CIA Citizens Inc

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•	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 1.-Item 1A- Risk Factors" of this report.

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PART I

Item 1 .   BUSINESS

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.  We had approximately $1.6 billion of assets at December 31, 2016 and approximately $4.5 billion of insurance in force.  Our core insurance operations include issuing and servicing:

•	U.S. Dollar-denominated ordinary whole life insurance and endowment policies predominantly sold to foreign residents, located principally in Latin America and the Pacific Rim, through independent marketing consultants;

•	ordinary whole life insurance policies to middle income households concentrated in the Midwest, Mountain West and southern United States through independent marketing consultants; and

•	final expense and limited liability property policies to middle and lower income households in Louisiana, Mississippi and Arkansas 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.  

Our business has grown, both internationally and domestically, in recent years, though our profitability has declined.  From 2012 through 2016 , revenues rose 21% from $202.8 million in 2012 to $245.4 million in 2016 .  During that same period, our assets grew 35% from $1,171.8 million to $1,583.7 million .  During this same period, our net income declined 61% from $4.9 million to $2.0 million , primarily as a result of other than temporary impairments ("OTTI"), expense related to an additional tax liability contingency and higher consulting and legal costs as we proactively addressed the tax liability contingency and undertook an assessment of our business model and strategies. See Item 6.  "Selected Financial Data" and Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Report.

Recent Board of Directors and Officer Changes

See Strategic Initiatives below for initiatives that the Company, its Board of Directors (the “Board”) and the executive management team initiated in 2016 and will continue to pursue in 2017.

On June 8, 2016, the Board appointed independent Board member Dr. Robert Sloan, as non-executive Chairman. Dr. Sloan succeeded Rick Riley who became Chairman of the Board in June 2015. Kay Osbourn, Citizens’ President at that time and former Chief Financial Officer, was also unanimously appointed by the Board as interim CEO.

On June 24, 2016, Rick Riley announced his retirement as a Citizens, Inc. employee and his resignation from the Board.

On July 14, 2016, independent director Dr. Terry Maness was elected Chairman of the Audit Committee (the “Audit Committee”) of the Board by the other members of the Audit Committee, succeeding Tim Timmerman who resigned as a director and Chairman of the Audit Committee.

On November 7, 2016, the Company's Board unanimously appointed Geoff Kolander as Chief Executive Officer. Mr. Kolander, joined Citizens in 2006 as General Counsel and most recently had served as Chief Legal Officer and head of Corporate Strategy. The Board also confirmed that Kay Osbourn would continue to serve as the Company's President.

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

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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.

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.

A prolonged low interest rate period has required us to revisit the benefits and dividends included under many policies offered internationally.  In many cases, policyholders stand to benefit from significantly higher guarantees and dividends under our policies than the financial markets might otherwise offer.  As such, the Company cut discretionary dividends on existing policies in 2016 and created new policies sold internationally to better reflect the prolonged low interest rate environment that we face.

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. For more information about the financial performance of our business segments, see “Note 8 - Segment and Other Operating Information” of the "Notes to Consolidated Financial Statements."

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 subsidiaries:  CICA Life Insurance Company of America ("CICA") and Citizens National Life Insurance Company ("CNLIC").

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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.  As of December 31, 2016 , we had insurance policies in force in approximately 30 countries, including Venezuela, Colombia, Taiwan, Ecuador and Brazil as our top producing countries. In 2016 , international direct premiums comprised approximately 73% of our total direct premiums, and exceeded 10% of our premiums for each of the last three years. We have participated in the foreign marketplace since 1975. 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 administrative costs per unit of coverage;

•	premiums typically paid annually rather than monthly or quarterly, which saves us 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 our U.S. policies.

 

We have implemented several policies and procedures to limit the risks of asset and premium loss relating to our international business.  Approvals for policy issuance are made in our Austin, Texas office and policies are issued and delivered to the independent consultants, who deliver the policies to the insureds.  We have no offices, employees or assets outside of the United States.  Insurance policy applications and premium payments are submitted by the independent consultants or customers to us, and we review the applications in our home offices in Austin, Texas.  Premiums are paid in U.S. Dollars by check, wire or credit card.  The policies we issue contain limitations on benefits for certain causes of death, such as homicide.  We have also developed disciplined underwriting criteria, which include medical reviews of applicants as well as background and reference checks.  In addition, we have a claims policy that requires investigation of substantially all death claims.  Furthermore, we perform background reviews and reference checks of prospective independent marketing firms and consultants.

Our independent marketing firms and consultants specialize in marketing life insurance products and generally have several years of insurance marketing experience.  We maintain contracts with the independent marketing firms pursuant to which they provide recruitment, training and supervision of their managers and associates in the service and placement of our products; however, all associates of these firms also contract directly with us as independent contractors and receive their compensation directly from us.  Accordingly, should an arrangement between any independent marketing firm and us be terminated for any reason, we expect that we would seek to continue with the existing marketing arrangements with the associates of these firms.  Our agreements with independent marketing firms and consultants typically provide that they are independent contractors responsible for their own operation expenses and are the representative of the prospective insured.  In addition, the marketing firms guarantee any debts of their associates to us.  The marketing firms receive commissions on all new and renewal policies serviced or placed by them or their associates.  All of these contracts provide that the independent marketing firms and consultants are aware of and responsible for compliance with local laws.

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 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 is participating (i.e., provides for cash dividends as apportioned by the board of directors).  Once a policyowner pays the annual premium and the policy is issued, the owner becomes entitled to a cash dividend as well as an annual guaranteed endowment, if elected.  The policyowner has several options with regard to the dividend and annual guaranteed endowments, including the right to assign policy values to the Citizens, Inc. Stock Investment Plan, registered under the Securities Act of 1933 (the "Securities Act"), and administered in the United States by Computershare, our plan administrator and transfer agent.

