CITIZENS, INC. - Quarter Report: 2017 March (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 March 31, 2017

¨ 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 ¨	Emerging growth company ¨

If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

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

As of May 5, 2017, the Registrant had 49,080,114 shares of Class A common stock, no par value, outstanding and 1,001,714 shares of Class B common stock outstanding.

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TABLE OF CONTENTS



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

		Consolidated Statements of Financial Position, March 31, 2017 (Unaudited) and December 31, 2016	2

		Consolidated Statements of Comprehensive Income, Three Months Ended March 31, 2017 and 2016 (Unaudited)	4

		Consolidated Statements of Cash Flows, Three Months Ended March 31, 2017 and 2016 (Unaudited)	5

		Notes to Consolidated Financial Statements	7

	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	25

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	47

	Item 4.	Controls and Procedures	48

Part II.	Other Information

	Item 1.	Legal Proceedings	49

	Item 1A.	Risk Factors	49

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	63

	Item 3.	Defaults Upon Senior Securities	63

	Item 4.	Mine Safety Disclosures	64

	Item 5.	Other Information	64

	Item 6.	Exhibits	65

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

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



	March 31, 2017		December 31, 2016
Assets	(Unaudited)
Investments:
Fixed maturities available-for-sale, at fair value (cost: $881,102 and $860,473 in 2017 and 2016, respectively)	$	907,216	881,668
Fixed maturities held-to-maturity, at amortized cost (fair value: $251,700 and $252,545 in 2017 and 2016, respectively)	244,776		247,004
Equity securities available-for-sale, at fair value (cost: $15,620 and $17,765 in 2017 and 2016, respectively)	16,090		18,159
Mortgage loans on real estate	200		232
Policy loans	67,616		66,672
Real estate held for investment (less $1,108 and $1,083 accumulated depreciation in 2017 and 2016, respectively)	5,894		5,919
Real estate held for sale	—		1,939
Other long-term investments	38		38
Short-term investments	502		508
Total investments	1,242,332		1,222,139
Cash and cash equivalents	41,151		35,510
Accrued investment income	17,636		17,903
Reinsurance recoverable	3,909		3,862
Deferred policy acquisition costs	167,267		167,790
Cost of customer relationships acquired	18,855		19,415
Goodwill	17,255		17,255
Other intangible assets	965		966
Deferred tax asset	79,020		76,869
Property and equipment, net	8,124		7,890
Due premiums, net (less $1,397 and $1,600 allowance for doubtful accounts in 2017 and 2016, respectively)	11,263		12,852
Prepaid expenses	1,345		299
Other assets	1,028		918
Total assets	$	1,610,150	1,583,668

(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)



	March 31, 2017			December 31, 2016
Liabilities and Stockholders' Equity	(Unaudited)
Liabilities:
Policy liabilities:
Future policy benefit reserves:
Life insurance	$	1,073,601		1,059,722
Annuities	71,476			69,578
Accident and health	982			1,022
Dividend accumulations	21,400			20,897
Premiums paid in advance	51,211			48,198
Policy claims payable	9,585			9,538
Other policyholders' funds	8,032			7,744
Total policy liabilities	1,236,287			1,216,699
Commissions payable	2,093			3,540
Federal income tax payable	87,424			81,270
Payable for securities in process of settlement	4,292			3,061
Other liabilities	25,658			29,998
Total liabilities	1,355,754			1,334,568
Commitments and contingencies (Note 8)
Stockholders' equity:
Class A, no par value, 100,000,000 shares authorized, 52,215,852 shares issued and outstanding in 2017 and 2016, including shares in treasury of 3,135,738 in 2017 and 2016	259,383			259,383
Class B, no par value, 2,000,000 shares authorized, 1,001,714 shares issued and outstanding in 2017 and 2016	3,184			3,184
Accumulated deficit	(14,192		)	(16,248	)
Accumulated other comprehensive income:
Unrealized gains on securities, net of tax	17,032			13,792
Treasury stock, at cost	(11,011		)	(11,011	)
Total stockholders' equity	254,396			249,100
Total liabilities and stockholders' equity	$	1,610,150		1,583,668

See accompanying notes to consolidated financial statements.

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

	2017					2016
Revenues:
Premiums:
Life insurance			$	43,804					42,773
Accident and health insurance			328						390
Property insurance			1,249						1,276
Net investment income			12,739						11,731
Realized investment gains (losses), net			1,263						(1,796	)
Other income			198						151
Total revenues			59,581						54,525
Benefits and expenses:
Insurance benefits paid or provided:
Claims and surrenders			21,724						19,005
Increase in future policy benefit reserves			14,536						15,726
Policyholders' dividends			1,304						1,549
Total insurance benefits paid or provided			37,564						36,280
Commissions			9,925						9,468
Other general expenses			10,156						9,174
Capitalization of deferred policy acquisition costs			(6,901		)				(6,264	)
Amortization of deferred policy acquisition costs			7,375						6,631
Amortization of cost of customer relationships acquired			519						545
Total benefits and expenses			58,638						55,834
Income (loss) before federal income tax			943						(1,309	)
Federal income tax expense (benefit)			(1,113		)				1,082
Net income (loss)			2,056						(2,391	)
Per Share Amounts:
Basic earnings (losses) per share of Class A common stock	$	0.04				$	(0.05	)
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					(0.05		)
Diluted earnings (losses) per share of Class B common stock	0.02					(0.02		)
Other comprehensive income:
Unrealized gains (losses) on available-for-sale securities:
Unrealized holding gains arising during period			5,137						11,333
Reclassification adjustment for gains (losses) included in net income			(152		)				1,796
Unrealized gains on available-for-sale securities, net			4,985						13,129
Income tax expense on unrealized gains on available-for-sale securities			1,745						4,595
Other comprehensive income			3,240						8,534
Comprehensive income			$	5,296					6,143

See accompanying notes to consolidated financial statements.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Cash Flows Three Months Ended March 31, (In thousands) (Unaudited)

	2017			2016
Cash flows from operating activities:
Net income (loss)	$	2,056		(2,391	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Realized (gains) losses on sale of investments and other assets	(1,263		)	1,796
Net deferred policy acquisition costs	474			367
Amortization of cost of customer relationships acquired	519			545
Depreciation	236			324
Amortization of premiums and discounts on investments	4,106			3,366
Deferred federal income tax benefit	(3,895		)	6,009
Change in:
Accrued investment income	267			(724	)
Reinsurance recoverable	(47		)	227
Due premiums	1,589			981
Future policy benefit reserves	14,527			15,645
Other policyholders' liabilities	3,849			1,043
Federal income tax payable	6,155			(4,928	)
Commissions payable and other liabilities	(5,785		)	(122	)
Other, net	(1,158		)	(1,134	)
Net cash provided by operating activities	21,630			21,004
Cash flows from investing activities:
Sale of fixed maturities, available-for-sale	508			—
Maturities and calls of fixed maturities, available-for-sale	18,111			7,876
Maturities and calls of fixed maturities, held-to-maturity	1,245			5,970
Purchase of fixed maturities, available-for-sale	(41,076		)	(68,533	)
Purchase of fixed maturities, held-to-maturity	—			(2,547	)
Sale of equity securities, available-for-sale	1,940			—
Calls of equity securities, available-for-sale	300			—
Principal payments on mortgage loans	32			7
Increase in policy loans, net	(944		)	(1,845	)
Sale of other long-term investments	3,039			—
Purchase of property and equipment	(433		)	(266	)
Maturity of short-term investments	—			251
Net cash used in investing activities	(17,278		)	(59,087	)

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Cash Flows, Continued Three Months Ended March 31, (In thousands) (Unaudited)


	2017			2016
Cash flows from financing activities:
Annuity deposits	$	2,705		1,891
Annuity withdrawals	(1,416		)	(1,280	)
Net cash provided by financing activities	1,289			611
Net increase (decrease) in cash and cash equivalents	5,641			(37,472	)
Cash and cash equivalents at beginning of year	35,510			82,827
Cash and cash equivalents at end of period	$	41,151		45,355
Supplemental disclosures of operating activities:
Cash paid (received) during the period for income taxes, net	$	(3,372	)	—

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

March 31, 2017

(Unaudited)

(1) Financial Statements

Basis of Presentation and Consolidation

The consolidated financial statements include the accounts and operations of Citizens, Inc. ("Citizens"), a Colorado corporation, and its wholly-owned subsidiaries, CICA Life Insurance Company of America ("CICA"), Security Plan Life Insurance Company ("SPLIC"), Security Plan Fire Insurance Company ("SPFIC"), Citizens National Life Insurance Company ("CNLIC"), Magnolia Guaranty Life Insurance Company ("MGLIC"), Computing Technology, Inc. ("CTI") 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 March 31, 2017, and the consolidated statements of comprehensive income (loss) for the three months ended March 31, 2017 and 2016 and cash flows for the three-month periods ended March 31, 2017 and 2016, 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 March 31, 2017 and for comparative periods have been made. The consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and with the instructions to Form 10-Q adopted by the Securities and Exchange Commission (“SEC”). Accordingly, the financial statements do not include all of the information and footnotes required for complete financial statements and should be read in conjunction with the Company’s consolidated financial statements, and notes thereto, for the year ended December 31, 2016. Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period.

We provide primarily life insurance and a small amount of health insurance policies through our insurance subsidiaries: CICA, SPLIC, MGLIC and CNLIC. 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, though the Company-owned airplane is not being used and is for sale.

Immaterial Error Correction Related to Prior Interim Periods

In the course of preparing its consolidated financial statements for the year ended December 31, 2016, the Company identified immaterial errors in its previously filed financial statements. The errors were in the Company’s accounting for DAC and future policy benefits in the life insurance segment and several other immaterial errors in our other two segments. Corrections of those errors for the interim period ended March 31, 2016 increased the Company's net loss by $442 thousand and increased the basic loss per share of class A common stock by $0.01.

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

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

March 31, 2017

(Unaudited)

of these estimates are particularly sensitive to market conditions, and deterioration and/or volatility in the worldwide debt or equity markets could have a material impact on the consolidated financial statements.

Significant Accounting Policies

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

(2) Accounting Pronouncements

Accounting Standards Recently Adopted

None.

Accounting Standards Not Yet Adopted

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

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), with the main objective to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The amendments in this ASU require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. The income statement reflects the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. Credit losses on available-for-sale debt securities should be measured in a 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

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

March 31, 2017

(Unaudited)

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.

