CITIZENS, INC. - Quarter Report: 2016 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

___________________________

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2016

¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from _____ to _____

Commission File Number: 000-16509

CITIZENS, INC.

(Exact name of registrant as specified in its charter)



Colorado	84-0755371
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

400 East Anderson Lane, Austin, TX	78752
(Address of principal executive offices)	(Zip Code)



	(512) 837-7100

(Registrant's telephone number, including area code)



	N/A

(Former name, former address and former fiscal year, if changed since last report)



Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes 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. See the definition of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨	Accelerated filer x	Non-accelerated filer ¨	Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No

As of October 28, 2016, the Registrant had 49,080,114 shares of Class A common stock, no par value, outstanding and 1,001,714 shares of Class B common stock outstanding.

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TABLE OF CONTENTS



			Page Number
Part I.	Financial Information
	Item 1.	Financial Statements

		Consolidated Statements of Financial Position, September 30, 2016 (Unaudited) and December 31, 2015	2

		Consolidated Statements of Comprehensive Income, Three Months Ended September 30, 2016 and 2015 (Unaudited)	4

		Consolidated Statements of Comprehensive Income, Nine Months Ended September 30, 2016 and 2015 (Unaudited)	5

		Consolidated Statements of Cash Flows, Nine Months Ended September 30, 2016 and 2015 (Unaudited)	6

		Notes to Consolidated Financial Statements	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	54

	Item 4.	Controls and Procedures	55

Part II.	Other Information

	Item 1.	Legal Proceedings	56

	Item 1A.	Risk Factors	56

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	68

	Item 3.	Defaults Upon Senior Securities	68

	Item 4.	Mine Safety Disclosures	68

	Item 5.	Other Information	68

	Item 6.	Exhibits	69

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Financial Position (In thousands)



	September 30, 2016		December 31, 2015
Assets	(Unaudited)
Investments:
Fixed maturities available-for-sale, at fair value (cost: $826,271 and $714,137 in 2016 and 2015, respectively)	$	875,217	735,648
Fixed maturities held-to-maturity, at amortized cost (fair value: $264,176 and $264,966 in 2016 and 2015, respectively)	251,637		259,953
Equity securities available-for-sale, at fair value (cost: $22,577 and $23,727 in 2016 and 2015, respectively)	23,347		23,438
Mortgage loans on real estate	237		594
Policy loans	64,714		60,166
Real estate held for investment (less $1,831 and $1,721 accumulated depreciation in 2016 and 2015, respectively)	7,862		7,956
Other long-term investments	39		75
Short-term investments	514		251
Total investments	1,223,567		1,088,081
Cash and cash equivalents	32,323		82,827
Accrued investment income	16,739		15,406
Reinsurance recoverable	3,682		4,166
Deferred policy acquisition costs	166,849		165,362
Cost of customer relationships acquired	19,546		21,585
Goodwill	17,255		17,255
Other intangible assets	968		971
Deferred tax asset	65,506		68,764
Property and equipment, net	6,816		6,338
Due premiums, net (less $1,393 and $1,490 allowance for doubtful accounts in 2016 and 2015, respectively)	10,937		11,819
Prepaid expenses	844		162
Other assets	1,306		1,304
Total assets	$	1,566,338	1,484,040

(Continued)

See accompanying notes to consolidated financial statements.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Financial Position (In thousands, except share amounts)



	September 30, 2016			December 31, 2015
Liabilities and Stockholders' Equity	(Unaudited)
Liabilities:
Policy liabilities:
Future policy benefit reserves:
Life insurance	$	1,045,531		995,972
Annuities	68,288			64,933
Accident and health	1,051			1,118
Dividend accumulations	20,220			18,465
Premiums paid in advance	45,254			43,220
Policy claims payable	9,265			9,653
Other policyholders' funds	7,358			7,518
Total policy liabilities	1,196,967			1,140,879
Commissions payable	2,387			2,757
Federal income tax payable	78,479			71,225
Payable for securities in process of settlement	1,476			2,457
Other liabilities	24,258			24,205
Total liabilities	1,303,567			1,241,523
Commitments and contingencies (Note 7)
Stockholders' equity:
Class A, no par value, 100,000,000 shares authorized, 52,215,852 shares issued and outstanding in 2016 and 2015, including shares in treasury of 3,135,738 in 2016 and 2015	259,383			259,383
Class B, no par value, 2,000,000 shares authorized, 1,001,714 shares issued and outstanding in 2016 and 2015	3,184			3,184
Accumulated deficit	(20,712		)	(22,626	)
Accumulated other comprehensive income:
Unrealized gains on securities, net of tax	31,927			13,587
Treasury stock, at cost	(11,011		)	(11,011	)
Total stockholders' equity	262,771			242,517
Total liabilities and stockholders' equity	$	1,566,338		1,484,040

See accompanying notes to consolidated financial statements.

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

	2016					2015
Revenues:
Premiums:
Life insurance			$	47,513			47,219
Accident and health insurance			385				387
Property insurance			1,274				1,302
Net investment income			12,320				11,325
Realized investment gains (losses), net			46				(2,407	)
Other income			203				298
Total revenues			61,741				58,124
Benefits and expenses:
Insurance benefits paid or provided:
Claims and surrenders			21,014				19,528
Increase in future policy benefit reserves			19,267				19,276
Policyholders' dividends			1,620				2,719
Total insurance benefits paid or provided			41,901				41,523
Commissions			10,852				11,388
Other general expenses			5,076				6,958
Capitalization of deferred policy acquisition costs			(7,890		)		(8,482	)
Amortization of deferred policy acquisition costs			6,889				6,271
Amortization of cost of customer relationships acquired			641				605
Total benefits and expenses			57,469				58,263
Income (loss) before federal income tax			4,272				(139	)
Federal income tax expense (benefit)			1,728				(242	)
Net income			2,544				103
Per Share Amounts:
Basic earnings per share of Class A common stock	$	0.05				—
Basic earnings per share of Class B common stock	0.03					—
Diluted earnings per share of Class A common stock	0.05					—
Diluted earnings per share of Class B common stock	0.03					—
Other comprehensive income (loss):
Unrealized gains (losses) on available-for-sale securities:
Unrealized holding gains (losses) arising during period			(1,261		)		(1,803	)
Reclassification adjustment for (gains) losses included in net income			(47		)		2,405
Unrealized gains (losses) on available-for-sale securities, net			(1,308		)		602
Income tax expense (benefit) on unrealized gains (losses) on available-for-sale securities			(458		)		210
Other comprehensive income (loss)			(850		)		392
Comprehensive income			$	1,694			495

See accompanying notes to consolidated financial statements.

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

	2016					2015
Revenues:
Premiums:
Life insurance			$	137,637					136,866
Accident and health insurance			1,170						1,183
Property insurance			3,811						3,885
Net investment income			36,051						33,595
Realized investment losses, net			(1,776		)				(2,486	)
Other income			610						1,020
Total revenues			177,503						174,063
Benefits and expenses:
Insurance benefits paid or provided:
Claims and surrenders			60,988						58,171
Increase in future policy benefit reserves			52,932						56,334
Policyholders' dividends			4,985						7,568
Total insurance benefits paid or provided			118,905						122,073
Commissions			31,097						32,052
Other general expenses			22,960						24,954
Capitalization of deferred policy acquisition costs			(22,257		)				(23,374	)
Amortization of deferred policy acquisition costs			20,424						17,217
Amortization of cost of customer relationships acquired			1,588						1,768
Total benefits and expenses			172,717						174,690
Income (loss) before federal income tax			4,786						(627	)
Federal income tax expense			2,872						759
Net income (loss)			1,914						(1,386	)
Per Share Amounts:
Basic earnings (losses) per share of Class A common stock	$	0.04				$	(0.03	)
Basic earnings (losses) per share of Class B common stock	0.02					(0.02		)
Diluted earnings (losses) per share of Class A common stock	0.04					(0.03		)
Diluted earnings (losses) per share of Class B common stock	0.02					(0.02		)
Other comprehensive income (loss):
Unrealized gains (losses) on available-for-sale securities:
Unrealized holding gains (losses) arising during period			26,446						(13,574	)
Reclassification adjustment for losses included in net income			1,769						2,449
Unrealized gains (losses) on available-for-sale securities, net			28,215						(11,125	)
Income tax expense (benefit) on unrealized gains (losses) on available-for-sale securities			9,875						(3,894	)
Other comprehensive income (loss)			18,340						(7,231	)
Comprehensive income (loss)			$	20,254					(8,617	)

See accompanying notes to consolidated financial statements.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Cash Flows Nine Months Ended September 30, (In thousands) (Unaudited)


	2016			2015
Cash flows from operating activities:
Net income (loss)	$	1,914		(1,386	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Realized losses on sale of investments and other assets	1,776			2,486
Net deferred policy acquisition costs	(1,833		)	(6,157	)
Amortization of cost of customer relationships acquired	1,588			1,768
Depreciation	600			571
Amortization of premiums and discounts on investments	10,709			8,785
Deferred federal income tax benefit	(6,616		)	(1,291	)
Change in:
Accrued investment income	(1,333		)	(1,763	)
Reinsurance recoverable	484			371
Due premiums	882			(242	)
Future policy benefit reserves	51,559			56,185
Other policyholders' liabilities	3,241			5,487
Federal income tax payable	7,254			(1,250	)
Commissions payable and other liabilities	(317		)	(121	)
Other, net	(670		)	(717	)
Net cash provided by operating activities	69,238			62,726
Cash flows from investing activities:
Sale of fixed maturities, available-for-sale	—			—
Maturities and calls of fixed maturities, available-for-sale	44,301			46,723
Maturities and calls of fixed maturities, held-to-maturity	9,790			15,755
Purchase of fixed maturities, available-for-sale	(165,539		)	(88,107	)
Purchase of fixed maturities, held-to-maturity	(5,507		)	(41,291	)
Sale of equity securities, available-for-sale	403			—
Calls of equity securities, available-for-sale	422			150
Purchase of equity securities, available-for-sale	—			(602	)
Principal payments on mortgage loans	357			29
Increase in policy loans, net	(4,548		)	(4,936	)
Sale of other long-term investments	1			59
Purchase of other long-term investments	(36		)	—
Sale of property and equipment	59			—
Purchase of property and equipment	(978		)	(240	)
Maturity of short-term investments	250			—
Purchase of short-term investments	(522		)	(254	)
Net cash used in investing activities	(121,547		)	(72,714	)