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International Competition

The life insurance business is highly competitive.  We compete with a large number of stock and mutual life insurance companies internationally and domestically, as well as with financial institutions that offer insurance products.  There are more than 800 life insurance companies in the United States, some of which also provide insurance to foreign residents.

We face competition primarily from companies formed and operated in the country in which the insureds reside, from companies that operate in the same manner as we do and from companies that are foreign to the countries in which policies are sold, but issue insurance policies denominated in the local currency of those countries.  A substantial number of companies may be deemed to have a competitive advantage over us due to their significantly greater financial resources, histories of successful operations and larger marketing forces. 

Because premiums on our international policies are paid in U.S. Dollars, and we pay claims and benefits in U.S. Dollars, we provide a product that is different from the products offered by foreign-domiciled companies.  We believe our international policies are usually acquired by individuals in the upper middle class in their countries and those with significant net worth and earnings that place them in the upper income brackets of their respective countries.  The policies sold by our foreign competitors are generally offered broadly and are priced using the mortality of the entire population of the geographic region.  Our mortality charges are therefore typically lower, which provides a competitive advantage.  Additionally, the assets backing the reserves for our foreign competitors' policies must be substantially invested in their respective countries and, therefore, are exposed to the inflationary risks and social or economic crises that have been more common in these foreign countries.

Domestic Sales

In 2016 , domestic direct premiums comprised approximately 27% of our total direct premiums. The majority of our domestic inforce business results from blocks of business of insurance companies we have acquired over the past 18 years.  Our acquisition transition strategy focuses on the introduction of our cash accumulation ordinary whole life products to independent agents associated with companies we have acquired, while continuing to service the needs of acquired policyholders.

In the Mountain West, Midwest and the southern United States, we seek to serve middle-income households through the sale of cash accumulation ordinary whole life insurance products.  Our distribution strategy is through independent agents. Over the past few years, new product sales have been modest while existing policies have been running off at a greater pace compressing the block of insurance in force.

Domestic Life Insurance Products

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

•	cash accumulation/living benefits;

•	tax-deferred 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 health care needs.

Domestic Competition

The U.S. life insurance industry is a mature industry that, in recent years, has experienced little to no growth.  Competition is intense because the life insurance industry is consolidating, with larger, more efficient and more effective organizations emerging from consolidation.

Many domestic life insurance companies have significantly greater financial, marketing forces and other resources, longer business histories and more diversified lines of insurance products than we do.  We also face competition from companies marketing in

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person as well as with direct mail and Internet sales campaigns.  Although we may be at a competitive disadvantage to these entities, we believe our premium rates and policy features are generally competitive with those of other life insurance companies selling similar types of ordinary whole life insurance.

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. Sales of these domestic life insurance products are not material to premium income. We are currently developing compliant products to be sold in the domestic market.

 

Domestic Home Service Insurance

Our domestic Home Service segment operates in this market through our subsidiaries Security Plan Life Insurance Company ("SPLIC"), Magnolia Guaranty Life Insurance Company ("MGLIC") and Security Plan Fire Insurance Company ("SPFIC"), and focuses 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 approximately 333  employee-agents who work on a route system and through over 286 funeral homes and independent agents to sell policies, collect premiums and service policyholders.  To a lesser extent, our Home Service segment sells limited-liability, named peril property policies covering dwelling and contents. In 2016 , our Home Service segment comprised 24%, or $47.5 million of our total direct premiums.

Home Service Products and Competition

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.  The average life insurance policy face amount issued was approximately $6,600 in 2016 ; therefore, the underwriting performed on these applications is limited.  Our property coverages are limited to $30,000 maximum coverage on any one dwelling and contents, while content-only coverage and dwelling-only coverage is limited to $20,000 . We face competition in Louisiana, Mississippi and Arkansas from other companies specializing in home service distribution of insurance.  We seek to compete based upon our emphasis on personal service to our customers.  We intend to continue premium growth within this segment via direct sales and acquisitions.

Other Non-Insurance Enterprises

Other Non-insurance Enterprises includes Computing Technology, Inc., which provides data processing services to the Company, and Insurance Investors, Inc., which provides aviation transportation to the Company, though the Company-owned airplane is not being used and is for sale.  This segment also includes the results of Citizens, Inc., the parent Company.

Operations and Technology

Our administrative operations principally serve our life insurance segment and are conducted primarily at our executive offices in Austin, Texas through approximately 134 administrative, operating and underwriting personnel.  Our Home Service operations are conducted to a large degree from our district offices in Louisiana, Arkansas and Mississippi, as well as our service center in Donaldsonville, Louisiana. At our executive offices, we also perform policy design, marketing oversight, underwriting, accounting and reporting, actuarial, customer service, claims processing, administrative and investing activities.

We have a single integrated system for our entire Company, which is a centrally-controlled, mainframe-based administrative system.  Functions of our policy administrative system include policy set up, administration, billing and collections, commission calculation, valuation, automated data edits, storage backup, image management and other related functions.  Each company we acquire is ultimately converted onto our administrative system.  This system has been in place for more than 30 years and has been updated on an ongoing basis, as technology has evolved.

We are currently reviewing technology options to transition from our legacy administration system to an upgraded, modernized technology platform that will service our needs into the future. On February 1, 2017, we went live with a modernized claims system. We are also currently converting our actuarial valuation from a third party service provider to an actuarial valuation modeling software system purchased from a vendor.

Enterprise Risk Management

The Company has an enterprise risk management function (“ERM”) that is charged with providing analyses of the Company’s risks on an individual and aggregated basis and with ensuring that the Company’s risks remain within its risk appetite and tolerances.