On January 26, 2017, the FASB issued Accounting Standards Update ("ASU") No. 2017-04, Simplifying the Test for Goodwill Impairment. An entity will no longer perform a hypothetical purchase price allocation to measure impairment, eliminating step 2 of the goodwill impairment test. Instead, impairment will be measured using the difference of the carrying amount to the fair value of the reporting unit. The ASU is effective prospectively for annual and interim periods in fiscal year beginning after December 15, 2019, but early adoption is permitted for goodwill impairment tests with measurement dates after January 1, 2017. The Company is not planning on early adoption of this ASU and has not yet quantified any potential impact of the ASU on the Company's financial statements.

(3) Segment Information

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

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



	Three Months Ended
	March 31, 2017
	Life Insurance			Home Service Insurance		Other Non-Insurance Enterprises		Consolidated
	(In thousands)
Revenues:
Premiums	$	33,563		11,818		—		45,381
Net investment income	9,131			3,259		349		12,739
Realized investment gains, net	77			1,186		—		1,263
Other income (loss)	118			(1	)	81		198
Total revenue	42,889			16,262		430		59,581
Benefits and expenses:
Insurance benefits paid or provided:
Claims and surrenders	15,676			6,048		—		21,724
Increase in future policy benefit reserves	13,260			1,276		—		14,536
Policyholders' dividends	1,295			9		—		1,304
Total insurance benefits paid or provided	30,231			7,333		—		37,564
Commissions	6,007			3,918		—		9,925
Other general expenses	3,872			4,858		1,426		10,156
Capitalization of deferred policy acquisition costs	(5,378		)	(1,523	)	—		(6,901	)
Amortization of deferred policy acquisition costs	6,306			1,069		—		7,375
Amortization of cost of customer relationships acquired	172			347		—		519
Total benefits and expenses	41,210			16,002		1,426		58,638
Income (loss) before income tax expense	$	1,679		260		(996	)	943

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

March 31, 2017

(Unaudited)



	Three Months Ended
	March 31, 2016
	Life Insurance			Home Service Insurance		Other Non-Insurance Enterprises		Consolidated
	(In thousands)
Revenues:
Premiums	$	32,848		11,591		—		44,439
Net investment income	7,954			3,414		363		11,731
Realized investment losses, net	(868		)	(928	)	—		(1,796	)
Other income	115			3		33		151
Total revenue	40,049			14,080		396		54,525
Benefits and expenses:
Insurance benefits paid or provided:
Claims and surrenders	13,464			5,541		—		19,005
Increase in future policy benefit reserves	14,540			1,186		—		15,726
Policyholders' dividends	1,536			13		—		1,549
Total insurance benefits paid or provided	29,540			6,740		—		36,280
Commissions	5,803			3,665		—		9,468
Other general expenses	4,084			4,190		900		9,174
Capitalization of deferred policy acquisition costs	(4,926		)	(1,338	)	—		(6,264	)
Amortization of deferred policy acquisition costs	5,804			827		—		6,631
Amortization of cost of customer relationships acquired	170			375		—		545
Total benefits and expenses	40,475			14,459		900		55,834
Loss before income tax expense	$	(426	)	(379	)	(504	)	(1,309	)

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

March 31, 2017

(Unaudited)

(4) Earnings Per Share

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



	Three Months Ended
	March 31, 2017		March 31, 2016
	(In thousands, except per share amounts)
Basic and diluted earnings per share:
Numerator:
Net income (loss)	$	2,056	(2,391	)
Net income (loss) allocated to Class A common stock	$	2,035	(2,367	)
Net income (loss) allocated to Class B common stock	21		(24	)
Net income (loss)	$	2,056	(2,391	)
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 (losses) earnings per share of Class A common stock	$	0.04	(0.05	)
Basic (losses) earnings per share of Class B common stock	0.02		(0.02	)
Diluted (losses) earnings per share of Class A common stock	0.04		(0.05	)
Diluted (losses) earnings per share of Class B common stock	0.02		(0.02	)

(5) Investments

The Company invests primarily in fixed maturity securities, which totaled 89.7% of total cash, cash equivalents and investments at March 31, 2017.



	March 31, 2017			December 31, 2016
	Carrying Value		% of Total Carrying Value	Carrying Value		% of Total Carrying Value
	($ In thousands)
Fixed maturity securities	$	1,151,992	89.7	$	1,128,672	89.8
Equity securities	16,090		1.3	18,159		1.5
Mortgage loans	200		—	232		0.0
Policy loans	67,616		5.3	66,672		5.3
Real estate and other long-term investments	5,932		0.5	7,896		0.6
Short-term investments	502		—	508		—
Cash and cash equivalents	41,151		3.2	35,510		2.8
Total cash, cash equivalents and investments	$	1,283,483	100.0	$	1,257,649	100.0

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

March 31, 2017

(Unaudited)

The following tables represent the cost, gross unrealized gains and losses and fair value for fixed maturities and equity securities as of the periods indicated.



	March 31, 2017
	Cost or Amortized Cost		Gross Unrealized Gains	Gross Unrealized Losses	Fair Value
	(In thousands)
Fixed maturities:
Available-for-sale:
U.S. Treasury securities	$	9,912	2,240	—	12,152
U.S. Government-sponsored enterprises	7,608		917	—	8,525
States and political subdivisions	571,591		16,091	3,995	583,687
Foreign governments	103		23	—	126
Corporate	289,718		13,355	2,681	300,392
Commercial mortgage-backed	27		—	—	27
Residential mortgage-backed	2,143		166	2	2,307
Total available-for-sale securities	881,102		32,792	6,678	907,216
Held-to-maturity securities:
U.S. Government-sponsored enterprises	2,001		9	—	2,010
States and political subdivisions	221,772		7,108	636	228,244
Corporate	21,003		1,082	639	21,446
Total held-to-maturity securities	244,776		8,199	1,275	251,700
Total fixed maturities	$	1,125,878	40,991	7,953	1,158,916

Short-term investments	$	502	—	—	502

Equity securities:
Stock mutual funds	$	2,867	162	—	3,029
Bond mutual funds	12,071		357	96	12,332
Common stock	22		1	—	23
Redeemable preferred stock	660		46	—	706
Total equity securities	$	15,620	566	96	16,090

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

March 31, 2017

(Unaudited)



	December 31, 2016
	Cost or Amortized Cost		Gross Unrealized Gains	Gross Unrealized Losses	Fair Value
	(In thousands)
Fixed maturities:
Available-for-sale securities:
U.S. Treasury securities	$	9,929	2,261	—	12,190
U.S. Government-sponsored enterprises	7,639		863	—	8,502
States and political subdivisions	563,279		15,017	5,022	573,274
Foreign governments	103		23	—	126
Corporate	277,226		12,095	4,222	285,099
Commercial mortgage-backed	50		1	—	51
Residential mortgage-backed	2,247		181	2	2,426
Total available-for-sale securities	860,473		30,441	9,246	881,668
Held-to-maturity securities:
U.S. Government-sponsored enterprises	2,003		28	—	2,031
States and political subdivisions	223,966		6,916	1,599	229,283
Corporate	21,035		888	692	21,231
Total held-to-maturity securities	247,004		7,832	2,291	252,545
Total fixed maturity securities	$	1,107,477	38,273	11,537	1,134,213

Short-term investments	$	508	—	—	508

Equity securities:
Stock mutual funds	$	2,867	79	—	2,946
Bond mutual funds	14,040		265	108	14,197
Common stock	39		3	17	25
Redeemable preferred stock	819		174	2	991
Total equity securities	$	17,765	521	127	18,159

The majority of the Company's equity securities are diversified stock and bond mutual funds.

Valuation of Investments in Fixed Maturity and Equity Securities

Held-to-maturity securities are reported in the financial statements at amortized cost and available-for-sale securities are reported at fair value.

The Company monitors all debt and equity securities on an on-going basis relative to changes in credit ratings, market prices, earnings trends and financial performance, in addition to specific region or industry reviews. The assessment of whether other-than-temporary impairments have occurred is based on a case-by-case evaluation of underlying reasons for the decline in fair value. The Company determines other-than-temporary impairment by reviewing relevant evidence related to the specific security issuer as well as the Company's intent to sell the security, or if it is more likely than not that the Company would be required to sell a security before recovery of its amortized cost.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

March 31, 2017

(Unaudited)

entire difference between the investment's cost and its fair value at the balance sheet date. If the Company does not intend to sell the security and it is more likely than not that the Company will not be required to sell the security before recovery of its amortized cost basis, the other-than-temporary impairment is separated into the following: (a) the amount representing the credit loss; and (b) the amount related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings. The amount of the total other-than-temporary impairment related to other factors is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the other-than-temporary impairment recognized in earnings becomes the new amortized cost basis of the investment. The new amortized cost basis is not adjusted for subsequent recoveries in fair value.

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

The primary factors considered in evaluating whether an impairment exists for an equity security include, but are not limited to: (a) the length of time and the extent to which the fair value has been less than the cost of the security; (b) changes in the financial condition, credit rating and near-term prospects of the issuer; (c) whether the issuer is current on contractually obligated payments; and (d) the intent and ability of the Company to retain the investment for a period of time sufficient to allow for recovery.

Other-than-temporary impairments ("OTTI") on one equity security totaling $17,000 were recognized during the three months ended March 31, 2017 and OTTI of $1.9 million was recognized during the three months ended March 31, 2016 related to one available-for-sale fixed maturity security.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

March 31, 2017

(Unaudited)

The following tables present the fair values and gross unrealized losses of fixed maturities and equity securities that have remained in a continuous unrealized loss position for the periods indicated.



