent a takeover attempt our shareholders might consider in their best interests.  As a result, our shareholders will be prevented from receiving the benefit from any premium to the market price of our Class A common stock that may be offered by a bidder in a takeover context.  Even in the absence of a takeover attempt, the existence of these provisions may adversely affect the prevailing market price of our Class A common stock if they are viewed as discouraging takeover attempts in the future.

The following provisions in our articles of incorporation and bylaws make it difficult for our Class A shareholders to replace or remove our directors and have other anti-takeover effects that may delay, deter or prevent a takeover attempt:

holders of shares of our Class B common stock elect a simple majority of our board of directors, and all of these shares are owned by the Harold E. Riley Foundation; and
our board of directors may issue one or more series of preferred stock without the approval of our shareholders.

State insurance laws generally require prior approval of a change in control of an insurance company.  Generally, such laws provide that control over an insurer is presumed to exist if any person, directly or indirectly, owns, controls, holds with the power to vote, or holds proxies representing 10% or more of the voting securities of the insurer.  In considering an application to acquire control of an insurer, an insurance commissioner generally will consider such factors as the experience, competence and financial strength of the proposed acquirer, the integrity of the proposed acquirer's board of directors and executive officers, the proposed acquirer's plans for the management and operation of the insurer, and any anti-competitive results that may arise from the acquisition.  In addition, a person seeking to acquire control of an insurance company is required in some states to make filings prior to completing an acquisition if the acquirer and the target insurance company and their affiliates have sufficiently large market shares in particular lines of insurance in those states.  These state insurance requirements may delay, deter or prevent our ability to complete an acquisition.

We have never paid any cash dividends on our Class A common stock and do not anticipate doing so in the foreseeable future.

We have never paid cash dividends on our Class A common stock, as it is our policy to retain earnings for use in the operation and expansion of our business.  We do not expect to pay cash dividends on our Class A common stock for the foreseeable future.

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

None.


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Table of Contents
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
September 30, 2017

Item 6. EXHIBITS

Exhibit Number The following exhibits are filed herewith:
   
3.1
Restated and Amended Articles of Incorporation (a)
3.2
Amended and Restated Bylaws dated March 1, 2013 (b)
10.1
Termination Agreement, dated as of September 12, 2017, by and between Citizens, Inc. and David S. Jorgensen (c)
11
Statement re:  Computation of per share earnings (see financial statements)
��
31.1
 
Certification of Chief Executive Officer 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 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*
  
101.INSXBRL Instance Document*
101.SCHXBRL Taxonomy Extension Schema*
101.CALXBRL Taxonomy Extension Calculation Linkbase*
101.DEFXBRL Taxonomy Extension Definition Linkbase*
101.LABXBRL Taxonomy Extension Label Linkbase*
101.PREXBRL Taxonomy Extension Presentation Linkbase*
__________________
* Filed herewith.
(a) Filed on March 15, 2004 with the Registrant's Annual Report on Form 10-K for the Year Ended December 31, 2003 as Exhibit 3.1, and incorporated herein by reference.
(b) Filed on June 10, 2016 with the Registrants' Current Report on Form 8-K as Exhibit 3.2 and incorporated herein by reference.
(c) Filed on September 13, 2017 as Exhibit 10.1 with the Registrant's Current Report on Form 8-K and incorporated herein by reference.


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/ Geoffrey M. Kolander
   Geoffrey M. Kolander
   President and Chief Executive Officer
    
    
  By:/s/ Kay E. Osbourn
   Kay E. Osbourn
   Executive Vice President, Chief Financial Officer,
   and Chief Investment Officer
    
    
Date:November 7,13, 2017  

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