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The Company's focus on ERM strengthens its risk management culture and discipline. The mission of ERM is to support the Company in achieving its strategic priorities by:

•	Providing a comprehensive view of the risks facing the Company, including risk concentrations and correlations;

•	Helping management define the Company’s overall capacity and appetite for risk by evaluating the risk return profile of the business relative to the Company’s strategic intent and financial underpinning;

•	Assisting management in setting specific risk tolerances and limits that are measurable, actionable, and comply with the Company’s overall risk philosophy;

•	Communicating and monitoring the Company’s risk exposures relative to set limits and recommending, or implementing as appropriate, mitigating strategies; and

•	Providing insight to assist in growing the businesses and achieving optimal risk-adjusted returns within established guidelines.

Enterprise Risk Management Structure and Governance

Effective risk oversight is an important priority for the Company’s Board of Directors and senior management team. While it is the job of the CEO and senior management to assess and manage the Company’ risk exposure through ERM, in accordance with NYSE requirements, the Audit Committee of the Board of Directors is charged with discussing guidelines and policies to govern the process by which ERM is handled. The Audit Committee periodically discusses the Company’s major financial risk exposures and the steps management has taken to monitor and control such exposures.

The categories of risk exposures assessed and managed by senior management include, but are not limited to:

•	Market risk, including credit, interest rate, equity market, and foreign exchange;

•	Liquidity and capital requirements of the Company;

•	Insurance risks, including those arising out of catastrophes and acts of terrorism;

•	International business risks;

•	Legal and regulatory compliance risks;

•	Cybersecurity risk; and

•	Any other risk that poses a material threat to the strategic viability of the Company.

In addition to the Audit Committee, the Compensation Committee considers the risks and rewards that may be implicated by our executive compensation philosophy and programs, and the Nominating and Corporate Governance Committee oversees the Company’s governance practices, director succession and committee composition and leadership to manage risks associated with corporate governance. Although risk oversight is conducted primarily through committees of the Board, the full Board has retained responsibility for general oversight of risks. The Board satisfies this responsibility through full reports by each committee chair regarding the committees’ considerations and actions, as well as through regular reports directly from officers responsible for oversight of particular risks within the Company.

Regulation

Our U.S. insurance operations are subject to a wide variety of laws and regulations.  State insurance laws establish supervisory agencies with broad regulatory authority to regulate most aspects of our U.S. insurance businesses, and our insurance subsidiaries are regulated by the insurance departments of each state in which they are licensed.  In addition, U.S. laws, such as the USA Patriot Act of 2001, the Foreign Corrupt Practices Act (“FCPA”), the Gramm-Leach-Bliley Act of 1999, the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001, the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Wall Street Reform and Consumer Protection Act ("the Dodd-Frank Act"), are examples of U.S. regulations that affect our business.  We are subject to comprehensive regulations under the USA Patriot Act and the Bank Secrecy Act with respect to money laundering, as well as federal regulations regarding privacy and confidentiality.  Our insurance products and thus our businesses also are affected by U.S. federal, state and local tax laws.  The Dodd-Frank Act focuses on financial reform and has resulted in changes to the regulation of institutions operating in the financial services industry, including the Company.  Its requirements include streamlining the state-based regulation of reinsurance and non-admitted insurance (also known as surplus lines insurance, which is property or casualty insurance written by a company that is not licensed to sell policies of insurance in a given state) and establishing a new Federal Insurance Office within the U.S. Department of the Treasury with powers over all lines of insurance except health insurance, certain long-term care insurance and crop insurance. The Federal Insurance Office is authorized to, among other things, gather data and information to monitor aspects of the insurance industry, identify issues in the regulation of insurers about insurance matters and preempt state insurance measures under certain circumstances. The Dodd-Frank Act calls for numerous studies and

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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.

 

The purpose of the laws and regulations that affect our insurance business is primarily to protect our insureds and not our stockholders.  Many of the laws and regulations to which we are subject are regularly re-examined, and existing or future laws and regulations may become more restrictive or otherwise adversely affect our operations.  In addition, insurance regulatory authorities (including state law enforcement agencies and attorneys general) periodically make inquiries and regularly conduct examinations regarding compliance by us and our subsidiaries with insurance, and other laws and regulations regarding the conduct of our insurance businesses.  We cooperate with such inquiries and examinations and take corrective action when warranted.

 

Our insurance subsidiaries are collectively licensed to transact business in 32 states.  We have insurance subsidiaries domiciled in the states of Colorado, Louisiana, Mississippi and Texas.  Our U.S. insurance subsidiaries are licensed and regulated in all U.S. jurisdictions in which they conduct insurance business.  The extent of this regulation varies, but most jurisdictions have laws and regulations based upon the National Association of Insurance Commissioners (“NAIC”) model rules governing the financial condition of insurers, including standards of solvency, types and concentration of investments, establishment and maintenance of reserves, credit for reinsurance and requirements of capital adequacy, and the business conduct of insurers, including marketing and sales practices and claims handling.  In addition, statutes and regulations usually require the licensing of insurers and their agents, the approval of policy forms and related materials and the approval of rates for certain types of insurance products.

 

All U.S. jurisdictions in which our U.S. insurance subsidiaries conduct insurance business have enacted legislation that requires each U.S. insurance company in a holding company system, except captive insurance companies, to register with the insurance regulatory authority of its jurisdiction of domicile and to furnish that regulatory authority financial and other information concerning the operations of, and the interrelationships and transactions among, companies within its holding company system that may materially affect the operations, management or financial condition of the insurers within the system.  These laws and regulations also regulate transactions between insurance companies and their parents and affiliates.  Generally, these laws and regulations require that all transactions within a holding company system between an insurer and its affiliates be fair and reasonable and that the insurer's statutory capital and surplus following any transaction with an affiliate be both reasonable in relation to its outstanding liabilities and adequate to its financial needs.  Statutory surplus is the excess of admitted assets over the sum of statutory liabilities and capital.  For certain types of agreements and transactions between an insurer and its affiliates, these laws and regulations require prior notification to, and non-disapproval or approval by, the insurance regulatory authority of the insurer's jurisdiction of domicile.