	March 31, 2017
	Less than 12 months				Greater than 12 months			Total
	Fair Value		Unrealized Losses	# of Securities	Fair Value	Unrealized Losses	# of Securities	Fair Value	Unrealized Losses	# of Securities
	(In thousands, except for # of securities)
Fixed maturities:
Available-for-sale securities:
States and political subdivisions	$	172,292	2,550	147	8,064	1,445	8	180,356	3,995	155
Corporate	78,715		2,205	64	1,886	476	7	80,601	2,681	71
Residential mortgage-backed	109		1	3	104	1	2	213	2	5
Total available-for-sale securities	251,116		4,756	214	10,054	1,922	17	261,170	6,678	231
Held-to-maturity securities:
States and political subdivisions	35,518		601	40	510	35	1	36,028	636	41
Corporate	—		—	—	2,206	639	2	2,206	639	2
Total held-to-maturity securities	35,518		601	40	2,716	674	3	38,234	1,275	43
Total fixed maturities	$	286,634	5,357	254	12,770	2,596	20	299,404	7,953	274
Equity securities:
Bond mutual funds	$	8,202	96	1	—	—	—	8,202	96	1
Common stocks	—		—	—	—	—	—	—	—	—
Redeemable preferred stocks	101		—	1	—	—	—	101	—	1
	$	8,303	96	2	—	—	—	8,303	96	2

As of March 31, 2017, the Company had 17 available-for-sale fixed maturity securities and 3 held-to-maturity fixed maturity securities that were in an unrealized loss position for greater than 12 months. There were no common stock holdings in an unrealized loss position for greater than 12 months as of March 31, 2017.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

March 31, 2017

(Unaudited)



	December 31, 2016
	Less than 12 months				Greater than 12 months			Total
	Fair Value		Unrealized Losses	# of Securities	Fair Value	Unrealized Losses	# of Securities	Fair Value	Unrealized Losses	# of Securities
	(In thousands, except for # of securities)
Fixed maturities:
Available-for-sale securities:
States and political subdivisions	$	202,788	3,513	184	8,018	1,509	8	210,806	5,022	192
Corporate	91,527		3,578	70	6,102	644	8	97,629	4,222	78
Residential mortgage-backed	116		1	4	105	1	2	221	2	6
Total available-for-sale securities	294,431		7,092	258	14,225	2,154	18	308,656	9,246	276
Held-to-maturity securities:
States and political subdivisions	43,659		1,562	47	509	37	1	44,168	1,599	48
Corporate	3,587		12	3	2,171	680	2	5,758	692	5
Total held-to-maturity securities	47,246		1,574	50	2,680	717	3	49,926	2,291	53
Total fixed maturities	$	341,677	8,666	308	16,905	2,871	21	358,582	11,537	329
Equity securities:
Bond mutual funds	$	10,160	108	2	—	—	—	10,160	108	2
Common stock	—		—	—	—	17	1	—	17	1
Redeemable preferred stocks	201		2	2	—	—	—	201	2	2
Total equities	$	10,361	110	4	—	17	1	10,361	127	5

We have reviewed these securities in an unrealized loss position for the periods ended March 31, 2017 and December 31, 2016 and determined that no other-than-temporary impairment exists that have not been recognized based on our evaluation of the credit worthiness of the issuers and the fact that we do not intend to sell the investments nor is it likely that we will be required to sell the securities before recovery of their amortized cost bases which may be maturity. We continue to monitor all securities on an on-going basis, and future information may become available which could result in other-than-temporary impairments being recorded.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

March 31, 2017

(Unaudited)

The amortized cost and fair value of fixed maturity securities at March 31, 2017 by contractual maturity are shown in the table below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date have been reflected based upon final stated maturity.



	March 31, 2017
	Amortized Cost		Fair Value
	(In thousands)
Available-for-sale securities:
Due in one year or less	$	50,405	50,885
Due after one year through five years	101,885		104,873
Due after five years through ten years	119,041		126,159
Due after ten years	609,771		625,299
Total available-for-sale securities	881,102		907,216
Held-to-maturity securities:
Due in one year or less	2,526		2,543
Due after one year through five years	59,799		62,061
Due after five years through ten years	40,591		42,255
Due after ten years	141,860		144,841
Total held-to-maturity securities	244,776		251,700
Total fixed maturities	$	1,125,878	1,158,916

The Company uses the specific identification method of the individual security to determine the cost basis used in the calculation of realized gains and losses related to security sales.



	Fixed Maturities, Available-for-Sale			Equity Securities
	Three Months Ended			Three Months Ended
	March 31,			March 31,
	2017		2016	2017	2016
	(In thousands)
Proceeds	$	508	—	1,940	—
Gross realized gains	$	6	—	—	—
Gross realized losses	$	—	—	30	—

There were no sales of available-for-sale securities for the three month periods ended March 31, 2016. There were no securities sold from the held-to-maturity portfolio for the three months ended March 31, 2017 or 2016.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

March 31, 2017

(Unaudited)

(6) Fair Value Measurements

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

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


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


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


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

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

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

Level 3 is comprised of financial instruments whose fair value is estimated based on non-binding broker prices utilizing significant inputs not based on or corroborated by readily available market information. 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

March 31, 2017

(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.



	March 31, 2017
Available-for-sale investments	Level 1		Level 2	Level 3	Total Fair Value
	(In thousands)
Financial assets:
Fixed maturities:
U.S. Treasury and U.S. Government-sponsored enterprises	$	12,152	8,525	—	20,677
States and political subdivisions	—		583,687	—	583,687
Corporate	—		300,392	—	300,392
Commercial mortgage-backed	—		—	27	27
Residential mortgage-backed	—		2,307	—	2,307
Foreign governments	—		126	—	126
Total fixed maturities	12,152		895,037	27	907,216
Equity securities:
Stock mutual funds	3,029		—	—	3,029
Bond mutual funds	12,332		—	—	12,332
Common stock	23		—	—	23
Redeemable preferred stock	706		—	—	706
Total equity securities	16,090		—	—	16,090
Total financial assets	$	28,242	895,037	27	923,306



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

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

March 31, 2017

(Unaudited)

Financial Instruments Valuation

Fixed maturity securities, available-for-sale. At March 31, 2017, our fixed maturity securities, valued using a third-party pricing source, totaled $895.0 million for Level 2 assets and comprised 96.9% of total reported fair value of our financial assets. The Level 1 and Level 2 valuations are reviewed and updated quarterly through random testing by comparisons to separate pricing models, other third-party pricing services, and back tested to recent trades. In addition, we obtain information relative to the third-party pricing models and review model parameters for reasonableness. Fair values for Level 3 assets are based upon unadjusted broker quotes that are non-binding, and consist of two private placement mortgage-backed securities with a total value of $27 thousand. Our Level 3 assets are current relative to principal and interest payments and are considered immaterial to our financial statements. For the three months ended March 31, 2017, there were no material changes to the valuation methods or assumptions used to determine fair values, and no broker or third party prices were changed from the values received.

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

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



	March 31, 2017			December 31, 2016
	(In thousands)

Balance at beginning of period	$	51		145
Total realized and unrealized gains (losses)
Included in net income	—			—
Included in other comprehensive income	—			(4	)
Principal paydowns	(24		)	(90	)
Transfer in and (out) of Level 3	—			—
Balance at end of period	$	27		51

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

March 31, 2017

(Unaudited)

The carrying amount and fair value for the financial assets and liabilities on the consolidated balance sheets not otherwise disclosed for the periods indicated are as follows:



	March 31, 2017			December 31, 2016
	Carrying Value		Fair Value	Carrying Value	Fair Value
	(In thousands)
Financial assets:
Fixed maturities, held-to-maturity	$	244,776	251,700	247,004	252,545
Mortgage loans	200		232	232	269
Policy loans	67,616		67,616	66,672	66,672
Short-term investments	502		502	508	508
Cash and cash equivalents	41,151		41,151	35,510	35,510
Financial liabilities:
Annuity - investment contracts	52,748		51,942	50,952	52,173

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

Mortgage loans are secured principally by residential properties. Weighted average interest rates for these loans were approximately 6.6% at March 31, 2017 and 6.8% at December 31, 2016, with maturities ranging from 1 to 28 years. Management estimated the fair value using an annual interest rate of 6.25% at March 31, 2017. Our mortgage loans are considered Level 3 assets in the fair value hierarchy.

Policy loans had a weighted average annual interest rate of 7.7% as of March 31, 2017 and December 31, 2016, and no specified maturity dates. The aggregate fair value of policy loans approximates the carrying value reflected on the consolidated balance sheets. These loans typically carry an interest rate that is tied to the crediting rate applied to the related policy and contract reserves. Policy loans are an integral part of the life insurance policies we have in force, cannot be valued separately and are not marketable. Therefore, the fair value of policy loans approximates the carrying value and policy loans are considered Level 3 assets in the fair value hierarchy.

The fair value of short-term investments approximate carrying value due to their short-term nature. Our short-term investments are considered Level 2 assets in the fair value hierarchy.

The fair value of cash and cash equivalents approximate carrying value and are characterized as Level 1 assets in the fair value hierarchy.

The fair value of the Company's liabilities under annuity contract policies, which are considered Level 3 assets, was estimated at March 31, 2017 using discounted cash flows based upon a swap rate curve with interest rates ranging from 1.38% to 3.77% 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

March 31, 2017

(7) Short Duration Contracts

Special Property Insurance (Allied and Fire)

The Company's short duration contracts consist of credit life and credit disability in the Life segment and property insurance in the Home Service segment. The following table presents information on changes in the liability for credit life, credit disability, life, accident and health and property policy and contract claims for the periods ended March 31, 2017 and March 31, 2016.



	March 31,			March 31,
	2017			2016

Policy claims payable at January 1	$	544		514
Less: reinsurance recoverable	—			—
Net balance at January 1	544			514
Add claims incurred, related to:
Current year	673			557
Prior years	(42		)	(87	)
	631			470
Deduct claims paid, related to:
Current year	428			306
Prior years	300			226
	728			532
Net balance March 31	447			452
Plus: reinsurance recoverable	—			—
Policy claims payable, March 31	$	447		452

(8) Commitments and Contingencies

Qualification of Life Products

As of December 31, 2014, we determined that a portion of the life insurance policies issued by our subsidiary insurance companies failed to qualify for the favorable U.S. federal income tax treatment afforded by 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 March 31, 2017 of $12.8 million, after tax, related to projected IRS toll charges and fees of $12.5 million as well as claims liability for past claims and reserves increases to bring policies into compliance totaling $0.3 million. The range of financial estimates relative to this issue is $7.4 million to $38.8 million, after tax. This estimated range includes projected toll charges and fees payable to the IRS, as well

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

March 31, 2017

(Unaudited)

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 was a complex undertaking including insight from external consultants and involved management’s judgment based upon a variety of factors known at the time. We recorded additional general expenses of $0.5 million in the first quarter of 2017 related to our 7702 and 72(s) issues. Additional costs will be incurred in 2017 associated with these issues. We believe these costs could be $1.0 million to $2.0 million, but due to the uncertainty of actions, we cannot reasonably estimate these costs with any reliability. Actual amounts incurred may exceed this estimate and will be recorded as they become probable and can be reasonably estimated.

Compliance

Some of our top international markets are in countries identified by the U.S. Department of State as jurisdictions of high risk for money laundering. As required by Bank Secrecy Act (“BSA”) regulations applicable to insurance companies, we have developed and implemented an anti-money laundering program that includes policies and procedures for complying with applicable BSA program, reporting and recordkeeping requirements and for deterring, preventing and detecting potential money laundering and other criminal activity (“BSA Program”). Based on a prior internal risk assessment, we have enhanced our BSA Program with additional controls, such as list screening software beyond sanctions screening required by the Office of Foreign Assets Control (“OFAC”), enhanced payment due diligence and transaction controls.