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Cash Flows, Continued Nine Months Ended September 30, (In thousands) (Unaudited)

	2016			2015
Cash flows from financing activities:
Annuity deposits	$	6,243		6,077
Annuity withdrawals	(4,438		)	(3,966	)
Net cash provided by financing activities	1,805			2,111
Net decrease in cash and cash equivalents	(50,504		)	(7,877	)
Cash and cash equivalents at beginning of year	82,827			50,708
Cash and cash equivalents at end of period	$	32,323		42,831
Supplemental disclosures of operating activities:
Cash paid during the period for income taxes, net	$	2,234		3,300

Supplemental Disclosures of Non-Cash Investing 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, 2016

(Unaudited)

(1) Financial Statements

Basis of Presentation and Consolidation

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

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

The consolidated statement of financial position for September 30, 2016, and the consolidated statements of comprehensive income (loss) for the three and nine months ended September 30, 2016 and 2015 and cash flows for the nine-month periods ended September 30, 2016 and 2015, have been prepared by the Company without audit. In the opinion of management, all adjustments to present fairly the financial position, results of operations, and changes in cash flows at September 30, 2016 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, 2015. Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period.

We provide primarily life insurance and a small amount of health insurance policies through our insurance subsidiaries: CICA, SPLIC, MGLIC and CNLIC. CICA and CNLIC issue ordinary whole-life policies, credit life and disability, burial insurance, pre-need policies, and accident and health related policies, throughout the Midwest and southern United States. CICA also issues ordinary whole-life 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 provides aviation transportation to the Company.

Use of Estimates

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

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

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

September 30, 2016

(Unaudited)

Significant Accounting Policies

For a description of significant accounting policies, see Note 1 of the notes to consolidated financial statements included in our 2015 Form 10-K Annual Report, 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") 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. Early application is not permitted. The Company is currently evaluating the effect that the adoption of this ASU will have on its financial statements.

On May 21, 2015, the FASB issued ASU 2015-09, Disclosures about Short-Duration Contracts, addressing enhanced disclosure requirements for insurers relating to short-duration insurance contract claims and the unpaid claims liability rollforward for long and short-duration contracts. The disclosures are intended to provide users of financial statements with more transparent information about an insurance entity’s initial claim estimates and subsequent adjustments to those estimates, the methodologies and judgments used to estimate claims, and the timing, frequency, and severity of claims. The new disclosures may require the accumulation and reporting of new and different groupings of claims data by insurers from what is currently captured for U.S. statutory and other reporting purposes. For public business entities, the amendments in this ASU are effective for annual periods beginning after December 15, 2015, and interim periods within annual periods beginning after December 15, 2016. The Company is currently assessing the new disclosure requirements related to short-duration contracts.

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.

On June 10, 2016, the National Association of Insurance Commissioners (“NAIC”) Executive Committee and Plenary voted to adopt a recommendation for January 1, 2017 as the operative date for the implementation of Principles-Based Reserves (“PBR”) as a national standard for life insurance products. Although this NAIC standard does not change the reserving requirements under U.S. GAAP, it can be significant for many life insurers. PBR replaces the current formulaic approach to determining policy reserves with an approach that more closely reflects the risks of highly complex products. Companies will be expected to develop “right-sized” reserves that better align with their specific product features, their observed actuarial experience, and their overall risk

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

September 30, 2016

(Unaudited)

management procedures. There is a three-year transition period where PBR is optional until PBR becomes required on January 1, 2020. The Company is assessing the impact that this standard will have on its statutory reserving.

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 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.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

September 30, 2016

(Unaudited)

(3) Segment Information

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

The Company has no reportable differences between segments and consolidated operations.



	Three Months Ended
	September 30, 2016
	Life Insurance			Home Service Insurance		Other Non-Insurance Enterprises	Consolidated
	(In thousands)
Revenues:
Premiums	$	37,572		11,600		—	49,172
Net investment income	8,473			3,467		380	12,320
Realized investment gains, net	—			46		—	46
Other income	166			2		35	203
Total revenue	46,211			15,115		415	61,741
Benefits and expenses:
Insurance benefits paid or provided:
Claims and surrenders	14,980			6,034		—	21,014
Increase in future policy benefit reserves	18,319			948		—	19,267
Policyholders' dividends	1,604			16		—	1,620
Total insurance benefits paid or provided	34,903			6,998		—	41,901
Commissions	6,973			3,879		—	10,852
Other general expenses	1,074			3,610		392	5,076
Capitalization of deferred policy acquisition costs	(6,346		)	(1,544	)	—	(7,890	)
Amortization of deferred policy acquisition costs	5,870			1,019		—	6,889
Amortization of cost of customer relationships acquired	119			522		—	641
Total benefits and expenses	42,593			14,484		392	57,469
Income before income tax expense	$	3,618		631		23	4,272

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

September 30, 2016

(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 income	24,534			10,386		1,131		36,051
Realized investment losses, net	(660		)	(1,116	)	—		(1,776	)
Other income	537			5		68		610
Total revenue	131,942			44,362		1,199		177,503
Benefits and expenses:
Insurance benefits paid or provided:
Claims and surrenders	43,601			17,387		—		60,988
Increase in future policy benefit reserves	49,482			3,450		—		52,932
Policyholders' dividends	4,942			43		—		4,985
Total insurance benefits paid or provided	98,025			20,880		—		118,905
Commissions	19,544			11,553		—		31,097
Other general expenses	9,199			11,357		2,404		22,960
Capitalization of deferred policy acquisition costs	(17,764		)	(4,493	)	—		(22,257	)
Amortization of deferred policy acquisition costs	17,813			2,611		—		20,424
Amortization of cost of customer relationships acquired	419			1,169		—		1,588
Total benefits and expenses	127,236			43,077		2,404		172,717
Income (loss) before income tax expense	$	4,706		1,285		(1,205	)	4,786

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

September 30, 2016

(Unaudited)



	Three Months Ended
	September 30, 2015
	Life Insurance			Home Service Insurance		Other Non-Insurance Enterprises		Consolidated
	(In thousands)
Revenues:
Premiums	$	37,213		11,695		—		48,908
Net investment income	7,512			3,436		377		11,325
Realized investment losses, net	(1,901		)	(506	)	—		(2,407	)
Other income	217			8		73		298
Total revenue	43,041			14,633		450		58,124
Benefits and expenses:
Insurance benefits paid or provided:
Claims and surrenders	13,727			5,801		—		19,528
Increase in future policy benefit reserves	18,337			939		—		19,276
Policyholders' dividends	2,708			11		—		2,719
Total insurance benefits paid or provided	34,772			6,751		—		41,523
Commissions	7,609			3,779		—		11,388
Other general expenses	3,026			3,391		541		6,958
Capitalization of deferred policy acquisition costs	(7,050		)	(1,432	)	—		(8,482	)
Amortization of deferred policy acquisition costs	5,359			912		—		6,271
Amortization of cost of customer relationships acquired	171			434		—		605
Total benefits and expenses	43,887			13,835		541		58,263
Income (loss) before income tax expense	$	(846	)	798		(91	)	(139	)

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

September 30, 2016

(Unaudited)



	Nine Months Ended
	September 30, 2015
	Life Insurance			Home Service Insurance		Other Non-Insurance Enterprises		Consolidated
	(In thousands)
Revenues:
Premiums	$	106,899		35,035		—		141,934
Net investment income	22,130			10,341		1,124		33,595
Realized investment losses, net	(1,959		)	(527	)	—		(2,486	)
Other income	591			78		351		1,020
Total revenue	127,661			44,927		1,475		174,063
Benefits and expenses:
Insurance benefits paid or provided:
Claims and surrenders	40,752			17,419		—		58,171
Increase in future policy benefit reserves	52,964			3,370		—		56,334
Policyholders' dividends	7,530			38		—		7,568
Total insurance benefits paid or provided	101,246			20,827		—		122,073
Commissions	20,450			11,602		—		32,052
Other general expenses	11,057			11,680		2,217		24,954
Capitalization of deferred policy acquisition costs	(18,816		)	(4,558	)	—		(23,374	)
Amortization of deferred policy acquisition costs	14,849			2,368		—		17,217
Amortization of cost of customer relationships acquired	493			1,275		—		1,768
Total benefits and expenses	129,279			43,194		2,217		174,690
Income (loss) before income tax expense	$	(1,618	)	1,733		(742	)	(627	)

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

September 30, 2016

(Unaudited)

(4) Earnings Per Share

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



	Three Months Ended
	September 30, 2016		September 30, 2015
	(In thousands, except per share amounts)
Basic and diluted earnings per share:
Numerator:
Net income	$	2,544	103
Net income allocated to Class A common stock	$	2,519	102
Net income allocated to Class B common stock	25		1
Net income	$	2,544	103
Denominator:
Weighted average shares of Class A outstanding - basic	49,080		49,080
Weighted average shares of Class A outstanding - diluted	49,080		49,080
Weighted average shares of Class B outstanding - basic and diluted	1,002		1,002
Basic earnings per share of Class A common stock	$	0.05	—
Basic earnings per share of Class B common stock	0.03		—
Diluted earnings per share of Class A common stock	0.05		—
Diluted earnings per share of Class B common stock	0.03		—



	Nine Months Ended
	September 30, 2016		September 30, 2015
	(In thousands, except per share amounts)
Basic and diluted earnings per share:
Numerator:
Net income (loss)	$	1,914	(1,386	)
Net income (loss) allocated to Class A common stock	$	1,895	(1,372	)
Net income (loss) allocated to Class B common stock	19		(14	)
Net loss	$	1,914	(1,386	)
Denominator:
Weighted average shares of Class A outstanding - basic	49,080		49,080
Weighted average shares of Class A outstanding - diluted	49,080		49,080
Weighted average shares of Class B outstanding - basic and diluted	1,002		1,002
Basic earnings (losses) per share of Class A common stock	$	0.04	(0.03	)
Basic earnings (losses) per share of Class B common stock	0.02		(0.02	)
Diluted earnings (losses) per share of Class A common stock	0.04		(0.03	)
Diluted earnings (losses) per share of Class B common stock	0.02		(0.02	)

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

September 30, 2016

(Unaudited)

(5) Investments

The Company invests primarily in fixed maturity securities, which totaled 89.7% and 85.0% of total cash, cash equivalents and investments at September 30, 2016 and December 31, 2015, respectively.