Generally, all foreign countries in which we offer insurance products require a license or other authority to conduct insurance business in that country. Some of these countries also require that local regulatory authorities approve the terms of any insurance product sold to residents of that country. We have never qualified to do business in any foreign country and have never submitted our insurance policies issued to residents of foreign countries for approval by any foreign or domestic insurance regulatory agency. We sell our policies to residents of foreign countries using foreign independent marketing firms and independent consultants, and 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 in 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 jurisdictions, as described in detail in “Item 1A - Risk Factors - Risks Relating to our Business.” Depending on the ultimate outcome of our ongoing compliance review, we may explore alternatives to our current business model in one or more jurisdictions, including withdrawing from a particular market. We cannot assure you that any of these laws, regulations, or application of them by foreign regulatory authorities, or any change in our business model, will not have a material adverse effect on our ability to market our products through our independent marketing consultants and, in turn, on our results of operations and financial condition.

The payment of dividends or other distributions to us by our insurance subsidiaries is regulated by the insurance laws and regulations of their respective states of domicile.  The laws and regulations of some of these jurisdictions also prohibit an insurer from declaring or paying a dividend except out of its earned surplus or require the insurer to obtain regulatory approval before it may do so.  In addition, insurance regulators may prohibit the payment of ordinary dividends or other payments by our insurance subsidiaries to us (such as a payment under a tax sharing agreement or for employee or other services) if they determine such payment could be adverse to policyholders or insurance contract holders of the subsidiary.

 

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The laws and regulations of the jurisdictions in which our U.S. insurance subsidiaries are domiciled require that a controlling party obtain the approval of the insurance commissioner of the insurance company's jurisdiction of domicile prior to acquiring control of the insurer and may delay, deter or prevent a transaction our shareholders might consider desirable.

 

Risk-based capital ("RBC") requirements are imposed on life and property and casualty insurance companies.  The NAIC has established minimum capital requirements in the form of 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 risk-based capital fall below 200%, a series of actions by the affected company would begin.

Potential Changes in Regulation

Government actions under the new presidential administration and congress could significantly impact the regulations to which we are subject. As part of a comprehensive reform of financial services regulation known as the Dodd-Frank Act, Congress established an office within the federal government to collect information about the insurance industry, recommend standards, and represent the United States in dealing with foreign insurance regulators. There can be no assurances under the new presidential administration that the Dodd-Frank Act will remain intact in part or in whole and as such, we cannot predict the impact that potential changes could have on the insurance industry and the Company.

 

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 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

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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 $ 14.4 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 $7.5 million to $44.8 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 and unrealized 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 December 31, 2016 , fixed maturities represented $1,128.7 million or 92.4% of our total investments of $1,222.1 million . The fair value of fixed maturities and the related investment income fluctuates depending on general economic and market conditions. The fair value of these investments generally increases or decreases in an inverse relationship with fluctuations in interest rates, while net investment income realized by us will generally increase or decrease in line with changes in market interest rates. In addition, actual net investment income and/or cash flows from investments that carry prepayment risk, such as mortgage-backed and other asset-backed securities, may differ from those anticipated at the time of investment as a result of interest rate fluctuations. An investment has prepayment risk when there is a risk that the timing of cash flows resulting from the repayment of principal might occur earlier than anticipated because of declining interest rates or later than anticipated because of rising interest rates. The impact of value fluctuations affects our consolidated financial statements, as a large portion of our fixed maturities are classified as available-for- sale, with changes in fair value reflected in our stockholders' equity (accumulated other

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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 December 31, 2016 , approximately 97.2% of our fixed maturities were investment grade with 78.2% 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.

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

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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 December 31, 2016 , we had $167.8 million of deferred policy acquisition costs, or DAC.  DAC represents costs that vary with and are primarily related to the successful sale and issuance of our insurance policies and are deferred and amortized over the estimated life of the related insurance policies.  These costs include commissions in excess of ultimate renewal commissions, solicitation and printing costs, sales material costs and some support costs, such as underwriting and contract and policy issuance expenses.  Under U.S. GAAP, DAC is amortized to income over the lives of the underlying policies, in relation to the premium-paying period of the policies.

In addition, when we acquire a block of insurance policies, we assign a portion of the purchase price to the right to receive future net cash flows from existing insurance and investment contracts and policies.  This intangible asset, called the cost of customer relationships acquired, or CCRA, represents the actuarially estimated present value of future cash flows from the acquired policies.  At December 31, 2016 , we had $19.4 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

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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 December 31, 2016 .

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.

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

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

As discussed in Note 1 - Correction of Immaterial Errors and Reclassification of Certain Amounts to the Consolidated Financial Statements, 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 of December 31, 2016, the known errors have been quantified by the Company.

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The errors in valuing DAC and future policy benefits caused the Company to understate amortization of DAC over several years and to overstate the increase in future policy benefit reserves during the same periods, resulting in an overstatement of DAC of $0.3 million and an overstatement of future policy benefits of $7.9 million at December 31, 2015. The cumulative errors have been corrected through retained earnings as of January 1, 2014, the earliest period presented, with an increase to retained earnings of $3.4 million .

As part of this conversion, the Company could identify additional differences that will be evaluated in future periods 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 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.

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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.

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

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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.

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

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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 (age 41), President Kay E. Osbourn (age 50) and Vice President, Chief Financial Officer and Treasurer David S. Jorgensen (age 53) 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, 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

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

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

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

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

We have a written information security program with appropriate administrative, technical and physical safeguards to protect such confidential information.  Cyber security attacks are on the rise throughout the world and while we believe we have taken reasonable steps to secure our customer information we could experience a breach of data. We closely monitor cyber attack attempts on our

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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 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.

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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.

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

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

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

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

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

•	holders of shares of our Class B common stock elect a simple majority of our board of directors, and all of these shares are owned by the Harold E. Riley 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 1B.    UNRESOLVED STAFF COMMENTS

None.