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

Litigation

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

(9) Income Taxes

The effective tax rate was (118.0)% and (82.7)% for the three months ended of March 31, 2017 and 2016, respectively. Additionally there is $0.8 million of tax benefit related to an uncertain tax position in the three months ended March 31, 2017. The effective tax rate is affected by our tax compliance issues, as IRS toll charge penalties are not tax deductible and can move up or down depending on the net adjustment to our best estimate liability. Absent the effect on our effective tax rate of our tax compliance

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

March 31, 2017

(Unaudited)

issues, in most periods where our effective tax rate is lower than the statutory tax rate of 35%, the difference is primarily due to tax-exempt state and local bond income which reduce the effective tax rate.

(10) 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 totaled $177,000 for the three months ended March 31, 2017.

(11) Related Party Transactions

The Company has various routine related party transactions in conjunction with our holding company structure, such as a management service agreement related to costs incurred, a tax sharing agreement between entities, and inter-company dividends and capital contributions. There were no changes related to these relationships during the three months ended March 31, 2017. See our Annual Report on Form 10-K for the year ended December 31, 2016 for a comprehensive discussion of related party transactions.

In the first quarter of 2017, Citizens made a $5.0 million capital contribution to CICA Life.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

March 31, 2017

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

FORWARD-LOOKING STATEMENTS

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

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


•	Changes in the application, interpretation or enforcement of foreign insurance laws that impact our business, which derives the majority of its revenues from residents of foreign countries;


•	Potential changes in amounts reserved for in connection with the noncompliance of a portion of our insurance policies with Sections 7702 under the Internal Revenue Code, the failure of certain annuity contracts to qualify under Section 72(s) of the Internal Revenue Code and the anticipated timing of our filings with the IRS to address these matters;


•	Changes in foreign and U.S. general economic, market, and political conditions, including the performance of financial markets and interest rates;


•	Changes in consumer behavior or regulatory oversight, which may affect the Company's ability to sell its products and retain business;


•	The timely development of and acceptance of new products of the Company and perceived overall value of these products and services by existing and potential customers;


•	Fluctuations in experience regarding current mortality, morbidity, persistency and interest rates relative to expected amounts used in pricing the Company's products;


•	The performance of our investment portfolio, which may be adversely affected by changes in interest rates, adverse developments and ratings of issuers whose debt securities we may hold, and other adverse macroeconomic events;


•	Results of litigation we may be involved in;


•	Changes in assumptions related to deferred acquisition costs and the value of any businesses we may acquire;


•	Regulatory, accounting or tax changes that may affect the cost of, or the demand for, the Company's products or services;


•	Our concentration of business from persons residing in Latin America and the Pacific Rim;


•	Changes in tax laws;


•	Effects of acquisitions and restructuring, including possible difficulties in integrating and realizing the projected results of acquisitions;


•	Changes in statutory or U.S. Generally Accepted Accounting Principles ("U.S. GAAP"), policies or practices;


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


•	Our success at managing risks involved in the foregoing; and


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

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

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

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March 31, 2017

releases, and, if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable after we electronically file such reports with, or furnish such reports to, the Securities and Exchange Commission. We are not including any of the information contained on our website as part of, or incorporating it by reference into, this report.

Overview

Citizens, Inc. (“Citizens” or the "Company") is an insurance holding company incorporated in Colorado serving the life insurance needs of individuals in the United States since 1969 and internationally since 1975. Through our insurance subsidiaries, we pursue a strategy of offering traditional insurance products in niche markets where we believe we are able to achieve competitive advantages. As of March 31, 2017, we had approximately $1.6 billion of total assets and approximately $5.0 billion of insurance in force. Our core insurance operations include issuing and servicing:


•	U.S. Dollar-denominated ordinary whole life insurance and endowment policies predominantly 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. Historically, our Company has experienced growth through acquisitions in the domestic market and through organic market expansion in the international market. We strive to generate bottom line returns using knowledge of our niche markets and our well-established distribution channels.

Recent Developments

On February 1, 2017, the Company announced the appointment of Terry Festervand, as Chief Operating Officer.

On February 22, 2017, the Company announced the appointment of Gerald W. Shields to fill the open Board seat vacated by former Chairman and Chief Executive Officer Rick D. Riley. Mr. Shields joins the Board with over 37 years of technology experience, including significant life insurance experience as the Senior Vice President and Chief Information Officer of AFLAC, Inc., a leading provider of supplemental insurance. During the last five years, Mr. Shields has served as Director of the IT practice at RE Nolan, a management-consulting firm that caters to the insurance, health care, technology, and banking industries. He also currently serves as the Chief Information Officer of FirstCare Health Plans, a provider of comprehensive health care services to health maintenance organization ("HMO") subscribers that also owns Southwest Life & Health Insurance Company which offers the FirstCare PPO and life insurance products. Mr. Shields brings to the Board expertise in technology, cybersecurity and insurance operating systems, having significant experience directing these areas throughout his career.

On February 27, 2017, the Company announced the appointment of Frank Keating as a director. Governor Keating is a partner at the law firm of Holland & Knight, LLP. Governor Keating has held significant leadership positions in both the public and private sectors. In addition to serving as Governor of Oklahoma, his career included serving as CEO of the American Bankers Association and prior to that President and CEO of the American Council of Life Insurers, the trade association for the life insurance and retirement security industry. He also has served as Assistant Secretary of the Treasury and Associate Attorney General under President Ronald Reagan. He was later General Counsel and Acting Deputy Secretary for the Department of Housing and Urban Development ("HUD") under President George H.W. Bush. During his tenure at the Treasury Department and HUD, he worked on significant issues affecting the banking, insurance and the financial services industries. His law enforcement career included serving as the U.S. Attorney for the Northern District of Oklahoma and as an FBI agent.

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Strategic Initiatives

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

The Company reviews its investment strategies on a quarterly basis 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 diversified investment strategy to improve returns on 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 month period ended March 31, 2017, compared to the same period in 2016 were:


•	Insurance premiums increased slightly for the three month period ended March 31, 2017 to $45.4 million from $44.4 million for the corresponding period in 2016, an increase of 2.1% driven by increases in first year and renewal premiums in both our Life and Home Service segments.


•	Net investment income increased 8.6% for the three month period ended March 31, 2017, compared to the corresponding period in 2016. The average yield on the consolidated portfolio as of the three months ended March 31, 2017 decreased to an annualized rate of 4.22% down from 4.29% for the same period in 2016.


•	A realized gain was recorded for the three month period ended March 31, 2017 of $1.1 million related to the sale of our Markham building in Little Rock Arkansas. Other-than-temporary impairments were recorded for the three month period ended March 31, 2016 totaling $1.9 million related to one available-for-sale fixed maturity security.


•	Claims and surrenders expense increased 14.3% for the three month period ended March 31, 2017 compared to 2016, primarily due to an increase in surrender benefits in the life segment in 2017 compared to 2016 levels.


•	General expenses have increased 10.7% for the three months ended March 31, 2017 due primarily to additional audit fees related to the 2016 audit, higher legal and consulting fees and higher permanent and temporary salaries, somewhat offset by a decrease in our 7702/72(s) tax compliance best estimate liability.

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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.



	Three Months Ended March 31,
	2017					2016
	Amount of Insurance Issued		Number of Policies Issued	Average Policy Face Amount Issued		Amount of Insurance Issued		Number of Policies Issued	Average Policy Face Amount Issued
Life	$	72,965,275	1,298	$	56,214	$	68,290,882	1,288	$	53,021
Home Service	50,864,113		7,429	6,847		47,938,579		7,215	6,644

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Note: All discussions below compare or state results for the three-month periods ended March 31, 2017 compared to the three-month periods ended March 31, 2016.

Consolidated Results of Operations

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

Revenues

Revenues are generated primarily by insurance premiums and investment income on invested assets.



	Three Months Ended
	March 31,
	2017		2016
	(In thousands)
Revenues:
Premiums:
Life insurance	$	43,804	42,773
Accident and health insurance	328		390
Property insurance	1,249		1,276
Net investment income	12,739		11,731
Realized investment losses, net	1,263		(1,796	)
Other income	198		151
Total revenues	$	59,581	54,525

Premium Income. Premium income derived from life, accident and health, and property insurance sales increased 2.1% for the three month period ended March 31, 2017 compared to the same period ended March 31, 2016. The increase is driven by increases in first year and renewal premiums in both our Life and Home Service segments.

Net investment income performance is summarized as follows.



	March 31,			December 31,		March 31,
	2017			2016		2016
	(In thousands, except for %)
Net investment income, annualized	$	50,956		48,560		46,924
Average invested assets, at amortized cost	1,208,149			1,133,705		1,092,876
Annualized yield on average invested assets	4.22		%	4.28	%	4.29	%

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

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Investment income from debt securities accounted for approximately 87.5% of total investment income for the three months ended March 31, 2017.



	Three Months Ended
	March 31,
	2017			2016
	(In thousands)
Gross investment income:
Fixed maturity securities	$	11,505		10,621
Equity securities	192			124
Mortgage loans	3			9
Policy loans	1,387			1,265
Long-term investments	51			51
Other investment income	7			11
Total investment income	13,145			12,081
Investment expenses	(406		)	(350	)
Net investment income	$	12,739		11,731

The consolidated invested asset portfolio has increased approximately 1.7% from year end 2016 to March 31, 2017 with investments in the fixed maturity securities portfolio accounting for the most significant increase in investment income. In addition, the increase in policy loans, which represents policyholders utilizing their accumulated policy cash value, contributed to the increase in investment income.

Realized Investment Gains (Losses), Net. A realized gain was recorded for the three month period ended March 31, 2017 of $1.1 million related to the sale of our Markham building in Little Rock Arkansas. Other-than-temporary impairments were recorded for the three month period ended March 31, 2016 totaling $1.9 million related to one available-for-sale fixed maturity security.

Benefits and Expenses



	Three Months Ended
	March 31,
	2017			2016
	(In thousands)
Benefits and expenses:
Insurance benefits paid or provided:
Claims and surrenders	$	21,724		19,005
Increase in future policy benefit reserves	14,536			15,726
Policyholders' dividends	1,304			1,549
Total insurance benefits paid or provided	37,564			36,280
Commissions	9,925			9,468
Other general expenses	10,156			9,174
Capitalization of deferred policy acquisition costs	(6,901		)	(6,264	)
Amortization of deferred policy acquisition costs	7,375			6,631
Amortization of cost of customer relationships acquired	519			545
Total benefits and expenses	$	58,638		55,834

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



	Three Months Ended
	March 31,
	2017		2016
	(In thousands)
Death claims	$	6,304	5,973
Surrender benefits	9,830		7,941
Endowments	3,607		3,716
Matured endowments	649		210
Property claims	622		450
Accident and health benefits	92		97
Other policy benefits	620		618
Total claims and surrenders	$	21,724	19,005


•	Death claims increased 5.5% for the three months ended March 31, 2017 compared to the same period in 2016. Mortality experience is closely monitored by the Company and the activity is within expected levels.