	September 30, 2016			December 31, 2015
	Carrying Value		% of Total Carrying Value	Carrying Value		% of Total Carrying Value
	(In thousands)
Fixed maturity securities	$	1,126,854	89.7	$	995,601	85.0
Equity securities	23,347		1.9	23,438		2.0
Mortgage loans	237		—	594		0.1
Policy loans	64,714		5.2	60,166		5.1
Real estate and other long-term investments	7,901		0.6	8,031		0.7
Short-term investments	514		—	251		—
Cash and cash equivalents	32,323		2.6	82,827		7.1
Total cash, cash equivalents and investments	$	1,255,890	100.0	$	1,170,908	100.0

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

September 30, 2016

(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, 2016
	Cost or Amortized Cost		Gross Unrealized Gains	Gross Unrealized Losses	Fair Value
	(In thousands)
Fixed maturities:
Available-for-sale:
U.S. Treasury securities	$	9,946	2,968	—	12,914
U.S. Government-sponsored enterprises	7,670		1,302	—	8,972
States and political subdivisions	528,607		27,241	1,179	554,669
Foreign governments	103		29	—	132
Corporate	277,550		20,447	2,075	295,922
Commercial mortgage-backed	73		2	—	75
Residential mortgage-backed	2,322		213	2	2,533
Total available-for-sale securities	826,271		52,202	3,256	875,217
Held-to-maturity securities:
U.S. Government-sponsored enterprises	2,005		57	—	2,062
States and political subdivisions	228,564		12,515	539	240,540
Corporate	21,068		1,040	534	21,574
Total held-to-maturity securities	251,637		13,612	1,073	264,176
Total fixed maturities	$	1,077,908	65,814	4,329	1,139,393

Short-term investments	$	514	—	—	514

Equity securities:
Stock mutual funds	$	2,866	57	—	2,923
Bond mutual funds	18,451		521	2	18,970
Common stock	39		2	17	24
Preferred stock	1,221		209	—	1,430
Total equity securities	$	22,577	789	19	23,347

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

September 30, 2016

(Unaudited)



	December 31, 2015
	Cost or Amortized Cost		Gross Unrealized Gains	Gross Unrealized Losses	Fair Value
	(In thousands)
Fixed maturities:
Available-for-sale securities:
U.S. Treasury securities	$	9,995	2,597	—	12,592
U.S. Government-sponsored enterprises	19,676		1,104	—	20,780
States and political subdivisions	470,319		15,815	3,085	483,049
Foreign governments	104		27	—	131
Corporate	211,245		9,683	4,847	216,081
Commercial mortgage-backed	140		5	—	145
Residential mortgage-backed	2,658		214	2	2,870
Total available-for-sale securities	714,137		29,445	7,934	735,648
Held-to-maturity securities:
U.S. Government-sponsored enterprises	2,010		110	—	2,120
States and political subdivisions	236,776		6,756	883	242,649
Corporate	21,167		530	1,500	20,197
Total held-to-maturity securities	259,953		7,396	2,383	264,966
Total fixed maturity securities	$	974,090	36,841	10,317	1,000,614

Short-term investments	$	251	—	—	251

Equity securities:
Stock mutual funds	$	3,270	—	237	3,033
Bond mutual funds	18,798		55	349	18,504
Common stock	65		—	22	43
Preferred stock	1,594		266	2	1,858
Total equity securities	$	23,727	321	610	23,438

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.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

September 30, 2016

(Unaudited)

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 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 impairments ("OTTI") were recognized on investment securities during the nine months ended September 30, 2016 totaling $2.3 million. No OTTIs were recognized during the three months ended September 30, 2016. OTTIs were recognized during the three and nine months ended September 30, 2015 totaling $2.4 million.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

September 30, 2016

(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, 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	$	30,962	219	32	$	8,568	960	7	$	39,530	1,179	39
Corporate	30,891		1,588	25	10,286		487	13	41,177		2,075	38
Residential mortgage-backed	120		1	3	107		1	2	227		2	5
Total available-for-sale securities	61,973		1,808	60	18,961		1,448	22	80,934		3,256	82
Held-to-maturity securities:
States and political subdivisions	4,947		510	6	2,853		29	2	7,800		539	8
Corporate	—		—	—	5,339		534	4	5,339		534	4
Total held-to-maturity securities	4,947		510	6	8,192		563	6	13,139		1,073	12
Total fixed maturities	$	66,920	2,318	66	$	27,153	2,011	28	$	94,073	4,329	94
Equity securities:
Bond mutual funds	$	1,968	2	1	$	—	—	—	$	1,968	2	1
Common stocks	—		—	—	1		17	1	1		17	1
Total equities	$	1,968	2	1	$	1	17	1	$	1,969	19	2

As of September 30, 2016, the Company had 22 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. We reported 1 equity security holding in an unrealized loss position for greater than 12 months as of September 30, 2016.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

September 30, 2016

(Unaudited)



	December 31, 2015
	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	$	136,862	1,474	129	$	12,633	1,611	12	$	149,495	3,085	141
Corporate	70,081		4,330	69	3,308		517	3	73,389		4,847	72
Residential mortgage-backed	57		1	2	133		1	3	190		2	5
Total available-for-sale securities	207,000		5,805	200	16,074		2,129	18	223,074		7,934	218
Held-to-maturity securities:
States and political subdivisions	74,628		774	59	2,404		109	5	77,032		883	64
Corporate	4,585		641	4	2,160		859	2	6,745		1,500	6
Total held-to-maturity securities	79,213		1,415	63	4,564		968	7	83,777		2,383	70
Total fixed maturities	$	286,213	7,220	263	$	20,638	3,097	25	$	306,851	10,317	288
Equity securities:
Stock mutual funds	$	3,030	237	4	$	2	—	1	$	3,032	237	5
Bond mutual funds	10,158		318	2	108		31	1	10,266		349	3
Preferred stocks	101		1	1	1		1	1	102		2	2
Common stock	22		1	2	21		21	2	43		22	4
Total equities	$	13,311	557	9	$	132	53	5	$	13,443	610	14

We have reviewed these securities for the periods ended September 30, 2016 and December 31, 2015 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.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

September 30, 2016

(Unaudited)

The amortized cost and fair value of fixed maturity securities at September 30, 2016 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, 2016
	Amortized Cost		Fair Value
	(In thousands)
Available-for-sale securities:
Due in one year or less	$	48,418	49,177
Due after one year through five years	105,628		108,283
Due after five years through ten years	117,132		126,595
Due after ten years	555,093		591,162
Total available-for-sale securities	826,271		875,217
Held-to-maturity securities:
Due in one year or less	5,633		5,671
Due after one year through five years	51,097		53,479
Due after five years through ten years	51,165		54,583
Due after ten years	143,742		150,443
Total held-to-maturity securities	251,637		264,176
Total fixed maturities	$	1,077,908	1,139,393

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,
	2016		2015	2016	2015	2016	2015	2016	2015

	(In thousands)
Proceeds	$	—	—	—	—	—	—	403	—
Gross realized gains	$	—	—	—	—	—	—	40	—
Gross realized losses	$	—	—	—	—	—	—	36	—

There were a small number of sales of equity securities in the second quarter of 2016, namely one equity security and three mutual funds. There were no sales of available-for-sale securities during the three months ended September 30, 2016. There were no sales of available-for-sale securities for the three and nine month periods ended September 30, 2015. There were no securities sold from the held-to-maturity portfolio for the three and nine months ended September 30, 2016 or 2015.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

September 30, 2016

(Unaudited)

(6) Fair Value Measurements

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

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


•	Level 1 - Quoted prices for identical instruments in active markets.


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


•	Level 3 - Instruments whose significant value drivers are unobservable.

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

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

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

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

September 30, 2016

(Unaudited)

The following tables set forth our assets and liabilities that are measured at fair value on a recurring basis as of the dates indicated.