Item 2.     PROPERTIES

We own our principal office in Austin, Texas, consisting of an 80,000 square foot office building in addition to approximately one acre of land nearby that houses storage facilities.  Approximately 50,000 square feet is occupied or reserved for our operations.  We also own a training facility at Lake Buchanan, Texas.  In addition, we own other properties in Texas, Arkansas and Louisiana that are incidental to our operations.

Item 3.    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

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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 4.    MINE SAFETY DISCLOSURES

 

Not applicable.

PART II

Item 5.	MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our Class A common stock is traded on the New York Stock Exchange ("NYSE") under the symbol CIA.

Quarterly high and low closing prices per share of our Class A common stock as reported by the NYSE are shown below.

	2016						2015
Quarter Ended	High			Low			High			Low
March 31	7.82			6.16			7.89			6.03
June 30	8.41			7.07			7.97			5.37
September 30	10.92			7.41			7.52			5.96
December 31	11.69			7.51			10.05			7.17

 

Equity Security Holders

The number of stockholders on record on April 19, 2017 was as follows:

•	Class A Common Stock - 98,946

•	Class B Common Stock - 1

We have never paid cash dividends on our Class A or B common stock and do not expect to pay cash dividends in the foreseeable future.  For restrictions on our present and future ability to pay dividends, see Note 6 of the "Notes to Consolidated Financial Statements."

We did not purchase any of our equity securities during any quarter in 2014 , 2015 or 2016 .

Securities Authorized for Issuance Under Equity Compensation Plans

We do not maintain any equity compensation plans or arrangements.  Thus, we do not have any securities authorized for issuance under these types of plans, nor have we issued any options, warrants or similar instruments to purchase any of our equity securities.

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Performance Comparison

The following graph compares the change in the Company’s cumulative total stockholder return on its common stock over a five-year period.  The following graph assumes a $100 investment on December 31, 2011 , and reinvestment of all dividends in each of the Company’s common shares, the New York Stock Exchange (“NYSE”) Composite and the Hemscott Group Index, a peer group of major U.S.-based insurance companies.

	2011				2012			2013			2014			2015			2016
Citizens, Inc.	$	100.00			114.04			90.30			78.43			76.68			101.34
NYSE Composite	$	100.00			115.99			146.47			156.36			149.97			167.87
Peer Group	$	100.00			125.36			193.59			203.13			189.31			203.48

 

The peer group index weights individual company returns for stock market capitalization. The companies included in the peer group index are shown in the following table.

American Equity Investment Life Holding		Independence Holding Co		Primerica, Inc.
Atlantic American Corp.		Investors Heritage Capital Corp.		Prudential Financial, Inc.
Aviva PLC		Kansas City Life Ins. Co.		Prudential PLC
China Life Ins Co. Limited		Lincoln National Corp.		Reinsurance Group of America, Inc.
Citizens, Inc.		Metlife, Inc.		Torchmark, Corp.
Genworth Financial, Inc.		National Western Life Ins. Co.		UTG, Inc.

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Item 6.    SELECTED FINANCIAL DATA

The following table presents selected financial data of the Company.  This should be read in conjunction with Item 7.  "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Item 8.  "Financial Statements and Supplementary Data" of this Form 10-K. The 2012-2015 amounts have been adjusted for the immaterial errors described in Note 1 to the consolidated financial statements.

	Years ended December 31,
	2016				2015			2014			2013			2012
	(In thousands, except per share data)
Operating items
Insurance premiums	$	197,876			194,480			188,532			176,158			169,873
Net investment income	48,560				45,782			41,062			36,597			31,725
Realized investment gains (losses)	(1,985		)		(5,459	)		(19	)		(247	)		196
Change in fair value of warrants	—				—			—			—			451
Total revenues	245,406				236,268			230,225			213,636			202,759
Net income (loss)	1,969				(3,143	)		(5,970	)		5,279			4,912
Balance sheet data
Total assets	1,583,668				1,480,751			1,413,798			1,212,837			1,171,779
Total liabilities	1,334,568				1,233,825			1,151,466			963,591			905,720
Total stockholders' equity	249,100				246,926			262,332			249,246			266,059
Life insurance in force	4,497,735				4,478,202			4,662,660			4,616,128			4,976,157
Per share data
Book value per share	4.97				4.93			5.24			4.98			5.31
Basic and diluted earnings (losses) per Class A share	0.04				(0.06	)		(0.12	)		0.11			0.10

 

See Item 1.  "Business" and Item 7.  "Management's Discussion and Analysis of Financial Condition and Results of Operations," for information that may affect the comparability of the financial data contained in the above table.

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Item 7.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is management's discussion and analysis of the consolidated financial condition and consolidated results of operations of the Company.  It is intended to be a discussion of certain key financial information regarding the Company and should be read in conjunction with the Consolidated Financial Statements and related Notes to this report on Form 10-K.

Overview

We conduct operations as an insurance holding company emphasizing ordinary life insurance and endowment products in niche markets where we believe we can achieve competitive advantages.  As an insurance provider, we collect premiums on an ongoing basis to pay future benefits to our policy and contract holders.  Our core operations include issuing:

 

•	whole life insurance;

•	endowments;

•	final expense; and

•	limited liability property policies.

The Company derives its revenues principally from 1) premiums earned for insurance coverages provided to insureds;  2) net investment income; and 3) net realized capital gains and losses.

Profitability of our insurance operations depends heavily upon the Company’s underwriting discipline, as we seek to manage exposure to loss through favorable risk selection and diversification, management of claims, use of reinsurance, sizing of our in force block, careful monitoring of our mortality and morbidity experience, and management our expense ratio, which we accomplish through economies of scale and management of acquisition costs and other underwriting expenses.