•	Surrenders increased 23.8% for the three months ended March 31, 2017 compared to 2016 primarily due to activity in the life insurance segment. This increased surrender activity is in the later durations after the surrender charges are reduced or for periods in which the surrender charges have concluded. This is due to a maturing book of business.

Increase in Future Policy Benefit Reserves. The change in future policy benefit reserves for the three months ended March 31, 2017, compared to the same period in 2016, is primarily due to the increase in surrenders noted above.

Policyholder Dividends. The Company issues long duration participating policies to foreign residents that are expected to pay dividends to policyholders based upon actual experience. Initially, policyholder dividend scales are factored into the guaranteed premiums at the time the product is developed, based on expected future experience and desired profit goals. As actual and expected experience develops over time, it can become necessary to adjust dividends, as we did at the end of 2015, in order to maintain our original expected level of long term product profitability. This dividend action taken in 2015 affected some policies immediately, and will affect all policies in the future relative to the original dividend scales. Thus, we expect dividend expense 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 months ended March 31, 2017 fluctuated directly in relation to the increase in first year and renewal premiums compared to premium levels for the three months ended March 31, 2016.

Other General Expenses. Expenses increased for the three months ended March 31, 2017 due primarily to additional audit fees related to the 2016 audit, higher legal and consulting fees and higher permanent and temporary salaries, somewhat offset by a decrease in our 7702/72(s) tax compliance best estimate liability.

Capitalized and Amortized Deferred Policy Acquisition Costs. Costs capitalized 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 increase for the three months ended March 31, 2017, compared to the same period in 2016 was the result of an increase in first year premium production in the current period, which increased capitalized amounts. Commissions paid on renewal premiums are significantly lower than those paid on first year business.

Amortization for the three months ended March 31, 2017, increased compared to the same period in 2016 due to higher surrender activity in 2017. Amortization of deferred policy acquisition costs is impacted by persistency and may fluctuate from year to year.

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Federal Income Tax. The effective tax rate was (118.0)% and (82.7)% for the three months ended March 31, 2017 and 2016, respectively. Additionally there is $0.8 million of tax benefit related to an uncertain tax position in the three months ended March 31, 2017. 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 9 - Income Taxes in the consolidated financial statements for further discussion.

Segment Operations

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



	Three Months Ended
	March 31,
	2017			2016
	(In thousands)
Life Insurance	$	1,679		(426	)
Home Service Insurance	260			(379	)
Other Non-Insurance Enterprises	(996		)	(504	)
Total	$	943		(1,309	)

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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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
	March 31,
	2017		2016
	(In thousands)
Country
Venezuela	$	6,766	7,031
Colombia	6,386		5,971
Taiwan	5,107		4,612
Ecuador	3,562		3,337
Brazil	2,090		1,867
Other Non-U.S.	8,593		8,967
Total	$	32,504	31,785

We continue to report strong first year and renewal premiums in our top producing countries as noted above, however this business is dependent on our clients having access to U.S. dollars. Our international business and premium collections could be impacted by our inability to comply with current or future foreign laws or regulations applicable to the Company or our independent consultants in the countries from which we accept applications as well as by marketing or operational changes made by the Company to comply with those laws or regulations. Our international business may also be affected by economic or other events in foreign countries in which our policies are marketed. Venezuela, for example, is continuing to experience civil unrest due to local demonstrations against crime, corruption and soaring inflation. See "Item 1A. Risk Factors" for additional information.

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 business results from blocks of business

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March 31, 2017

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
	March 31,
	2017		2016
	(In thousands)
State
Texas	$	476	531
Indiana	314		298
Florida	143		137
Missouri	113		116
Kentucky	83		99
Other States	511		441
Total	$	1,640	1,622

A number of domestic life insurance companies we acquired had blocks of accident and health insurance policies, which we did not consider to be a core part of our business. We have ceded the majority of our accident and health insurance business to an unaffiliated insurance company under a coinsurance agreement.

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The results of operations for the life insurance segment for the periods indicated are as follows.



		Three Months Ended
		March 31,
		2017		2016
	(In thousands)
Revenue:
Premiums	$	33,563		32,848
Net investment income		9,131		7,954
Realized investment gains (losses), net		77		(868	)
Other income		118		115
Total revenue		42,889		40,049
Benefits and expenses:
Insurance benefits paid or provided:
Claims and surrenders		15,676		13,464
Increase in future policy benefit reserves		13,260		14,540
Policyholders' dividends		1,295		1,536
Total insurance benefits paid or provided		30,231		29,540
Commissions		6,007		5,803
Other general expenses		3,872		4,084
Capitalization of deferred policy acquisition costs		(5,378	)	(4,926	)
Amortization of deferred policy acquisition costs		6,306		5,804
Amortization of cost of customer relationships acquired		172		170
Total benefits and expenses		41,210		40,475
Income (loss) before income tax expense	$	1,679		(426	)

Premiums. Premium revenues increased for the three month period ended March 31, 2017, compared to the same period in 2016 due primarily to higher new and renewal international business, with higher renewal business showing strong persistency as this block of insurance ages. First year premium revenues for the three months ended March 31, 2017, 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 81.6% of total new first year premiums for the three months ended March 31, 2017.

Life insurance premium breakout is detailed below.



		Three Months Ended
		March 31,
		2017	2016
	(In thousands)
Premiums:
First year	$	4,173	3,971
Renewal		29,390	28,877
Total premiums	$	33,563	32,848

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Net Investment Income. Net investment income increased primarily due to the growth in average invested assets.



	Three Months Ended			Year Ended		Three Months Ended
	March 31,			December 31,		March 31,
	2017			2016		2016
	(In thousands, except for %)
Net investment income, annualized	$	36,524		33,350		31,816
Average invested assets, at amortized cost	862,621			779,592		728,950
Annualized yield on average invested assets	4.23		%	4.28	%	4.36	%

Realized Investment Gains (Losses), Net. Realized investment gains recorded for the three month period ended March 31, 2017 were negligible. Other-than-temporary impairments were recorded for the three month period ended March 31, 2016 totaling $959,000 related to one available-for-sale fixed maturity.

Claims and Surrenders. These amounts fluctuate from period to period but were within anticipated ranges based upon management's expectations.



		Three Months Ended
		March 31,
		2017	2016
	(In thousands)
Death claims	$	1,795	1,730
Surrender benefits		9,112	7,234
Endowment benefits		3,598	3,710
Matured endowments		502	92
Accident and health benefits		52	84
Other policy benefits		617	614
Total claims and surrenders	$	15,676	13,464


•	Death claims expense was relatively flat for the three months ended March 31, 2017 compared with the same period in 2016. Mortality experience is closely monitored by the Company as a key performance indicator and these amounts were within expected levels.


•	Surrenders increased in the three month period ended March 31, 2017 by 26% compared to 2016. The majority of policy surrender benefits paid is attributable to our international business and is in the later durations after the surrender charges are reduced or for periods in which the surrender charges have concluded. This is due to a maturing book of business.


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


•	Matured endowments increased as this block of business increases, persists and policies begin to reach maturity.


•	Other policy benefits resulted primarily from interest paid on premium deposits and policy benefit accumulations.

Increase in Future Policy Benefit Reserves. The change in policy benefit reserves decreased for the three months ended March 31, 2017 compared to the same period in 2016, primarily due to the increase in surrenders noted above.

Commissions. Commission expense increased for the three months ended March 31, 2017, compared to the same period in 2016. This expense fluctuates directly with new premium revenues and commission rates paid are higher on first year premium sales, which were up for the three months ended March 31, 2017, compared to the same period in 2016. Renewal premiums for the three months, for which we pay commissions at lower rates, were also up from the prior year.

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Other General Expenses. These expenses are allocated by segment, based upon an annual expense study performed by the Company. Expenses were down for the three months ended March 31, 2017, compared to the same period in 2016 due primarily to a reduction in our best estimate liability for our tax compliance issue offset somewhat by additional audit fees related to the 2016 audit.

Capitalization of Deferred Policy Acquisition Costs ("DAC"). Capitalized costs fluctuate in direct relation to commissions, increasing for the three months ended March 31, 2017, based upon first year and renewal premiums and commissions paid compared to 2016.

Amortization of Deferred Policy Acquisition Costs. Amortization for the three months ended March 31, 2017 increased and was impacted by higher surrenders in this segment. As previously noted, persistency is monitored closely by the Company and was within expectations.

Home Service Insurance

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

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



		Three Months Ended
		March 31,
		2017	2016
	(In thousands)
State
Louisiana	$	10,652	10,586
Mississippi		701	606
Arkansas		458	406
Other States		219	217
Total	$	12,030	11,815

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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March 31, 2017

The results of operations for the home service insurance segment for the periods indicated are as follows.



		Three Months Ended
		March 31,
		2017		2016
	(In thousands)
Revenue:
Premiums	$	11,818		11,591
Net investment income		3,259		3,414
Realized investment gains (losses), net		1,186		(928	)
Other income		(1	)	3
Total revenue		16,262		14,080
Benefits and expenses:
Insurance benefits paid or provided:
Claims and surrenders		6,048		5,541
Increase in future policy benefit reserves		1,276		1,186
Policyholders' dividends		9		13
Total insurance benefits paid or provided		7,333		6,740
Commissions		3,918		3,665
Other general expenses		4,858		4,190
Capitalization of deferred policy acquisition costs		(1,523	)	(1,338	)
Amortization of deferred policy acquisition costs		1,069		827
Amortization of cost of customer relationships acquired		347		375
Total benefits and expenses		16,002		14,459
Income (loss) before income tax expense	$	260		(379	)

Premiums. Premiums were up slightly for the three month period ended March 31, 2017, compared to 2016, as first year premiums were up 3.7% and renewal premiums were up 1.7%.

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



	Three Months Ended			Year Ended		Three Months Ended
	March 31,			December 31,		March 31,
	2017			2016		2016
	(In thousands, except for %)
Net investment income, annualized	$	13,036		13,705		13,656
Average invested assets, at amortized cost	289,792			294,132		301,818
Annualized yield on average invested assets	4.50		%	4.66	%	4.52	%

Realized Investment Gains (Losses), Net. A realized gain was recorded for the three month period ended March 31, 2017 of $1.1 million related to the sale of our Markham building in Little Rock Arkansas. Other-than-temporary impairments were recorded for the three month period ended March 31, 2016 totaling $959,000 related to one available-for-sale fixed maturity security.