	September 30, 2016
Available-for-sale investments	Level 1		Level 2	Level 3	Fair Value
	(In thousands)
Financial assets:
Fixed maturities:
U.S. Treasury and U.S. Government-sponsored enterprises	$	12,914	8,972	—	21,886
States and political subdivisions	—		554,669	—	554,669
Corporate	—		295,922	—	295,922
Commercial mortgage-backed	—		—	75	75
Residential mortgage-backed	—		2,533	—	2,533
Foreign governments	—		132	—	132
Total fixed maturities	12,914		862,228	75	875,217
Equity securities:
Stock mutual funds	2,923		—	—	2,923
Bond mutual funds	18,970		—	—	18,970
Common stock	24		—	—	24
Preferred stock	1,430		—	—	1,430
Total equity securities	23,347		—	—	23,347
Total financial assets	$	36,261	862,228	75	898,564



	December 31, 2015
Available-for-sale investments	Level 1		Level 2	Level 3	Fair Value
	(In thousands)
Financial assets:
Fixed maturities:
U.S. Treasury and U.S. Government-sponsored enterprises	$	12,592	20,780	—	33,372
States and political subdivisions	—		483,049	—	483,049
Corporate	—		216,081	—	216,081
Commercial mortgage-backed	—		—	145	145
Residential mortgage-backed	—		2,870	—	2,870
Foreign governments	—		131	—	131
Total fixed maturities	12,592		722,911	145	735,648
Equity securities:
Stock mutual funds	3,033		—	—	3,033
Bond mutual funds	18,504		—	—	18,504
Common stock	43		—	—	43
Preferred stock	1,858		—	—	1,858
Total equity securities	23,438		—	—	23,438
Total financial assets	$	36,030	722,911	145	759,086

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

September 30, 2016

(Unaudited)

Financial Instruments Valuation

Fixed maturity securities, available-for-sale. At September 30, 2016, our fixed maturity securities, valued using a third-party pricing source, totaled $862.2 million for Level 2 assets and comprised 96.0% of total reported fair value of our financial assets. The Level 1 and Level 2 valuations are reviewed and updated quarterly through random testing by comparisons to separate pricing models, other third-party pricing services, and back tested to recent trades. In addition, we obtain information relative to the third-party pricing models and review model parameters for reasonableness. Fair values for Level 3 assets are based upon unadjusted broker quotes that are non-binding, and consist of two private placement mortgage-backed securities with a total value of $0.1 million. Our Level 3 assets are current relative to principal and interest payments and are considered immaterial to our financial statements. For the nine months ended September 30, 2016, 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, 2016			December 31, 2015
	(In thousands)

Balance at beginning of period	$	145		231
Total realized and unrealized gains (losses)
Included in net income	—			—
Included in other comprehensive income	(3		)	(2	)
Principal paydowns	(67		)	(84	)
Transfer in and (out) of Level 3	—			—
Balance at end of period	$	75		145

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

Financial Instruments not Carried at Fair Value

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

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

September 30, 2016

(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, 2016			December 31, 2015
	Carrying Value		Fair Value	Carrying Value	Fair Value
	(In thousands)
Financial assets:
Fixed maturities, held-to-maturity	$	251,637	264,176	259,953	264,966
Mortgage loans	237		274	594	617
Policy loans	64,714		64,714	60,166	60,166
Short-term investments	514		514	251	251
Cash and cash equivalents	32,323		32,323	82,827	82,827
Financial liabilities:
Annuity - investment contracts	49,618		51,485	46,905	47,222

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

Mortgage loans are secured principally by residential and commercial properties. Weighted average interest rates for these loans were approximately 6.8% as of September 30, 2016 and 6.2% at December 31, 2015, with maturities ranging from 1 to 26 years. Management estimated the fair value using an annual interest rate of 6.3% at September 30, 2016. Our mortgage loans are considered Level 3 assets in the fair value hierarchy.

Policy loans had a weighted average annual interest rate of 7.7% as of September 30, 2016 and December 31, 2015, 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, 2016 using discounted cash flows based upon a swap rate curve with interest rates ranging from 1.02% to 3.21% 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, 2016

(Unaudited)

(7) 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 Sections 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 CICA 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 endowment-like 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, 2016 of $12.8 million, after tax, related to projected IRS toll charges and fees of $12.6 million as well as $0.3 million of reserve increases to bring policies into compliance. The estimated liability at September 30, 2016 is down $2.1 million from the estimated liability at June 30, 2016 of $14.9 million and down $1.8 million from the estimated liability at December 31, 2015 of $14.6 million, after tax, due to a continued refinement of our estimate. The probability weighted range of financial estimates relative to this issue is $6.1 million to $40.5 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 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 is a complex undertaking, which includes insight from external consultants and involves management’s judgment based upon a variety of factors known at the time. We recorded additional general expenses of $1.4 million for the nine months ended September 30, 2016 and $2.0 million for the twelve months ended December 31, 2015 related to our 7702 and 72(s) issues. Additional costs will be incurred in the remainder of 2016 associated with these issues and we believe these costs will range from $0.5 million to $1.0 million, however, actual amounts incurred may differ from this estimate and changes will be recorded as they become probable and can be reasonably estimated.

Compliance

As part of our periodic review of our compliance controls, we completed an internal risk assessment of our compliance with the Bank Secrecy Act ("BSA") anti-money laundering requirements. As a result of this risk assessment, we have enhanced our BSA compliance program with additional controls, such as list screening software beyond OFAC sanctions screening, enhanced payment due diligence and transaction controls to better deter, detect, prevent and report money laundering and other illegal activity.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

September 30, 2016

(Unaudited)

Unclaimed Property Contingencies

The Company has been informed 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. 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.

(8) Income Taxes

The effective tax rate was 40.4% and 174.1% for the three months and 60.0% and (121.1)% for the nine months ended September 30, 2016 and 2015, respectively. Additionally there is $1.8 million and $0.6 million of tax expense recorded related to an uncertain tax position in the nine months ended September 30, 2016 and September 30, 2015, respectively. In most periods where our effective tax rate is lower than the statutory tax rate of 35%, the difference, absent tax consequences of our 7702/72(s) issues, is primarily due to tax-exempt state and local bond income.

(9) Benefit Plans

The Company introduced a new employer-sponsored 401(k) plan to all eligible employees, effective March 1, 2016. This is an additional benefit offered to employees, which supplements the defined contribution profit-sharing plan which was already in existence. Employees with one year of service can participate in the new 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 new 401(k) plan was not material to the Company's results of operations.

(10) 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, 2016. In September 2016, CICA made a $150,000 cash capital contribution to III. In June 2015, CICA made a $1 million cash capital contribution to CNLIC. See our Annual Report on Form 10-K as of December 31, 2015 for a comprehensive discussion of related party transactions.

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Notes to Consolidated Financial Statements, Continued

September 30, 2016

(Unaudited)

(11) Subsequent Events

On November 1, 2016, SPLIC paid a $20.0 million extraordinary dividend to its parent, CICA. The dividend had no impact on the consolidated financial statements of the Company and will be used by CICA for general corporate purposes. The dividend was approved by the Louisiana Department of Insurance, SPLIC’s state of domicile. SPLIC’s risk-based capital after the dividend remains is in excess of minimum capital requirements.

As disclosed in Note (8), Income Taxes, the Company has recorded a $1.8 million tax expense in 2016 related to uncertain tax positions (“UTP”). The Company's tax liability for UTP's totaled $82.9 million at September 30, 2016. The Company has now received notice that the Internal Revenue Service (“IRS”) has completed its examination related to the Company’s 2011 and 2012 amended tax returns. The amended returns have been accepted by the IRS and the Company will release $0.6 million of tax liability related to this UTP in the fourth quarter of 2016.

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September 30, 2016

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

FORWARD-LOOKING STATEMENTS

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

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


•	Changes in 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 and the failure of certain annuity contracts to qualify under Section 72(s) of the Internal Revenue Code;


•	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;


•	Our success at managing risks involved in the foregoing;


•	The risk factors discussed in "Part II. - Item 1A - Risk Factors." of this report; and


•	Changes in leadership among our board and senior management team.

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September 30, 2016

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.

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

Overview

Citizens is an insurance holding company serving the life insurance needs of individuals in the United States since 1969 and internationally since 1975. Through our insurance subsidiaries, we pursue a strategy of offering traditional insurance products in niche markets where we believe we are able to achieve competitive advantages. As of September 30, 2016, we had approximately $1.6 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 by our founder, Harold E. Riley. Prior to our formation, Mr. Riley had many years of experience in the international and domestic life insurance business. Our Company has experienced significant growth through acquisitions in the domestic market and through market expansion in the international market. We seek to capitalize on the experience of our management team in marketing and operations as we strive to generate bottom line return using knowledge of our niche markets and our well-established distribution channels.

Recent Developments

See Strategic Initiatives below for initiatives the Company began in 2015, which continue to be the main areas of focus for the executive management team in 2016.

On July 14, 2016, independent director Dr. Terry Maness was elected Chairman of the Audit Committee (the “Audit Committee”) of the Board by the other members of the Audit Committee, succeeding Tim Timmerman. Effective July 14, 2016, Tim Timmerman resigned as a director and Chairman of the Audit Committee. Dr. Maness also serves as the qualified “audit committee financial expert,” as that term is defined by the Securities and Exchange Commission, and will continue to serve on the Company’s Compensation Committee and Nominating and Corporate Governance Committee.

Strategic Initiatives

The Company's Board of Directors and executive management team are currently assessing the Company's business model and business strategies with the assistance and support of external consultants and advisors. Specifically, we are evaluating certain elements and assumptions underlying the Company's historical business model to consider potential changes to align with our risk profile, the current economic and regulatory environment and sustainable business objectives. Incorporated in our business model review are analyses of (1) our products and profitability; (2) a potential restructuring of our international business and operations;

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

September 30, 2016

(3) potential upgrades to our technology systems and operations with a strategic focus on our future business needs and cyber risk; and (4) potential additions to our executive management structure, personnel needs and compensation incentives.

A prolonged low interest rate period has forced us to revisit the benefits and dividends included under many policies offered internationally. In many cases, policyholders stand to benefit from significantly higher guarantees and dividends than the financial markets might otherwise offer. As such, the Company has responded to cut discretionary dividends on existing policies and revisit the structure of new policies sold internationally to better reflect the prolonged low interest rate environment that we face.

The Company also is revisiting its investment strategies for premiums received in order to augment its rate of return. By combining more conservative interest rate features in our insurance policies with a more flexible investment strategy to manage our investment portfolio, we intend to grow bottom line returns to shareholders. There is risk that these changes will result in lower demand for new policies, or that the financial markets will make our investment strategy more difficult. Despite the risks, the Company believes that such strategies are in the best interest of our shareholders.

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 period ended September 30, 2016, compared to the same periods in 2015 were:

•

Insurance premiums increased slightly for the three and nine month periods ended September 30, 2016 to $49.2 million and $142.6 million from $48.9 million and $141.9 million for the corresponding periods in 2015, an increase of 0.5% and 0.5% driven primarily by an increase in renewal premiums, somewhat offset by a decrease in first year premiums in both our life insurance and home service segments.