Pricing adequacy depends on a number of factors, including the ability to obtain regulatory approval for rate changes, proper evaluation of underwriting risks, the ability to project future losses based on historical loss experience adjusted for known trends, the Company’s response to competitors, and expectations about regulatory and legal developments and expense levels. The Company seeks to price our insurance policies such that insurance premiums and future net investment income earned on premiums received will cover underwriting expenses and the ultimate cost of paying claims reported on the policies and provide for a profit margin.  The Company repriced its top six selling international products at the end of 2016 to increase profitability. Because the products are more expensive for potential policyholders, the Company is closely monitoring sales trends. The Company has the ability to adjust dividend scales and interest crediting rates at its discretion based on economic and other factors. The profitability of fixed annuities, riders and other “spread-based” product features depends largely on the Company’s ability to earn target spreads between earned investment rates on assets and interest credited to policyholders.

The investment return, or yield, on invested assets is an important element of the Company’s earnings since insurance products are priced with the assumption that premiums received can be invested for a period of time before benefits are paid.  The majority of the Company’s invested assets have been held in fixed maturities available-for-sale and held-to-maturity securities, primarily in asset classes of corporate bonds, municipal bonds, and government obligation bonds. The interest rate environment has a significant impact on the determination of insurance contract liabilities, our investment rates and yields and our asset/liability management.

 

The primary investment objective for the Company is to maximize economic value, consistent with acceptable risk parameters, including the management of credit risk and interest rate sensitivity of invested assets, while generating sufficient after-tax income to meet policyholder and corporate obligations. The Company maintains a conservative investment strategy that may vary based on a variety of factors including business needs, regulatory requirements and tax considerations.

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 $ 14.4

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

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 $7.5 million to $44.8 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 financial data for 2015 has been restated to correct accounting for policy benefit reserves, DAC and a legal expense accrual and the financial data used for 2014 has been restated to correct accounting for policy benefit reserves and DAC. See Note 1, Correction of Immaterial Errors and Reclassifications of Certain Amounts in the notes to the consolidated financial statements.

Current Financial Highlights

Our 2016 financial results are driven by our historical business management model and traditional life insurance product sales. Although interest rates have risen recently, the historically low interest rate environment continues to impact our results and our industry as investment yields are an integral component of our business operations.

•	Our assets grew $103 million in 2016 and totaled $1.6 billion as of December 31, 2016 .

•	Total stockholders' equity increased from $246.9 million at December 31, 2015 , to $249.1 million at December 31, 2016 due to our net income and net unrealized gains on available-for-sale securities in 2016 .

•	Insurance premiums rose 1.7% and 3.2% in 2016 and 2015 , respectively, primarily from our life insurance segment, which increased $3.4 million from 2015 .

•

Net investment income increased 6.1% and 11.5% for 2016 and 2015 , respectively, primarily due to an increase in the investment asset balances in 2016 compared to the prior year and an increase in yields in 2015 .  The average yield on the consolidated investment portfolio has changed from a yield of 4.21% in 2014 up to 4.38% in 2015 and declining to a yield of 4.28% in 2016 , as investment rates available have remained low in the sustained low interest rate environment.

•

Realized net investment losses resulted from other-than-temporary impairments ("OTTI") on investment securities which were recorded totaling $4.3 million and $5.4 million , in 2016 and 2015 , respectively, and are reported as realized losses. The OTTI in 2016 was somewhat offset by realized investment gains on sales of fixed maturity securities in our available-for-sale portfolio and sales of equity securities.

•	During 2016 , claims and surrenders expense increased 3.2% from the comparable period in 2015 , primarily due to an increase in surrender benefits and matured endowments in the life segment compared to the 2015 levels.

•	Policyholders' dividends decreased 36.4% in 2016 compared to 2015 , due to the dividend rate actions taken by us at the end of 2015 to improve our product profitability.

•	General expenses increased slightly and remained at relatively high levels due to the tax compliance issue noted above relating to product qualification under IRC section 7702 and 72(s) and remediation costs that have been identified, as well as increased consulting costs for actuarial, tax, and legal assistance.

•	Amortization of deferred policy acquisition expenses increased from $23.4 million at December 31, 2015 to $28.5 million at December 31, 2016 primarily due to the higher surrender activity.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Life Insurance .  For over thirty-seven years, CICA and its predecessors have accepted policy applications from foreign nationals for U.S. Dollar-denominated ordinary whole life insurance and endowment policies.  We make our insurance products available using third-party marketing organizations and independent marketing consultants.

Endowment product sales have been on the rise and represented approximately 77.1% of new sales in the life segment in 2016 .  The Company currently offers a fifteen and twenty year endowment and our top selling endowment is a product that matures at age sixty-five.  The Company repriced its top six selling international products at the end of 2016 to increase profitability.

Through the domestic market of our Life Insurance segment, we provide ordinary whole life, credit life insurance, and final expense policies to middle and lower income families and individuals in certain markets in the mountain west, mid-west and southern U.S.  The majority of our domestic revenues are generated by the policies of domestic life insurance companies we have acquired since 1987.

Home Service Insurance .  We provide final expense ordinary and industrial life insurance to middle and lower income individuals in Louisiana, Mississippi and Arkansas.  Our policies in this segment are sold and serviced through a home service marketing distribution system utilizing employee-agents who work on a route system to collect premiums and service policyholders, and through networks of funeral homes that collect premiums and provide personal policyholder service.

Premiums in this segment increased slightly in 2016 compared to 2015 , as renewal premiums increased while first year premiums decreased slightly as the Home Service business is a mature business. This is the same trend we saw in 2015 compared to 2014 .

Economic and Insurance Industry Developments

Significant economic issues impacting our business and industry currently and into the future are discussed below.

•

Slow increases in the interest rate environment will limit increases in profit margins for insurers.  We have been impacted by the historically low interest rate environment over the past several years as our fixed income investment portfolio, primarily invested in callable securities, has been reinvested at lower yields.  The Company’s conservative investment strategy has not changed but we have focused new purchases into holding of state, municipalities, essential service and corporate issuers compared to our historical investment in U.S. government holdings. Our investment earnings also impact the reserve and Deferred Acquisition Costs (“DAC”) balances, as assumptions are used in the development of the balances.  Due to the recent decline in investment yields on our portfolio, our projection of long-term investment returns has declined.  This has resulted in increasing the reserves on policies issued in the current year, as well as reducing the DAC asset.