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March 31, 2017

Claims and Surrenders. Claims and surrenders increased for the three months ended March 31, 2017, compared to the same periods in 2016, based upon reported claims compared to the prior year, but were within expected ranges.



		Three Months Ended
		March 31,
		2017	2016
	(In thousands)
Death claims	$	4,509	4,243
Surrender benefits		718	707
Endowment benefits		9	5
Matured endowments		147	118
Property claims		622	450
Accident and health benefits		40	13
Other policy benefits		3	5
Total claims and surrenders	$	6,048	5,541


•	Death claims expense fluctuates based upon reported claims. We experienced a larger number of reported claims in the three months ended March 31, 2017. Mortality experience is closely monitored by the Company as a key performance indicator and amounts were within expected levels.


•	Surrender benefits increased slightly for the three months ended in 2017 compared to the same period in 2016. Management is not aware of any unusual surrender activity, but will continue to monitor for any developing trends.


•	Property claims increased 38.2% for the three months ended March 31, 2017 as we experienced more weather-related claims in 2017, primarily due to tornadoes in Louisiana.

Increase in Future Policy Benefit Reserves. The Company recorded a slight increase in future policy benefit reserves for the three months ended March 31, 2017, compared to the corresponding period in 2016.

Commissions. Commission expense increased for the three months ended March 31, 2017, compared to the same period in 2016, consistent with premium collections.

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

Capitalization of Deferred Policy Acquisition Costs ("DAC"). Capitalized costs increased for the three months ended March 31, 2017, as commission expense increased during the period. DAC capitalization is directly correlated to fluctuations in new business and commissions.

Amortization of Deferred Policy Acquisition Costs. Amortization for the three months ended March 31, 2017 fluctuated compared to the corresponding period in 2016 as this segment experienced persistency changes compared to the prior year, which results in lower or high amortization.

Other Non-Insurance Enterprises

This segment represents the administrative support entities to the insurance operations whose revenues are primarily intercompany and have been eliminated in consolidation under GAAP. The segment loss reported for the three months of 2017 and 2016 is typical since the elimination of intercompany revenue is its primary source of revenue.

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Investments

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

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.



	March 31, 2017			December 31, 2016
	Carrying Value		% of Total Carrying Value	Carrying Value		% of Total Carrying Value
	(In thousands)			(In thousands)
Marketable debt securities:
U.S. Treasury and U.S. Government-sponsored enterprises	$	22,678	1.8	$	22,695	1.8
States and political subdivisions	805,459		62.8	797,240		63.4
Corporate	321,395		25.0	306,134		24.4
Mortgage-backed (1)	2,334		0.2	2,477		0.2
Foreign governments	126		—	126		—
Total fixed maturity securities	1,151,992		89.8	1,128,672		89.8
Short-term investments	502		—	508		—
Cash and cash equivalents	41,151		3.2	35,510		2.8
Other investments:
Policy loans	67,616		5.3	66,672		5.3
Equity securities	16,090		1.2	18,159		1.4
Mortgage loans	200		—	232		—
Real estate held for investment	5,894		0.5	5,919		0.5
Real estate held for investment	—		—	1,939		0.2
Other long-term investments	38		—	38		—
Total cash, cash equivalents and investments	$	1,283,483	100.0	$	1,257,649	100.0

⁽¹⁾ Includes $2.1 million and $2.5 million of U.S. Government-sponsored enterprises at March 31, 2017 and December 31, 2016, respectively.

Cash and cash equivalents increased as of March 31, 2017 due to timing of cash inflows and investment of cash into marketable securities.

The held-to-maturity portfolio as of March 31, 2017 represented 21.2% of the total fixed maturity securities owned based upon carrying values, with the remaining 78.8% 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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March 31, 2017

The following table sets forth the distribution of the credit ratings of our portfolio of fixed maturity securities by carrying value as of March 31, 2017 and December 31, 2016.



	March 31, 2017			December 31, 2016
	Carrying Value		% of Total Carrying Value	Carrying Value		% of Total Carrying Value
	(In thousands)			(In thousands)
AAA	$	97,125	8.4	$	82,676	7.8
AA	547,522		47.5	529,525		50.0
A	257,523		22.4	260,110		24.6
BBB	216,787		18.8	162,435		15.3
BB and other	33,035		2.9	24,519		2.3
Totals	$	1,151,992	100.0	$	1,059,265	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 March 31, 2017. We do have indirect exposure in one bond mutual fund holding, but the amount is deemed immaterial to the current investment holdings and consolidated financials.

As of March 31, 2017, the Company held municipal securities that include third party guarantees. Detailed below is a presentation by NRSRO rating of our municipal holdings by funding type.

Municipals shown including third party guarantees



	March 31, 2017
	General Obligation			Special Revenue		Other		Total		% Based on
	Fair Value		Amortized Cost	Fair Value	Amortized Cost	Fair Value	Amortized Cost	Fair Value	Amortized Cost	Amortized Cost
	(In thousands)
AAA	$	61,318	59,387	33,673	33,058	—	—	94,991	92,445	11.7
AA	181,524		177,367	288,839	281,248	26,023	25,392	496,386	484,007	61.0
A	19,626		19,339	144,191	140,127	10,844	10,394	174,661	169,860	21.4
BBB	7,860		8,281	30,214	29,557	1,997	2,017	40,071	39,855	5.0
BB and other	2,772		3,727	3,050	3,469		—	5,822	7,196	0.9
Total	$	273,100	268,101	499,967	487,459	38,864	37,803	811,931	793,363	100.0

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March 31, 2017

Municipals shown excluding third party guarantees



	March 31, 2017
	General Obligation			Special Revenue		Other		Total		% Based on
	Fair Value		Amortized Cost	Fair Value	Amortized Cost	Fair Value	Amortized Cost	Fair Value	Amortized Cost	Amortized Cost
	(In thousands)
AAA	$	35,580	35,281	12,375	12,391	—	—	47,955	47,672	6.0
AA	138,716		135,154	236,483	229,547	20,323	19,635	395,522	384,336	48.4
A	41,568		40,385	153,115	149,198	9,754	9,340	204,437	198,923	25.1
BBB	11,612		11,919	33,204	32,518	—	—	44,816	44,437	5.6
BB and other	45,624		45,362	64,790	63,805	8,787	8,828	119,201	117,995	14.9
Total	$	273,100	268,101	499,967	487,459	38,864	37,803	811,931	793,363	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	$	165,574	170,661	21.0	%

Education	112,612		116,035	14.3	%

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March 31, 2017

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 March 31, 2017.



	March 31, 2017
	General Obligation			Special Revenue		Other		Total
	Fair Value		Amortized Cost	Fair Value	Amortized Cost	Fair Value	Amortized Cost	Fair Value	Amortized Cost
	(In thousands)
Texas securities including third party guarantees
AAA	$	59,247	57,374	15,682	15,192	—	—	74,929	72,566
AA	55,292		54,361	34,512	33,697	—	—	89,804	88,058
A	199		199	16,017	15,461	—	—	16,216	15,660
BBB	—		—	7,225	6,718	—	—	7,225	6,718
BB and other	—		—	1,675	2,101	—	—	1,675	2,101
Total	$	114,738	111,934	75,111	73,169	—	—	189,849	185,103
Texas securities excluding third party guarantees
AAA	$	34,599	34,298	1,512	1,512	—	—	36,111	35,810
AA	58,809		56,758	31,900	30,901	—	—	90,709	87,659
A	8,879		8,645	23,541	22,682	—	—	32,420	31,327
BBB	199		199	10,375	9,909	—	—	10,574	10,108
BB and other	12,252		12,034	7,783	8,165	—	—	20,035	20,199
Total	$	114,738	111,934	75,111	73,169	—	—	189,849	185,103



Louisiana securities including third party guarantees
AA	$	8,005	7,892	15,768	15,113	—	—	23,773	23,005
A	5,308		5,146	9,084	8,956	—	—	14,392	14,102
BBB	—		—	376	377	—	—	376	377
BB and other	—		—	363	357	—	—	363	357
Total	$	13,313	13,038	25,591	24,803	—	—	38,904	37,841
Louisiana securities excluding third party guarantees
AA	$	10,596	10,335	11,799	11,416	—	—	22,395	21,751
A	2,209		2,179	10,288	10,050	—	—	12,497	12,229
BBB	—		—	1,062	1,005	—	—	1,062	1,005
BB and other	508		524	2,442	2,332	—	—	2,950	2,856
Total	$	13,313	13,038	25,591	24,803	—	—	38,904	37,841

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March 31, 2017



	March 31, 2017
	General Obligation			Special Revenue		Other		Total
	Fair Value		Amortized Cost	Fair Value	Amortized Cost	Fair Value	Amortized Cost	Fair Value	Amortized Cost
	(In thousands)
Florida securities including third party guarantees
AAA	$	538	517	3,765	3,620	—	—	4,303	4,137
AA	—		—	58,336	57,262	3,837	3,876	62,173	61,138
A	—		—	13,220	12,854	10,844	10,394	24,064	23,248
BBB	—		—	—	—	—	—	—	—
BB and other	—		—	486	480	—	—	486	480
Total	$	538	517	75,807	74,216	14,681	14,270	91,026	89,003

Florida securities excluding third party guarantees
AAA	$	—	—	1,063	1,043	—	—	1,063	1,043
AA	538		517	41,747	40,839	3,292	3,329	45,577	44,685
A	—		—	28,969	28,366	9,754	9,340	38,723	37,706
BBB	—		—	—	—	—	—	—	—
BB and other	—		—	4,028	3,968	1,635	1,601	5,663	5,569
Total	$	538	517	75,807	74,216	14,681	14,270	91,026	89,003

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 March 31, 2017, total holdings of municipal securities in Louisiana represented 4.8% of all municipal holdings based upon fair value. The Company also holds 23.4% of its municipal holdings in Texas issuers. The Company also holds 11.2% 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 March 31, 2017.

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

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March 31, 2017

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 recognized other-than-temporary impairments of $17,000 for the three months ended March 31, 2017 for equity securities that were in an unrealized loss position for greater than one year. The Company recognized an other-than-temporary impairment of $1.9 million for the three months ended March 31, 2016.

Liquidity and Capital Resources

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

Liquidity requirements of the Company are met primarily by funds provided from operations. Premium deposits and revenues, investment income and investment maturities are the primary sources of funds, while investment purchases, policy benefits, and operating expenses are the primary uses of funds. We historically have not had to liquidate investments to provide cash flow and did not do so during the first three months of 2017. Our investments as of March 31, 2017, consist of 73.0% 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 $21.6 million and $21.0 million for the three months ended March 31, 2017 and 2016, respectively. We have traditionally also had significant cash flows from both scheduled and unscheduled investment security maturities, redemptions, and prepayments. These cash flows, for the most part, are reinvested in fixed income securities. Net cash outflows from investing activities totaled $17.3 million and $59.1 million for the three months ended March 31, 2017 and 2016, respectively. The investing activities fluctuate from period to period due to timing of securities activities such as calls and maturities and reinvestment of those funds.