•

Net investment income increased 8.8% and 7.3% for the three and nine month periods ended September 30, 2016, compared to the corresponding periods in 2015. The average yield on the consolidated portfolio as of the nine months ended September 30, 2016 increased to an annualized rate of 4.29% up from 4.24% for the same period in 2015. The increase in investment income was primarily due to growth in the invested asset portfolio, primarily fixed maturities.


•	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 months ended September 30, 2016.


•	Claims and surrenders expense increased 7.6% and 4.8% for the three and nine months ended 2016 compared to 2015, as surrender benefits increased in both periods in the life segment and death benefits reported in both insurance segments decreased year to date in the current year compared to 2015 levels.


•	The change in reserves decreased in the nine month period ended September 30, 2016 compared to the corresponding period in 2015, primarily as a result of the increase in surrenders in the period, while premiums remained relatively flat. The change in reserves were flat for the three months ended September 31, 2016, compared to the same period in 2015.


•	Policyholders' dividends decreased 40.4% and 34.1% for the three and nine months ended 2016 compared to 2015, due to the dividend rate actions taken late last year to improve our product profitability.


•	General expenses decreased 27.0% and 8.0% for the three and nine months ended September 30, 2016, respectively, compared to the same periods in 2015. The decrease was primarily driven by a decrease in our estimated potential liability related to our 7702 and 72(s) tax compliance issue for the three and nine months ended September 30, 2016 of $2.1 million and $2.2 million, respectively.

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September 30, 2016

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,
	2016					2015
	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	$	248,234,181	4,416	$	56,212	$	271,462,375	4,854	$	55,925
Home Service	137,691,263		20,847	6,605		145,190,327		21,790	6,663

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September 30, 2016

Note: All discussions below compare or state results for the three and nine-month periods ended September 30, 2016 compared to the three and nine-month periods ended September 30, 2015.

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,
	2016		2015		2016		2015
	(In thousands)
Revenues:
Premiums:
Life insurance	$	47,513	47,219		137,637		136,866
Accident and health insurance	385		387		1,170		1,183
Property insurance	1,274		1,302		3,811		3,885
Net investment income	12,320		11,325		36,051		33,595
Realized investment gains (losses), net	46		(2,407	)	(1,776	)	(2,486	)
Other income	203		298		610		1,020
Total revenues	$	61,741	58,124		177,503		174,063

Premium Income. Premium income derived from life, accident and health, and property insurance sales increased 0.5% and 0.5% for both the three and nine month periods ended September 30, 2016 compared to the same periods ended September 30, 2015. The increase is generated primarily from an increase in renewal premium, somewhat offset by an decrease in first year premium.

Net investment income performance is summarized as follows.



	September 30,			December 31,		September 30,
	2016			2015		2015
	(In thousands, except for %)
Net investment income, annualized	$	48,068		45,782		44,794
Average invested assets, at amortized cost	1,120,356			1,045,736		1,056,930
Annualized yield on average invested assets	4.29		%	4.38	%	4.24	%

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

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September 30, 2016

Investment income from debt securities accounted for approximately 87.0% of total investment income for the nine months ended September 30, 2016.



	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2016			2015		2016		2015
	(In thousands)
Gross investment income:
Fixed maturity securities	$	10,984		9,947		32,432		29,524
Equity securities	247			636		635		1,903
Mortgage loans	3			9		20		27
Policy loans	1,353			1,172		3,903		3,402
Long-term investments	77			62		229		209
Other investment income	40			—		70		34
Total investment income	12,704			11,826		37,289		35,099
Investment expenses	(384		)	(501	)	(1,238	)	(1,504	)
Net investment income	$	12,320		11,325		36,051		33,595

The consolidated invested asset portfolio has increased approximately 12.5% from year end 2015 to September 30, 2016 with, primarily, investments in the fixed maturity securities portfolio accounting for the most significant increase in investment income. Bond mutual funds are the primary source of dividend income in the equity securities holdings. The decrease in equity securities investment income was due to sales of a portion of the bond mutual funds at the end of 2015. In addition, the increase in policy loans, which represents policyholders utilizing their accumulated policy cash value, contributed to the increase to investment income.

Realized Investment Gains (Losses), Net. 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 and impairment of one available-for-sale fixed maturity in the first quarter of 2016. Absent the impairments, the net gains generated for the three and nine months ended 2016 were due to gains on issuer calls. No other-than-temporary impairments were recognized during the three months ended September 30, 2016. Other-than-temporary impairments were recorded for the three and nine month periods ended September 30, 2015 totaling $2.4 million related to two bond mutual funds.

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September 30, 2016

Benefits and Expenses



	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2016			2015		2016		2015
	(In thousands)
Benefits and expenses:
Insurance benefits paid or provided:
Claims and surrenders	$	21,014		19,528		60,988		58,171
Increase in future policy benefit reserves	19,267			19,276		52,932		56,334
Policyholders' dividends	1,620			2,719		4,985		7,568
Total insurance benefits paid or provided	41,901			41,523		118,905		122,073
Commissions	10,852			11,388		31,097		32,052
Other general expenses	5,076			6,958		22,960		24,954
Capitalization of deferred policy acquisition costs	(7,890		)	(8,482	)	(22,257	)	(23,374	)
Amortization of deferred policy acquisition costs	6,889			6,271		20,424		17,217
Amortization of cost of customer relationships acquired	641			605		1,588		1,768
Total benefits and expenses	$	57,469		58,263		172,717		174,690

Claims and Surrenders. A detail of claims and surrender benefits is provided below.



	Three Months Ended			Nine Months Ended
	September 30,			September 30,
	2016		2015	2016	2015
	(In thousands)
Death claims	$	5,795	5,717	17,775	18,723
Surrender benefits	8,488		8,096	25,432	23,007
Endowment benefits	4,170		4,044	11,862	12,029
Matured endowments	1,149		472	2,178	1,057
Property claims	593		519	1,477	1,304
Accident and health benefits	158		58	327	233
Other policy benefits	661		622	1,937	1,818
Total claims and surrenders	$	21,014	19,528	60,988	58,171


•	Death claims increased 1.4% and decreased 5.1% for the three and nine months ended September 30, 2016, respectively, compared to the same periods in 2015. We experienced favorable claims development in the nine months ended September 30, 2016 for both the life and home service segments. Mortality experience is closely monitored by the Company and the activity is within expected levels.

•

Surrenders increased 4.8% and 10.5% in the current three and nine month periods, compared to 2015 primarily due to activity in the life segment. This increased surrender activity is in the earlier durations (years 1-15), which still have surrender charges. We are seeing various reasons for individuals surrendering their policies, including the sustained slow world-wide economy, individuals simply needing their money and ex associates moving business to other insurance carriers.


•	Matured endowments increased as contracts have begun reaching their maturity dates.

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Increase in Future Policy Benefit Reserves. The decrease in the change in future policy benefit reserves for the nine months ended September 30, 2016, compared to the same period in 2015, is primarily due to the increase in surrenders noted above.

Policyholders' Dividends. The majority of our international policies are participating, and at the time the products were developed, an assumed increasing dividend scale was factored into the guaranteed premium rates charged. Premium rates are guaranteed at issue, but dividends are not. As our current and anticipated investment results have worsened relative to the assumptions underlying the original dividend scale development, dividend scales in later durations were reduced in 2016 in order to improve profitability. This dividend action affected some policies immediately, and will affect all policies in the future relative to the original dividend scales. Thus, we experienced a decrease in policyholder dividend expense in the current period and we expect dividend expense to continue to decrease as this block of insurance becomes more seasoned. Should investment experience improve significantly in the future, dividends may be increased as a result.

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, 2016 fluctuated directly in relation to the decrease of first year and increase of renewal premiums in the life segment compared to premium levels for the three and nine months ended September 30, 2015. First year commissions are higher than renewal commissions, so the decrease in first year premium has a larger overall impact on commissions, which is shown above in the decrease in commission expense.

Other General Expenses. Expenses decreased for the three and nine months ended September 30, 2016 primarily driven by a decrease in our estimated potential liability related to our 7702 and 72(s) tax compliance issue of $2.1 million and $2.2 million, respectively. Additionally, there were $2.5 million of expenses in the nine months of 2015 related to Section 72(s) toll charges. Offsetting this decrease is an increase in consulting fees of $1.1 million in the nine months of 2016 compared to the same period in 2015.

Capitalized and Amortized Deferred Policy Acquisition Costs. Costs capitalized under current accounting guidance include certain commissions, policy issuance costs, and underwriting and agency expenses that relate to successful sales efforts for insurance contracts. The fluctuation in capitalized deferred policy acquisition costs tracks closely with the fluctuation of commissions, the largest component of capitalized costs.

Amortization for the three and nine months ended September 30, 2016, increased compared to the same periods in 2015, primarily due to the higher surrender activity, including early duration elections to convert to reduced paid up ("RPU") or extended term insurance ("ETI") in 2016. There are higher deferred acquisition costs associated with early duration conversions to RPU or ETI, which, when converted, increases amortization expense. Amortization of deferred policy acquisition costs is impacted by persistency and the higher level of surrenders is impacting our amortization.

Federal Income Tax. The effective tax rate was 40.4% and 174.1% for the three months and 60.0% and (121.1)% for the nine months ended September 30, 2016 and 2015, respectively. Additionally there is $1.8 million and $0.6 million of tax expense related to an uncertain tax position in the nine months ended September 30, 2016 and September 30, 2015, respectively. Differences between our effective tax rate and the statutory tax rate result from income and expense items that are treated differently for financial reporting and tax purposes. See Note 8 - Income Taxes in the consolidated financial statements for further discussion.

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September 30, 2016

Segment Operations

The Company has three reportable segments: Life Insurance, Home Service Insurance and Other Non-Insurance Enterprises. These segments are reported in accordance with U.S. GAAP. The Company evaluates profit and loss performance of its segments based on net income or loss before income taxes.



	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2016		2015		2016		2015
	(In thousands)
Life Insurance	$	3,618	(846	)	4,706		(1,618	)
Home Service Insurance	631		798		1,285		1,733
Other Non-Insurance Enterprises	23		(91	)	(1,205	)	(742	)
Total	$	4,272	(139	)	4,786		(627	)

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 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.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

September 30, 2016

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.