•

As an increasing percentage of the world population reaches retirement age, we believe we will benefit from increased demand for living benefit products rather than death products, as customers will require cash accumulation to pay expenses to meet their lifetime income needs.  Our ordinary life products are designed to accumulate cash values to provide for living expenses in a policy owner's later years, while continuously providing a death benefit.

•

We believe there is a trend toward consolidation of domestic life insurance companies, due to significant losses incurred by the life insurance industry as a result of the credit crisis and related economic pressures, as well as increasing costs of regulatory compliance for domestic life insurance companies.  We believe this trend should benefit our acquisition strategy as more complementary acquisition candidates may become available for us to consider.

•

Many of the events and trends affecting the life insurance industry have had an impact on the life reinsurance industry.  These events have led to a decline in the availability of reinsurance.  While we currently cede a limited amount of our primary insurance business to reinsurers, we may find it difficult to obtain reinsurance in the future, forcing us to seek reinsurers who are more expensive to us.  If we cannot obtain affordable reinsurance coverage, either our net exposures will increase or we will have to reduce our underwriting commitments.

•	While our management has extensive experience in writing life insurance policies for foreign residents, changes to foreign laws and regulations and their related application and enforcement, along with currency controls affecting our foreign resident insureds could adversely impact our revenues, results of operations and financial condition.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Acquisition History - Last Five Years

On March 7, 2014, the Company acquired Magnolia Guaranty Life Insurance Company ("MGLIC") in the amount of $5.2 million. MGLIC is a Mississippi domiciled company that began writing business in 1992 and issues primarily industrial life policies through independent funeral homes in the state of Mississippi. We recorded $0.1 million of goodwill as a result of this transaction. MGLIC is reported in our home service segment.

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

Insurance revenues are primarily generated from premium revenues and investment income.  In addition, realized gains and losses on investment holdings can significantly impact revenues from year to year.

	Years Ended December 31,
	2016				2015			2014
	(In thousands)
Revenues:
Premiums:
Life insurance	$	191,254			187,686			181,857
Accident and health insurance	1,546				1,599			1,557
Property insurance	5,076				5,195			5,118
Net investment income	48,560				45,782			41,062
Realized investment losses, net	(1,985		)		(5,459	)		(19	)
Other income	955				1,465			650
Total revenues	$	245,406			236,268			230,225

 

Premium Income .  Premium income derived from life, accident and health, and property insurance sales, increased 1.7% during 2016 .  The increase resulted primarily from renewal premiums, which increased 2.7% and 5.1% in the life segment for 2016 and 2015 and totaled $168.3 million , $164.4 million and $157.8 million on the consolidated level in 2016 , 2015 and 2014 , respectively.  New sales, termed as first year premiums, decreased 0.5% and 2.7% , and increased 13.2% in the life segment in 2016 , 2015 and 2014 , respectively.

Endowment sales represent a significant portion of new business sales internationally with the 20-year endowment and endowment to age 65 as our top products. In addition, most of our life insurance policies contain a policy loan provision, which allows the policyholder to use cash value within a policy to pay premiums.  The policy loan asset balance increased 10.8% and 11.4% in 2016 and 2015 , year over year.

Net Investment Income .  Net investment income increased to $48.6 million in 2016 compared to $45.8 million in 2015 , as we experienced higher average invested assets as a result of investment of new premium revenue. Our yield on average invested assets decreased 10 basis points from 2015 to 2016 as it has been difficult to find investments in higher yielding securities with high credit quality.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Net investment income performance is summarized as follows.

	Years Ended December 31,
	2016				2015			2014
	(In thousands, except for %)
Net investment income	$	48,560			45,782			41,062
Average invested assets, at amortized cost	1,133,705				1,045,736			976,079
Yield on average invested assets	4.28		%		4.38	%		4.21	%

 

We have traditionally invested in fixed maturity securities with a large percent held in callable issues. The sustained low interest rate environment of the past several years is holding down yields.  While U.S. Treasury interest rates have risen recently after a fairly significant decline during 2016, yields on high quality corporate and municipal securities have been slower to rise. The interest rate direction is uncertain but as market interest rates begin to rise, our call risk will diminish, resulting in our fixed securities maturing at the stated maturity dates and our portfolio yield will rise more slowly over time, as new money investments would be made at higher rates.

Investment income from fixed maturity securities accounted for approximately 87.0% of total investment income for the year ended December 31, 2016 .  We have increased our investment purchases of corporate and municipal securities over the past several years, with no focus on any particular industry sectors in these security categories, but rather a focus on higher yielding securities.  In addition, we currently have $17.1 million invested in equity securities related to bond and stock mutual funds as these securities offer a competitive yield with a shorter duration. However, we have reduced our holdings over the last several years due to higher earnings volatility and RBC charges.

	Years Ended December 31,
	2016				2015			2014
	(In thousands)
Gross investment income:
Fixed maturity securities	$	43,637			39,570			36,670
Equity securities	851				2,909			1,986
Mortgage loans	24				36			42
Policy loans	5,277				4,614			4,172
Long-term investments	305				247			287
Other	89				53			45
Total investment income	50,183				47,429			43,202
Less investment expenses	(1,623		)		(1,647	)		(2,140	)
Net investment income	$	48,560			45,782			41,062

Investment income from fixed maturity investments increased in 2016 due to an increase in the portfolio from new money investment purchases as noted above relative to the fixed maturity portfolio.  In addition, the increase in the policy loans asset balance, which represents policyholders utilizing their accumulated policy cash value, contributed to the increase to investment income.  Investment income from equity securities has declined as we have reduced our holdings as discussed above.