In 2015, we determined that a portion of the life insurance and annuity policies issued by our subsidiary insurance companies failed to qualify for the favorable U.S. federal income tax treatment afforded by Sections 7702 and 72(s) of the Internal Revenue Code ("IRC") of 1986. As 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 $7.4 million to $38.8 million, net of tax. This estimate and range includes projected toll charges and fees payable to the IRS, as well as estimated increased payout obligations to current and former holders of non-compliant domestic life insurance policies expected to result from remediation of those policies. The amount of our liabilities and expenses depends on a number of uncertainties, including the number of prior tax years for which we may be liable to the IRS, the number of domestic life insurance policies we will be required to remediate, and the methodology applicable to the calculation of taxable benefits under non-compliant policies. Given the range of potential outcomes and the significant variables assumed in establishing our estimates, actual amounts incurred may exceed our reserve and also could exceed the high end of our estimated range of liabilities and expenses.

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March 31, 2017

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

Dividends are declared and paid from time to time from the insurance affiliates as determined by their respective boards.

The NAIC has established minimum capital requirements in the form of Risk-Based Capital ("RBC"). RBC factors the type of business written by an insurance company, the quality of its assets, and various other aspects of an insurance company's business to develop a minimum level of capital called "authorized control level risk-based capital" and compares this level to adjusted statutory capital that includes capital and surplus as reported under statutory accounting principles, plus certain investment reserves. Should the ratio of adjusted statutory capital to control level RBC fall below 200%, a series of remedial actions by the affected company would be required. Capital balances could be impacted by this tax compliance issue for the insurance companies affected. The holding company would anticipate funding the life companies as needed to keep capital amounts within required levels.

All insurance subsidiaries were above the RBC minimums at March 31, 2017.

Contractual Obligations and Off-balance Sheet Arrangements

There have been no material changes in contractual obligations from those reported in the Company's Annual Report on Form 10-K for the year ended December 31, 2016. The Company does not have off-balance sheet arrangements at March 31, 2017. We do not utilize special purpose entities as investment vehicles, nor are there any such entities in which we have an investment that engage in speculative activities of any nature, and we do not use such investments to hedge our investment positions.

Parent Company Liquidity and Capital Resources

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

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 months ended March 31, 2017 and 2016. We believe that the accounting policies set forth in the Notes to our Consolidated Financial Statements and “Critical Accounting Policies and Estimates” in the Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2016 continue to describe the significant judgments and estimates used in the preparation of our consolidated financial statements.

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March 31, 2017

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.



	March 31, 2017				December 31, 2016
	Amortized Cost		Fair Value	Net Unrealized Gains(Losses)	Amortized Cost	Fair Value	Net Unrealized Gains
	(In thousands)
Fixed maturities, available-for-sale	$	881,102	907,216	26,114	860,473	881,668	21,195
Fixed maturities, held-to-maturity	244,776		251,700	6,924	247,004	252,545	5,541
Short-term investments	502		502	—	508	508	—
Total fixed maturities	$	1,126,380	1,159,418	33,038	1,107,985	1,134,721	26,736
Total equity securities	$	15,620	16,090	470	17,765	18,159	394

Market Risk Related to Interest Rates

Our exposure to interest rate changes results from our significant holdings of fixed maturity investments, which comprised 92.7% of our investment portfolio based on carrying value as of March 31, 2017. These investments are mainly exposed to changes in U.S. Treasury rates. Our fixed maturity investments include U.S. Government-sponsored enterprises, U.S. Government bonds, securities issued by government agencies, municipal bonds and corporate bonds.

To manage interest rate risk, we perform periodic projections of asset and liability cash flows to evaluate the potential sensitivity of our investments and liabilities. We assess interest rate sensitivity annually with respect to our available-for-sale fixed maturities investments using hypothetical test scenarios that assume either upward or downward shifts in the prevailing interest rates. The changes in fair values of our debt and equity securities as of March 31, 2017 were within the expected range of this analysis.

Changes in interest rates typically have a sizable effect on the fair values of our debt and equity securities. The interest rate of the ten-year U.S. Treasury bond decreased to 2.40% during the quarter ended March 31, 2017, from 2.45% at December 31, 2016. Net unrealized gains on fixed maturity securities totaled $33.0 million at March 31, 2017, compared to $26.7 million at December 31, 2016.

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

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March 31, 2017

There are no fixed maturities or other investments classified as trading instruments. Approximately 78.3% of fixed maturities were held in available-for-sale and 21.7% in held-to-maturity based upon fair value at March 31, 2017. At March 31, 2017 and December 31, 2016, we had no investments in derivative instruments, nor did we have any subprime or collateralized debt obligation risk.

Market Risk Related to Equity Prices

Changes in the level or volatility of equity prices affect the value of equity securities we hold as investments. Our equity investments portfolio represented 1.3% of our total investments at March 31, 2017, with 95.5% 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 March 31, 2017, there were no changes in the Company's internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company's internal controls over financial reporting (as defined in rules 13a-15(f) and 15d-15(f) under the Exchange Act). The Company is in the process of remediating the material weaknesses identified in our Annual Report on Form 10-K for the year ended December 31, 2016.

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PART II. OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

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

In the normal course of business, the Company is subject to various legal and regulatory actions which are immaterial to the Company's financial statements. For more information about the risks related to litigation and regulatory actions, please see the risk factor titled “We are a defendant in lawsuits, which may adversely affect our financial condition and detract from the time our management is able to devote to our business, and we are subject to risks related to litigation and regulatory matters.” in Item 1A. Risk Factors.

Item 1A. RISK FACTORS

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

Risks Relating to Our Business

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

The majority of our direct premiums, approximately 73% in 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. Our Company’s future sales and financial results depend upon avoiding significant regulatory restraints on receiving insurance policy applications and premiums from, and issuing insurance policies to, residents outside of the United States.

Currency control laws or other currency exchange restrictions in foreign countries could materially adversely affect our revenues by imposing restrictions on asset transfers outside of a country where our insureds reside. Difficulties in transferring funds from or converting currencies to U.S. dollars in certain countries could prevent our insureds in those countries from purchasing or paying premiums on our policies. There can be no assurance that such restrictions will not be imposed and that our revenues, results of operations and financial condition will not be materially adversely affected if they do occur.

We also face risks associated with the application of foreign laws to our sales of policies to residents in foreign countries. Generally, all foreign countries in which we offer insurance products require a license or other authority to conduct insurance business in that country. Some of these countries also require that local regulatory authorities approve the terms of any insurance product sold to

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residents of that country. We have never sought to qualify to do business in any foreign country and have never submitted the insurance policies that we issue to residents of foreign countries for approval by any foreign or domestic insurance regulatory agency. Traditionally, we have sought to address risks associated with the potential application of foreign laws to our sales of insurance policies in our foreign markets by, among other things, not locating any of our offices or assets in foreign countries, selling policies only through independent consultants rather than our own employees, requiring that all applications for insurance be submitted to and accepted only in our offices in the U.S., and requiring that policy premiums be paid to us only in U.S. Dollars. We rely on our independent consultants to comply with laws applicable to them in marketing our insurance products in their respective countries.

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

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

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

We previously announced that we determined that a portion of the life and annuity insurance policies issued by our subsidiary insurance companies failed to qualify for the favorable U.S. federal income tax treatment afforded by Sections 7702 and 72(s) of the Internal Revenue Code ("IRC") of 1986. To the extent that these policies had unreported income build-up, we may be liable to the IRS for failure to withhold taxes or to notify policyholders of their obligation to pay taxes directly to the IRS. We have undertaken an analysis of our potential liability to the IRS arising from this matter, as well as other expenses we may incur to remediate (i.e., conform to the requirements of the IRS) certain previously issued domestic life insurance and annuity policies and to address any missed reporting for policies issued to non-U.S. citizens and have established a best estimate reserve of $12.8 million, net of tax as of December 31, 2016 for probable liabilities and expenses. The probability weighted range of financial estimates relative to this issue is $7.4 million to $38.8 million, net of tax. This estimated range includes projected toll charges and fees payable to the IRS, as well as estimated increased payout obligations to current and former holders of non-compliant domestic life insurance policies expected to result from remediation of those policies. The amount of our liabilities and expenses depends on a number of uncertainties, including the number of prior tax years for which we may be liable to the IRS, the number of domestic life insurance policies we will be required to remediate, the methodology applicable to the calculation of taxable benefits under non-compliant policies and the amount of time and resources we will require from external advisors who are assisting us with resolving these issues. Given the range of potential outcomes and the significant variables assumed in establishing our estimates, actual amounts incurred may exceed our reserve and also could exceed the high end of our estimated range of liabilities and expenses. To the extent the amount reserved is insufficient to meet the actual amount of our liabilities and expenses, or if our estimates of those liabilities and expenses change in the future, our financial condition and results of operations may be materially adversely affected.

The Company currently expects to submit required filings with the IRS in 2017 to address all affected policies, though there can be no assurance that this process will be completed within this anticipated timeframe.

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We face financial and capital market risks in our operations.

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

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

Changes in market interest rates may significantly affect our profitability.

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

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

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

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

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

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

In particular, at March 31, 2017, fixed maturities represented $1,152.0 million, or 92.7% of our total investments of $1,242.3 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

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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 March 31, 2017, approximately 97.1% of our fixed maturities were investment grade with 78.3% rated A or above, all of our fixed maturities are subject to credit risk. If any of the issuers of our fixed maturities suffer financial setbacks, the ratings on the fixed maturities could be downgraded (with a concurrent decrease in fair value) and, in a worst-case scenario, the issuer could default on its financial obligations. If the issuer defaults, we could have realized losses associated with the impairment of the securities.

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

U.S. GAAP requires that when the fair value of any of our invested assets declines and the decline is deemed to be other-than-temporary, we recognize a loss in either other comprehensive income or in our statement of income based on certain criteria in the period for which the determination is made. The determination of the fair value of certain invested assets, particularly those that do not trade on a regular basis, requires an assessment of available data and the use of assumptions and estimates. Once it is determined that the fair value of an asset is below its carrying value, we must determine whether the decline in fair value is other-than-temporary, which is based on subjective factors and involves a variety of assumptions and estimates.