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,
	2016		2015	2016	2015
	(In thousands)
Country
Venezuela	$	7,833	8,162	22,690	23,596
Colombia	7,276		6,353	20,643	19,627
Taiwan	3,868		4,303	12,682	12,799
Ecuador	3,925		3,931	11,170	11,598
Argentina	2,542		2,716	6,932	7,104
Other Non-U.S.	10,990		10,650	30,183	28,471
Total	$	36,434	36,115	104,300	103,195

We have historically seen moderate increases in sales from our top producing countries. However, through the nine months ended September 30, 2016 we have seen slight sales decreases in four of our top five international markets (excluding Colombia). As previously discussed, as a reaction to the prolonged low interest rate environment, we reduced dividends on existing products and products being sold in 2016. In addition, there has both political and economic turmoil in Latin America.

Lastly, the Company implemented a new business process change in the third quarter of 2016, which required new training of our independent associates. We believe this has resulted in a reduction in new sales for the three months ended September 30, 2016. We believe now that training is complete, the fourth quarter sales will be in line with the prior year levels. Our international business and premium collections could be impacted by future changes relative to laws, regulations or economic events in the countries from which we accept applications as well as, by marketing, pricing or operational changes made by the Company.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

September 30, 2016

Domestic Sales

In the Midwest, Mountain West and the southern United States, we seek to serve middle income households through the sale of cash accumulation ordinary whole life insurance products. The majority of our inforce domestic business results from blocks of business of insurance companies we have acquired over the past 17 years. Over the past few years, new product sales have been modest while existing policies have been running off at a greater pace, which has compressed the block of insurance in force.

Domestic Products

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


•	cash accumulation/living benefits;


•	tax-deferred annuity interest earnings;


•	guaranteed lifetime income options;


•	monthly income for surviving family members;


•	accidental death benefit coverage options; and


•	an option to waive premium payments in the event of disability.

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

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



	Three Months Ended			Nine Months Ended
	September 30,			September 30,
	2016		2015	2016	2015
	(In thousands)
State
Texas	$	538	575	1,639	1,801
Indiana	300		335	928	1,053
Florida	204		173	440	434
Missouri	92		87	319	308
Kentucky	92		103	284	329
Other States	533		427	1,394	1,352
Total	$	1,759	1,700	5,004	5,277

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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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

September 30, 2016

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,
	2016			2015		2016		2015
	(In thousands)
Revenue:
Premiums	$	37,572		37,213		107,531		106,899
Net investment income	8,473			7,512		24,534		22,130
Realized investment losses, net	—			(1,901	)	(660	)	(1,959	)
Other income	166			217		537		591
Total revenue	46,211			43,041		131,942		127,661
Benefits and expenses:
Insurance benefits paid or provided:
Claims and surrenders	14,980			13,727		43,601		40,752
Increase in future policy benefit reserves	18,319			18,337		49,482		52,964
Policyholders' dividends	1,604			2,708		4,942		7,530
Total insurance benefits paid or provided	34,903			34,772		98,025		101,246
Commissions	6,973			7,609		19,544		20,450
Other general expenses	1,074			3,026		9,199		11,057
Capitalization of deferred policy acquisition costs	(6,346		)	(7,050	)	(17,764	)	(18,816	)
Amortization of deferred policy acquisition costs	5,870			5,359		17,813		14,849
Amortization of cost of customer relationships acquired	119			171		419		493
Total benefits and expenses	42,593			43,887		127,236		129,279
Income (loss) before income tax expense	$	3,618		(846	)	4,706		(1,618	)

Premiums. Premium revenues increased for the three and nine month periods ended September 30, 2016, compared to the same periods in 2015, due primarily to higher renewal business showing strong persistency as this block of insurance ages, somewhat offset by lower new international business. First year premium revenues for the nine months ended September 30, 2016, reflected sales internationally with endowment to age sixty-five and the twenty-year endowment products continuing as the top performers in the current year. Endowment sales sold to our international clients represented approximately 83.7% and 83.1% of total new first year premium for the three and nine months ended September 30, 2016, respectively.

We believe first year sales were down this quarter due to a change related to new business processes which required the associates to be trained on the new processes and therefore impacted current quarter production.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

September 30, 2016

Life insurance premium breakout is detailed below.



	Three Months Ended			Nine Months Ended
	September 30,			September 30,
	2016		2015	2016	2015
	(In thousands)
Premiums:
First year	$	4,785	6,055	13,544	15,609
Renewal	32,787		31,158	93,987	91,290
Total premiums	$	37,572	37,213	107,531	106,899

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,
	2016			2015		2015
	(In thousands, except for %)
Net investment income, annualized	$	32,712		30,206		29,507
Average invested assets, at amortized cost	756,730			684,590		692,469
Annualized yield on average invested assets	4.32		%	4.41	%	4.26	%

Realized Investment Losses, Net. Other-than-temporary impairments were recorded for the nine month period ended September 30, 2016 totaling $1.0 million related to one available-for-sale fixed maturity impairment in the first quarter of 2016. Other-than-temporary impairments were recorded for the three and nine month periods ended September 30, 2015 totaling $1.9 million related to two bond mutual funds.

Claims and Surrenders. These amounts fluctuate from period to period but were within anticipated ranges based upon management's expectations, other than surrender activity as described below.



	Three Months Ended			Nine Months Ended
	September 30,			September 30,
	2016		2015	2016	2015
	(In thousands)
Death claims	$	1,407	1,301	4,666	5,177
Surrender benefits	7,587		7,313	23,049	20,831
Endowment benefits	4,168		4,038	11,852	12,015
Matured endowments	1,050		384	1,821	720
Accident and health benefits	112		73	290	205
Other policy benefits	656		618	1,923	1,804
Total claims and surrenders	$	14,980	13,727	43,601	40,752


•	Death claims expense was unfavorable for the three months ended and favorable for the nine months ended September 30, 2016, based upon reported claims. No unusual trends have been noted in the periods presented. 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, 2016 by 3.7% and 10.6%, compared to 2015. This increased surrender activity is in the earlier durations (years 1-15), which still have surrender charges. We are seeing various reasons for individuals surrendering their policies, including the sustained slow world-wide economy, individuals simply needing their money and ex associates moving business to other insurance carriers.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

September 30, 2016


•	Endowment benefit expense primarily results from the election by policyholders of a product feature providing an annual guaranteed benefit. This is a fixed benefit over the life of the contract, thus this expense will increase with new sales and improved persistency.


•	Matured endowments increased as contracts have begun reaching their maturity dates.

Increase in Future Policy Benefit Reserves. Policy benefit reserves decreased for the three and nine months ended September 30, 2016 compared to the same periods in 2015, primarily due to the increase in surrenders noted above.

Commissions. Commission expense decreased for the three and nine months ended September 30, 2016, compared to the same periods in 2015. 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, 2016, compared to the same periods in 2015. 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. The decrease in general expenses was primarily driven by a decrease in our estimated potential liability related to our 7702 and 72(s) tax compliance issue for the three and nine months ended September 30, 2016 of $2.1 million and $1.5 million, respectively. Additionally, there were $1.9 million of expenses in the nine months ended in 2015 related to Section 72(s) toll charges. Offsetting these decreases year over year is an increase in consulting fees of $0.9 million in the nine months of 2016 compared to the same period in 2015.

Capitalization of Deferred Policy Acquisition Costs ("DAC"). Capitalized costs generally fluctuate in direct relation to commissions, based upon first year and renewal premiums and related commissions paid compared to 2015.

Amortization of Deferred Policy Acquisition Costs. Amortization for the three and nine months ended September 30, 2016 increased primarily due to the higher surrender activity, including early duration elections to convert to reduced paid up ("RPU") or extended term insurance ("ETI") in 2016. There are higher deferred acquisition costs associated with early duration conversions to RPU or ETI, which, when converted, increases amortization expense. Amortization of deferred policy acquisition costs is impacted by persistency and the higher level of surrenders is impacting our amortization.

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.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

September 30, 2016

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



	Three Months Ended			Nine Months Ended
	September 30,			September 30,
	2016		2015	2016	2015
	(In thousands)
State
Louisiana	$	10,673	10,637	31,991	31,906
Mississippi	549		679	1,919	1,979
Arkansas	399		379	1,192	1,189
Other States	193		229	635	657
Total	$	11,814	11,924	35,737	35,731

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.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

September 30, 2016

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,
	2016			2015		2016		2015
	(In thousands)
Revenue:
Premiums	$	11,600		11,695		35,087		35,035
Net investment income	3,467			3,436		10,386		10,341
Realized investment gains (losses), net	46			(506	)	(1,116	)	(527	)
Other income	2			8		5		78
Total revenue	15,115			14,633		44,362		44,927
Benefits and expenses:
Insurance benefits paid or provided:
Claims and surrenders	6,034			5,801		17,387		17,419
Increase in future policy benefit reserves	948			939		3,450		3,370
Policyholders' dividends	16			11		43		38
Total insurance benefits paid or provided	6,998			6,751		20,880		20,827
Commissions	3,879			3,779		11,553		11,602
Other general expenses	3,610			3,391		11,357		11,680
Capitalization of deferred policy acquisition costs	(1,544		)	(1,432	)	(4,493	)	(4,558	)
Amortization of deferred policy acquisition costs	1,019			912		2,611		2,368
Amortization of cost of customer relationships acquired	522			434		1,169		1,275
Total benefits and expenses	14,484			13,835		43,077		43,194
Income before income tax expense	$	631		798		1,285		1,733

Premiums. Premiums were essentially flat for the three and nine month periods ended September 30, 2016, compared to 2015, as first year premiums were down slightly, while renewal premiums were up.