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

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

Fixed maturity and equity securities classified as available-for-sale are reported at fair value. Unrealized gains and losses on available-for-sale securities are recognized as a component of other comprehensive income (loss) and are, therefore, excluded from our net income. Our total gross unrealized losses on our available-for-sale securities portfolio at December 31, 2016 were $9.4 million. The accumulated change in estimated fair value of these securities is recognized in net income when the gain or loss is realized upon sale of the security or in the event that the decline in estimated fair value is determined to be other-than-temporary and an impairment charge to earnings is taken. Realized losses or impairments may have a material adverse effect on our net income in a particular quarterly or annual period.

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

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

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

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

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

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

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

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

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

At March 31, 2017, we had $167.3 million of deferred policy acquisition costs, or DAC. DAC represents costs that vary with and are primarily related to the successful sale and issuance of our insurance policies and are deferred and amortized over the estimated life of the related insurance policies. These costs include commissions in excess of ultimate renewal commissions, solicitation and printing costs, sales material costs and some support costs, such as underwriting and contract and policy issuance expenses. Under U.S. GAAP, DAC is amortized to income over the lives of the underlying policies, in relation to the premium-paying period of the policies.

In addition, when we acquire a block of insurance policies, we assign a portion of the purchase price to the right to receive future net cash flows from existing insurance and investment contracts and policies. This intangible asset, called the cost of customer relationships acquired, or CCRA, represents the actuarially estimated present value of future cash flows from the acquired

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policies. At March 31, 2017, we had $18.9 million of CCRA. We amortize the value of this intangible asset in a manner similar to the amortization of DAC.

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

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

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 March 31, 2017.

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

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

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

In 2016, the Company's Home Service Segment failed the first step and thus the second impairment step had to be performed. The Company's Home Service Segment passed step two, so the goodwill value for the Home Service Segment of $4.6 million was not impaired.

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

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

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

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

As part of this conversion, the Company could identify additional differences that will be evaluated for financial reporting purposes. The conversion to the new system is expected to be completed in 2017.

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

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

•disputes over insurance coverage or claims adjudication;

•regulatory compliance with state laws, including insurance and securities regulations;


•	regulatory compliance with U.S. federal securities laws, tax, anti-money laundering, bank secrecy, anti-bribery, anti-corruption and foreign asset control laws, among others;


•	disputes with our independent marketing firms, independent consultants and employee-agents over compensation, termination of contracts, noncompliance with applicable laws and regulations and related claims;

•disputes regarding our tax liabilities;

•disputes relating to reinsurance and coinsurance agreements; and

•disputes relating to businesses acquired and operated by us.

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

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

Despite the fact we have no history of the asymmetric conduct in question, we have received notices from the Louisiana Department of Treasury, the Arkansas Auditor of State and the Texas State Comptroller, indicating they intend to audit Citizens, Inc. and certain

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of its affiliates for compliance with unclaimed property laws. The audits may result in additional payments to beneficiaries, additional escheatment of funds deemed abandoned under state laws, administrative penalties, interest, and changes to our Company's procedures for the identification and escheatment of abandoned property. At this time, our Company is not able to estimate any of these possible amounts.

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

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

Our reinsurance facilities are generally subject to annual renewal. We may not be able to maintain our current reinsurance facilities and, even if highly desirable or necessary, we may not be able to obtain replacement reinsurance facilities in adequate amounts or at rates economic to us. If we are unable to renew our expiring facilities or to obtain new reinsurance facilities, either our net exposures would increase or, if we are unwilling or unable to bear an increase in net exposures, we may have to reduce the level of our underwriting commitments. In addition, our reinsurance facilities may be canceled for new business, pursuant to their terms, upon the occurrence of certain specified events, including a change of control of our Company (generally defined as the acquisition of 10% or more of our voting equity securities) or the failure of our insurance company subsidiaries to maintain the minimum required levels of statutory surplus. Any of these potential developments could materially adversely affect our revenues, results of operations and financial condition.

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

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

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


•	Foreign operated companies with U.S. Dollar-denominated policies. We face direct competition from companies that operate in the same manner as we operate in our international markets.

•

Companies foreign to the countries in which their policies are sold but that issue local currency policies. Another group of our competitors in the international marketplace consists of companies that are foreign to the countries in which their policies are sold but issue life insurance policies denominated in the local currencies of those countries. Local currency policies provide the benefit of assets located in the country of foreign residents, but entail risks of uncertainty due to local currency fluctuations, as well as the perceived instability and weakness of local currencies.

•

Locally operated companies with local currency policies. We compete with companies formed and operated in the country in which our foreign insureds reside. Generally, these companies are subject to risks of currency fluctuations, and they primarily use mortality tables based on experience of the local population as a whole. These mortality tables are typically based on significantly shorter life spans than those we use. As a result, the cost of insurance from these companies tends to be higher than ours. Although these companies typically market their policies to a broader section of the population than do our independent marketing firms and independent consultants, there can be no assurance that these companies will not endeavor to place a greater emphasis on our target market and compete more directly with us.

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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 our compensation and support services. Any reduction in our ability to attract and retain effective sales representatives could materially adversely affect our revenues, results of operations and financial condition.

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

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

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

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

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

Significant changes have occurred recently in our board and executive leadership, including: the retirement in 2015 of our founder, who was our initial Chairman and Chief Executive Officer; the retirement in 2016 of our founder’s son, who succeeded our founder as Chairman and Chief Executive Officer; the resignation in 2016 of a long-serving board member and Audit Committee Chairman; the appointment in 2016 of a new Chairman of the Board; the appointment in 2016 of our former Chief Legal Officer Geoffrey M. Kolander as our Chief Executive Officer; and the appointments in 2017 of a new Chief Operating Officer and two new independent directors. The effectiveness of new leaders in these roles, and further transition as a result of these changes, could have a significant impact on our results of operations, financial condition and prospects. We rely on our senior executive team comprised of Chief Executive Officer Geoffrey M. Kolander, President Kay E. Osbourn, Vice President, Chief Financial Officer and Treasurer David S. Jorgensen and Vice President and Chief Operating Officer, Terry Festervand 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 for an extended period of time, could have a significant adverse effect on our business and prospects. Historically, our compensation philosophy focused primarily on cash compensation and excluded equity incentive compensation, employment agreements, change of control agreements or other compensation components that are common among similar publicly traded companies. While we recently entered into employment and change of control agreements with our top three executives, the agreements still provide only for cash compensation, and there is no assurance that these executives will complete the term of their employment agreements or that the Company will renew the agreements upon expiration. Our ability to retain and effectively incentivize our key executives and our ability to attract directors and new executive talent in the competitive insurance industry may be limited. Further, we do not carry key-man insurance policies on any of their lives.

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

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

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

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

Although the U.S. federal government historically has not regulated the insurance business, legislation proposing federal regulation of insurance has been proposed from time to time and the Dodd-Frank Act enacted in 2010 expanded the federal presence in insurance oversight. Its requirements include streamlining the state-based regulation of reinsurance and non-admitted insurance (also known as surplus lines insurance, which is property or casualty insurance written by a company that is not licensed to sell policies of insurance in a given state) and establishing a new Federal Insurance Office within the U.S. Department of the Treasury with powers over all lines of insurance except health insurance, certain long-term care insurance and crop insurance. The Federal Insurance Office is authorized to, among other things, gather data and information to monitor aspects of the insurance industry,

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identify issues in the regulation of insurers about insurance matters and preempt state insurance measures under certain circumstances. The Dodd-Frank Act calls for numerous studies and significant rulemaking across numerous federal agencies, some of which has been implemented. The rulemaking process going forward may change with the new presidential administration. We are currently unable to determine the ultimate impact of the Dodd-Frank Act on our business, results of operations, liquidity and capital resources.

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

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

Some of our information technology systems and software are mainframe-based, legacy-type systems that require an ongoing commitment of resources to maintain current standards. Our systems utilize proprietary code requiring highly skilled personnel. Due to the unique nature of our proprietary operating environment, we could have difficulty finding personnel with the skills required to provide ongoing system maintenance and development as we seek to keep pace with changes in our products and business models, information processing technology, evolving industry and regulatory standards and policyholder needs. Our success is dependent upon, among other things, maintaining and enhancing the effectiveness of existing systems, as well as continuing to integrate, develop and enhance our information systems to support business processes in a cost-effective manner.

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

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

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

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

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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 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

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

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

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

Risks Relating to Our Capital Stock

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

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

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Control of our Company, through the ownership of our Class B Common Stock, 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, or corporate operating strategies as a result of different ownership of our Class B common stock. A transfer of our Class B common stock from the Trust also may trigger certain “change in control” provisions in the employment agreements of our top three executives. Under each employment agreement, a “change in control" includes, among other things (1) the transfer of at least a majority of the Company’s Class B Common Stock from the Harold E. Riley Trust to an individual other than Harold E. Riley, an entity not beneficially owned by Harold E. Riley or a trust not controlled by Harold E. Riley and (2) the exercise of a power of attorney granted by Harold E. Riley over the Company’s Class B Common Stock. Upon a termination by Citizens without cause or the executive’s voluntary termination with Good Reason, in each case other than within the ninety (90) day period prior to the consummation of a change in control or within one (1) year following a change in control, each executive is entitled to certain cash payments and benefits.

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

There were 49,080,114 shares of our Class A common stock issued and outstanding as of December 31, 2016. Our executive officers and directors owned approximately 2,480,354 shares of our Class A common stock as of December 31, 2016, representing approximately 5.0% 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.

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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 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.

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Item 4. MINE SAFETY DISCLOSURES

Not applicable.

Item 5. OTHER INFORMATION

None.

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Item 6. EXHIBITS



Exhibit Number		The following exhibits are filed herewith:
3.1		Restated and Amended Articles of Incorporation (a)

3.2		Amended and Restated Bylaws dated March 1, 2013 (b)

10.1†		Employment Agreement, dated as of January 16, 2017, by and between Citizens, Inc. and Geoffrey M. Kolander (c)

10.2†		Employment Agreement, dated as of January 16, 2017, by and between Citizens, Inc. and Kay E. Osbourn (d)

10.3†		Employment Agreement, dated as of January 16, 2017, by and between Citizens, Inc. and David S. Jorgensen (e)

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*
		__________________

† Indicates a management contract or compensatory plan or arrangement.

* 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 January 17, 2017 with the Registrant's Current Report on Form 8-K as Exhibit 10.1, and incorporated herein by reference.

(d) Filed on January 17, 2017 with the Registrant's Current Report on Form 8-K as Exhibit 10.2, and incorporated herein by reference.

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(e) Filed on January 17, 2017 with the Registrant's Current Report on Form 8-K as Exhibit 10.3, and incorporated herein by reference.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



		CITIZENS, INC.


		By:	/s/ Geoffrey M. Kolander
			Geoffrey M. Kolander, Chief Executive Officer




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


Date:	May 9, 2017