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,
	2016			2015		2015
	(In thousands, except for %)
Net investment income, annualized	$	13,848		14,063		13,788
Average invested assets, at amortized cost	302,871			300,174		303,219
Annualized yield on average invested assets	4.57		%	4.68	%	4.55	%

Realized Investment Gains (Losses), Net. Other-than-temporary impairments were recorded for the three and nine month periods ended September 30, 2016 of $0.0 million and $1.3 million, respectively, related to mutual fund impairments in the second quarter of 2016 and one available-for-sale fixed maturity impairment in the first quarter of 2016. Absent the impairments, net gains for the three and nine months ended 2015 were due to gains on issuer calls.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

September 30, 2016

Claims and Surrenders. Claims and surrenders decreased for the three and nine months ended September 30, 2016, compared to the same periods in 2015, based upon reported claims compared to the prior year, but were within expected ranges.



	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2016		2015		2016	2015
	(In thousands)
Death claims	$	4,387	4,417		13,109	13,546
Surrender benefits	902		782		2,383	2,176
Endowment benefits	2		6		10	14
Matured endowments	99		88		357	337
Property claims	593		519		1,477	1,304
Accident and health benefits	46		(15	)	37	28
Other policy benefits	5		4		14	14
Total claims and surrenders	$	6,034	5,801		17,387	17,419


•	Death claims expense fluctuates based upon reported claims. We experienced a lower number of reported claims in the nine months ended September 30, 2016. Mortality experience is closely monitored by the Company as a key performance indicator and amounts were within expected levels.


•	Surrender benefits increased for the three and nine months ended in 2016, compared to the same periods in 2015. Management is not aware of any unusual surrender activity, but will continue to monitor for any developing trends.


•	Property claims increased 13.3 % for the nine months ended September 30, 2016 as we experienced more weather-related claims in 2016.

Increase in Future Policy Benefit Reserves. The Company reported relatively consistent changes in future policy benefit reserves for the three and nine months ended September 30, 2016, compared to the corresponding periods in 2015.

Commissions. Commission expense fluctuated for the three and nine months ended September 30, 2016, compared to the same periods in 2015 consistent with the first year and renewal premium collections.

Other General Expenses. Expenses are allocated by segment based upon an annual expense study performed by the Company. Expenses increased slightly for the three months ended September 30, 2016 and decreased slightly for the nine months ended September 30, 2016. The decrease year to date was primarily driven by a decrease of $0.7 million in our estimated potential liability related to our 7702 and 72(s) tax compliance issue. Additionally, there were $0.6 million of expenses in the nine months ended in 2015 related to Section 72(s) toll charges. Offsetting these decreases year over year is an increase in consulting fees of $0.3 million and an increase in employee medical claims of $0.3 million.

Capitalization of Deferred Policy Acquisition Costs ("DAC"). Capitalized costs decreased for the nine months ended September 30, 2016, as commission expense decreased 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, 2016 increased compared to the corresponding periods in 2015, as this segment experienced persistency changes compared to the prior year, which resulted in higher amortization.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

September 30, 2016

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 typically reports a loss 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 individual company 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.

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, 2016			December 31, 2015
	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	$	23,891	1.9	$	35,382	3.0
States and political subdivisions	783,233		62.4	719,825		61.5
Corporate	316,990		25.2	237,248		20.3
Mortgage-backed (1)	2,608		0.2	3,015		0.2
Foreign governments	132		—	131		—
Short-term investments	514		—	251		—
Total marketable debt securities	1,127,368		89.7	995,852		85.0
Cash and cash equivalents	32,323		2.6	82,827		7.1
Other investments:
Policy loans	64,714		5.2	60,166		5.1
Equity securities	23,347		1.9	23,438		2.0
Mortgage loans	237		—	594		0.1
Real estate	7,862		0.6	7,956		0.7
Other long-term investments	39		—	75		—
Total cash, cash equivalents and investments	$	1,255,890	100.0	$	1,170,908	100.0

⁽¹⁾ Includes $2.3 million and $2.6 million of U.S. Government-sponsored enterprises at September 30, 2016, and December 31, 2015, respectively.

Cash and cash equivalents decreased as of September 30, 2016 due to timing of cash inflows and investment of excess cash at the end of 2015 into marketable securities in the first half of 2016. Cash was high at the end of 2015, due to proceeds from sales of certain mutual funds late in the year.

The held-to-maturity portfolio as of September 30, 2016 represented 22.3% of the total fixed maturity securities owned based upon carrying values, with the remaining 77.7% 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.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

September 30, 2016

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, 2016 and December 31, 2015.



	September 30, 2016			December 31, 2015
	Carrying Value		% of Total Carrying Value	Carrying Value		% of Total Carrying Value
	(In thousands)			(In thousands)
AAA	$	87,709	7.8	$	76,026	7.6
AA	534,805		47.5	497,781		50.0
A	262,353		23.3	247,381		24.9
BBB	207,192		18.4	148,656		14.9
BB and other	34,795		3.0	25,757		2.6
Totals	$	1,126,854	100.0	$	995,601	100.0

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, 2016. 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, 2016, the Company held municipal securities that include third party guarantees. Detailed below is a presentation by NRSRO rating of our municipal holdings by funding type.

Municipals shown including third party guarantees



	September 30, 2016
	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	$	61,091	57,646	24,343	23,232	—	—	85,434	80,878	10.7
AA	168,299		160,336	295,251	281,327	21,683	20,388	485,233	462,051	61.0
A	22,683		21,916	154,771	146,425	11,384	10,484	188,838	178,825	23.6
BBB	8,121		8,313	20,104	18,524	586	570	28,811	27,407	3.6
BB and other	3,644		4,289	3,249	3,721	—	—	6,893	8,010	1.1
Total	$	263,838	252,500	497,718	473,229	33,653	31,442	795,209	757,171	100.0

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

September 30, 2016

Municipals shown excluding third party guarantees



	September 30, 2016
	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	$	34,432	33,727	4,452	4,393	—	—	38,884	38,120	5.0
AA	128,051		121,467	248,895	236,420	21,119	19,834	398,065	377,721	49.9
A	36,746		34,690	156,672	148,832	10,259	9,422	203,677	192,944	25.5
BBB	14,645		14,494	24,466	22,761	—	—	39,111	37,255	4.9
BB and other	49,964		48,122	63,233	60,823	2,275	2,186	115,472	111,131	14.7
Total	$	263,838	252,500	497,718	473,229	33,653	31,442	795,209	757,171	100.0

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	$	185,728	175,493	23.4

Education	115,458		109,289	14.5

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

September 30, 2016

The tables below represent the Company's exposure of municipal holdings in Louisiana, Texas and Florida, the three states with the largest municipal holdings as of September 30, 2016.



	September 30, 2016
	General Obligation			Special Revenue		Other		Total
	Fair Value		Amortized Cost	Fair Value	Amortized Cost	Fair Value	Amortized Cost	Fair Value	Amortized Cost
	(In thousands)
Louisiana securities including third party guarantees
AA	$	8,798	8,605	20,374	19,253	—	—	29,172	27,858
A	5,387		5,147	8,570	8,292	—	—	13,957	13,439
BBB	—		—	383	381	—	—	383	381
BB and other	—		—	363	357	—	—	363	357
Total	$	14,185	13,752	29,690	28,283	—	—	43,875	42,035
Louisiana securities excluding third party guarantees
AA	$	11,374	11,043	18,496	17,577	—	—	29,870	28,620
A	2,282		2,184	7,600	7,359	—	—	9,882	9,543
BBB	—		—	1,136	1,043	—	—	1,136	1,043
BB and other	529		525	2,458	2,304	—	—	2,987	2,829
Total	$	14,185	13,752	29,690	28,283	—	—	43,875	42,035
Texas securities including third party guarantees
AAA	$	58,942	55,615	16,194	15,322	—	—	75,136	70,937
AA	59,476		57,611	30,632	29,382	—	—	90,108	86,993
A	1,210		1,208	17,778	16,593	—	—	18,988	17,801
BBB	—		—	7,459	6,792	—	—	7,459	6,792
BB and other	538		535	1,841	2,346	—	—	2,379	2,881
Total	$	120,166	114,969	73,904	70,435	—	—	194,070	185,404
Texas securities excluding third party guarantees
AAA	$	33,420	32,732	1,538	1,537	—	—	34,958	34,269
AA	62,433		58,934	34,654	32,915	—	—	97,087	91,849
A	6,541		6,164	21,515	20,192	—	—	28,056	26,356
BBB	2,911		2,735	8,043	7,346	—	—	10,954	10,081
BB and other	14,861		14,404	8,154	8,445	—	—	23,015	22,849
Total	$	120,166	114,969	73,904	70,435	—	—	194,070	185,404

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	September 30, 2016
	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	$	548	520	3,837	3,654	—	—	4,385	4,174
AA	—		—	60,266	58,003	3,981	3,951	64,247	61,954
A	—		—	13,740	12,999	11,385	10,484	25,125	23,483
BB and other	—		—	504	483	—		504	483
Total	$	548	520	78,347	75,139	15,366	14,435	94,261	90,094

Florida securities excluding third party guarantees
AAA	$	—	—	1,092	1,049	—	—	1,092	1,049
AA	548		520	41,734	40,121	3,418	3,397	45,700	44,038
A	—		—	31,342	29,953	10,259	9,422	41,601	39,375
BB and other	—		—	4,179	4,016	1,689	1,616	5,868	5,632
Total	$	548	520	78,347	75,139	15,366	14,435	94,261	90,094

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, 2016, total holdings of municipal securities in Texas represented 24.4% of all municipal holdings based upon fair value. The Company also holds 11.9% of its municipal holdings in Florida issuers. There were no other states or individual issuer holdings that represented or exceeded 10% of the total municipal portfolio as of September 30, 2016. The next largest municipal holdings are in Louisiana, which the Company holds 5.5% of its municipal holdings.

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

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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 recognized other-than-temporary impairments of $2.3 million for the nine months ended September 30, 2016. No other-than-temporary impairments were recognized for the three months ended September 30, 2016. The Company recognized other-than-temporary impairments of $2.4 million for the three and nine months ended September 30, 2015.

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 2016. Our investments as of September 30, 2016, consist of 71.5% 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 $69.2 million and $62.7 million for the nine months ended September 30, 2016 and 2015, 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 $121.5 million and $72.7 million for the nine months ended September 30, 2016 and 2015, 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 a result, we have established a liability reserve of $12.8 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 $6.1 million to $40.5 million, net of tax. As of September 30, 2016, we reduced our estimated liability reserve by 1.8 million from December 31, 2015 and reduced both the low and high end of our range due to continued refinement of our estimate. 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.

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

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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, 2016.

Contractual Obligations and Off-balance Sheet Arrangements

There have been no material changes in contractual obligations from those reported in the Company's Form 10-K for the year ended December 31, 2015. The Company does not have off-balance sheet arrangements at September 30, 2016. 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.

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, 2016 and 2015. We believe that the accounting policies set forth in the Notes to our Consolidated Financial Statements and “Critical Accounting Policies and Estimates” in the Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2015 continue to describe the significant judgments and estimates used in the preparation of our consolidated financial statements.

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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, 2016				December 31, 2015
	Amortized Cost		Fair Value	Net Unrealized Gains (Losses)	Amortized Cost	Fair Value	Net Unrealized Gains (Losses)
	(In thousands)
Fixed maturities, available-for-sale	$	826,271	875,217	48,946	714,137	735,648	21,511
Fixed maturities, held-to-maturity	$	251,637	264,176	12,539	259,953	264,966	5,013
Total fixed maturities	$	1,077,908	1,139,393	61,485	974,090	1,000,614	26,524
Total equity securities	$	22,577	23,347	770	23,727	23,438	(289	)

Market Risk Related to Interest Rates

Our exposure to interest rate changes results from our significant holdings of fixed maturity investments, which comprised 92.1% of our investment portfolio based on carrying value as of September 30, 2016. 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, 2016 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 1.6% as of the quarter ended September 30, 2016, from 2.3% at December 31, 2015. Net unrealized gains on fixed maturity securities totaled $61.5 million at September 30, 2016, compared to $26.5 million at December 31, 2015.

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

There are no fixed maturities or other investments classified as trading instruments. Approximately 76.8% of fixed maturities were held in available-for-sale and 23.2% in held-to-maturity based upon fair value at September 30, 2016. At September 30,

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2016 and December 31, 2015, 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 1.9% of our total investments at September 30, 2016, with 93.8% invested in diversified equity and bond mutual funds. We believe that significant decreases in the equity markets would not have a material adverse impact on our total investment portfolio.

Item 4. CONTROLS AND PROCEDURES

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

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

During the three months ended September 30, 2016, 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). The Company is in the process of remediating the material weakness identified as an ineffective management review control as it pertains to our tax review of external tax experts' complex documentation as of December 31, 2015.

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PART II. OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

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.

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 believed to be 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% for the first nine months of 2016, 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. The Company’s future sales and financial results depend upon avoiding significant regulatory interruptions in 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 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. 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 in U.S. Dollars. Because we consider ourselves to be doing business only in the U.S., 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. We have sold our policies to residents of foreign countries using independent consultants and we have relied on those persons to comply with applicable laws in marketing our insurance products.

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We have undertaken a comprehensive review of risks associated with the potential application of foreign laws to our sales of insurance policies in foreign countries, including laws that might require us to qualify to do business in a foreign country or to submit our policies for approval by a foreign insurance regulatory authority. The application of foreign laws to our sales of insurance policies in foreign countries requires a country-by-country analysis due to the lack of uniformity of regulation in those countries, and the application of the laws of some countries to our sales of insurance policies may be uncertain due to unclear regulations or the absence of legal precedent addressing circumstances similar to ours. While our compliance review is ongoing and we cannot predict its ultimate outcome, preliminary results indicate a risk that the government of a foreign country could determine, under its existing laws, that its residents may not buy 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. 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 sales are subject to regulation under their laws could therefore have a material adverse effect on our ability to sell policies in that country and, in turn, on our revenues and profitability. Ultimately, we may decide to withdraw from or avoid a particular market if we conclude that we are subject to its laws and regulations.

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 revenues and profitability.

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 $12.8 million, net of tax as of September 30, 2016 for probable liabilities and expenses. We estimate the range of those probable liabilities and expenses to be $6.1 million to $40.5 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, 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.

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 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

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September 30, 2016

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.

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.

As 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 are anticipating releasing newly priced products to the market that will be more expensive to the customer due to lower investment returns, which is a key pricing assumption. This could result in a decrease in sales due to the product being more expensive.

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, 2016, fixed maturities represented $1,126.9 million or 92.1% of our total investments of $1,223.6 million. 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, 2016, approximately 97.0% of our fixed maturities were investment grade with 78.6% 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 fall (with a concurrent fall 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.

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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, 2016 were $3.3 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 claims 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 more mature 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 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.

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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, 2016, we had $166.8 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 generally 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, 2016, we had $19.5 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 would 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, they are 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.

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, 2016.

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 and related claims;

•disputes regarding our tax liabilities;

•disputes relating to reinsurance and coinsurance agreements; and

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•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, recent 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 the Company's procedures for the identification and escheatment of abandoned property. At this time, the Company is not able to estimate any of these possible amounts.

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 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, 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 2015, we reinsured $516.9 million of face amount of our life insurance policies. Amounts reinsured in 2015 represented 10.4% 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 for the period ended December 31, 2015.

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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 affect our ability to price our products at attractive profitable rates to us, thereby adversely affecting 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 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.

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

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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.

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.

Since June 2015, our board and executive leadership have undergone significant changes, including: the retirement of our founder, who was our initial Chairman and Chief Executive Officer; the retirement of the founder’s son, who was the successor as Chairman and Chief Executive Officer; and the resignation of a long serving board member and Audit Committee Chairman. These changes led to searches for other key executive roles. 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. Subsequent to the retirement and resignation of Rick D. Riley on June 24, 2016, we rely on our senior executive team comprised of Interim Chief Executive Officer and President, Kay E. Osbourn (age 50), Chief Financial Officer and Treasurer, David S. Jorgensen (age 52) and Chief Legal Officer, Geoffrey M. Kolander (age 40) 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 these individuals, or the failure to effectively manage succession or fill key vacancies such as our Chief Actuary position for an extended period of time, could have a significant adverse effect on our business and prospects. Due to our historical compensation philosophy that has focused primarily on cash compensation and excluded equity-based incentive compensation, employment agreements, change of control agreements or other compensation components of similar publicly traded companies, we face risk that we may limit 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. 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 increases our costs of doing business and could restrict the conduct of our business.

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, 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 has not historically regulated the insurance business, the Dodd-Frank Act, enacted in July 2010, expands the federal presence in insurance oversight. It's 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). This legislation established 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. As this Act calls for numerous studies and contemplates further

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regulation, the future impact of the Act on our results of operations or our financial condition cannot be determined at this time, but could have an adverse impact on profitable operations.

Changes in U.S. regulation may adversely affect our results of operations and financial condition and limit our prospective growth.

Currently, the U.S. Federal Government does not directly regulate the insurance business, although initiatives for federal regulation of insurance are proposed by members of the U.S. Congress from time to time. However, federal legislation, regulations and administrative policies in several other areas can materially and adversely affect insurance companies, including our business. These areas include U.S. anti-money laundering laws and related regulations, including the Bank Secrecy Act and its implementing regulations (collectively, the “BSA”), other financial services regulations, securities regulation, including the Sarbanes-Oxley Act of 2002, the Dodd-Frank Act, pension regulation, privacy, tort reform legislation and taxation. In addition, various forms of direct federal regulation of insurance have been proposed from time to time.

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 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.

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 an internal risk assessment completed in 2015, 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 98% percent of the shares of Class A common stock purchased under the Plan in 2015 were purchased by foreign holders of life insurance policies (or related brokers); the remaining 2% of the shares of Class A common stock purchased under the Plan in 2015 were purchased by approximately 640 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.

Control of our Company, through the ownership of our Class B Common Stock, may transfer 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 such an ownership change.

Harold E. Riley, our Founder and Chairman Emeritus, is the beneficial owner of 100% of our Class B common stock, which is held in the name of the Harold E. Riley Trust ("Trust"), of which he serves as Trustee. 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. Therefore, Mr. Riley controls our Company. The Class A common stock elects the remainder of the Board. The Trust documents provide that upon Mr. Riley's death, the Class B common stock will be 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"). 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 are appointed by its sole member, Harold Riley, three of which are appointed by Baylor University and three of which are appointed by Southwestern Baptist Theological Seminary. The trustees appointed by Harold Riley include himself, Dottie Riley and Rick Riley. In addition, the Trust documents provide that Mr. Riley may at any time transfer the Class B common stock held by the Trust to the Foundation. It is unclear what, if any, changes would occur to our board, management structure, or corporate operating strategies as a result of different ownership of our Class B common stock.

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There are a substantial number of our shares of Class A common stock issued to our executive officers, directors and management 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, 2015. Our executive officers, directors and management owned approximately 3,172,927 shares of our Class A common stock as of December 31, 2015, representing approximately 6.5% 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.

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 Trust; 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

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

September 30, 2016

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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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

September 30, 2016

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 June 7, 2016 (b)

4.1		Amendment to State Series A-1 and A-2 Senior Convertible Preferred Stock (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.INS		XBRL Instance Document*

101.SCH		XBRL Taxonomy Extension Schema*

101.CAL		XBRL Taxonomy Extension Calculation Linkbase*

101.DEF		XBRL Taxonomy Extension Definition Linkbase*

101.LAB		XBRL Taxonomy Extension Label Linkbase*

101.PRE		XBRL 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 July 15, 2004, with the Registrant's Current Report on Form 8-K as Exhibit 4.1, and incorporated herein by reference.

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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/ Kay E. Osbourn
			Kay E. Osbourn
			Interim CEO & President
			(Principal Executive Officer)


		By:	/s/ David S. Jorgensen
			David S. Jorgensen
			Vice President, Chief Financial Officer and Treasurer
			(Principal Financial and Accounting Officer)

Date:	November 7, 2016