Realized Losses on Investments . Net realized investment losses resulted from OTTI on both fixed maturity and equity securities totaling $4.3 million and $5.4 million , in 2016 and 2015 . The OTTI in 2016 was somewhat offset by realized investment gains on sales of fixed maturity securities in our available-for-sale portfolio and sales of equity securities.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Realized investment gains (losses) are as follows.

	Years Ended December 31,
	2016				2015			2014
	(In thousands)
Realized investment gains (losses):
Sales, calls and maturities
Fixed maturities	$	2,024			(111	)		359
Equity securities	303				37			49
Net realized investment gains (losses)	2,327				(74	)		408
Other-than-temporary impairments ("OTTI"):
Fixed maturities	(3,970		)		(2,998	)		—
Equity securities	(342		)		(2,387	)		(427	)
Realized losses on OTTI	(4,312		)		(5,385	)		(427	)
Net realized investment losses	$	(1,985	)		(5,459	)		(19	)

 

Benefits and Expenses

	Years Ended December 31,
	2016				2015			2014
	(In thousands)
Benefits and expenses:
Insurance benefits paid or provided:
Claims and surrenders	$	81,367			78,879			68,269
Increase in future policy benefit reserves	75,881				77,060			81,998
Policyholders' dividends	6,832				10,747			10,102
Total insurance benefits paid or provided	164,080				166,686			160,369
Commissions	44,641				43,625			44,021
Other general expenses	33,356				33,287			36,591
Capitalization of deferred policy acquisition costs	(32,732		)		(31,104	)		(32,071	)
Amortization of deferred policy acquisition costs	28,515				23,400			21,083
Amortization of cost of customer relationships acquired	2,063				2,317			2,182
Total benefits and expenses	$	239,923			238,211			232,175

 

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Claims and Surrenders.   As noted in the table below, claims, benefits and surrenders increased from $78.9 million in 2015 to $81.4 million in 2016 .

 

	Years Ended December 31,
	2016				2015			2014
	(In thousands)
Death claims	$	23,104			24,638			22,452
Surrender expenses	33,686				31,682			24,321
Endowment benefits	16,173				16,273			16,534
Matured endowments	3,392				1,773			944
Property claims	1,941				1,689			1,535
Accident and health benefits	462				388			520
Other policy benefits	2,609				2,436			1,963
Total claims and surrenders	$	81,367			78,879			68,269

•	The Company monitors death claims based upon expectations.  These values may routinely fluctuate from year to year. We did experience several higher value claims in the life segment in the first quarter of 2015 .

•

Policy surrenders increased 6.3% in 2016 from 2015 and 30.3% from 2014 to 2015 , or 0.7% and 0.7% of direct ordinary whole life insurance inforce for 2016 and 2015 , respectively.  The increase in surrender expense is primarily related to our international business and is expected to increase over time due to the aging of this block of business.  A significant portion of surrenders relates to policies that have been in force over fifteen years and no longer have a surrender charge associated with them.  Total direct insurance inforce reported in 2016 was $5.0 billion compared to $5.0 billion in 2015 and $4.9 billion 2014 .

•

Endowment benefits decreased slightly in 2016 compared to 2015 amounts. We have a series of international policies that carry an immediate endowment benefit of an amount selected by the policy owner.  These benefits have been popular in the Pacific Rim and Latin America, where the Company has experienced increased interest in our guaranteed products in recent years.  Annual guaranteed endowments are factored into the premium and, as such, the increase or decrease is expected to have little impact on expected profitability.

  

•	Matured endowments increased in each of the last two years and we expect this trend to continue as this block of business increases, persists and policies begin to reach maturity.

•	Property claims increased 15% to approximately $1.9 million in 2016 compared with the amount reported for 2015 due to a slight increase in weather related claims.

•	Other policy benefits resulted primarily from interest paid on premium deposits and policy benefit accumulations and increased as these policy liabilities also increased.

Reserves .  The change in future policy benefit reserves has decreased in 2016 by 1.5% and in 2015 by 6.0% , primarily due to higher surrenders in each year. Changes in future policy benefit reserves are largely driven by policyholder activity (e.g. premiums, surrenders, etc.)

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. Policyholders' dividends decreased 36.4% in 2016 compared to 2015 , due to the dividend rate actions that we took at the end of 2015 .

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Commissions .  Commission expense fluctuates in a direct relationship to new and renewal insurance premiums and has increased 2.3% in 2016 compared to 2015 as first year premium revenues, on which higher commission rates are paid, remained relatively flat while renewal premiums were up 2.7% .

Other General Expenses .  Total general expenses increased 0.2% on a consolidated basis in 2016 due primarily to increased legal, consulting and audit fees related to our tax compliance issue and business strategies review, as well as higher salaries, bonuses and related employee benefits paid to top executives.

Total general expenses decreased 9.0% on a consolidated basis in 2015 due primarily to the tax compliance issue we recognized in 2014 resulting in $10.2 million additional expense in 2014 for our best estimate liability. In 2015, we recorded an additional $3.4 million of expense related to this tax compliance issue.

We perform an expense study on an annual basis, utilizing an enterprise-wide time study, and we adjust cost allocations among entities as needed based upon this review.  Any allocation changes are reflected in the segment operations, but do not impact total expenses.

Deferred Policy Acquisition Costs .  Capitalized deferred policy acquisition costs ("DAC") were $32.7 million , $31.1 million and $32.1 million in 2016 , 2015 and 2014 .  These costs will vary based upon successful efforts related to newly issued policies and renewal business.  Significantly lower amounts are capitalized related to renewal business in correlation with the lower commissions paid on that business compared to first year business which have higher commission rates.  In addition, the prolonged low interest rate environment impacted the assumptions used in the development of the DAC asset for new policies issued.

Amortization of DAC totaled $28.5 million , $23.4 million and $21.1 million in 2016 , 2015 and 2014 primarily due to the higher surrender activity, including early duration elections to convert to reduced paid up ("RPU") or extended term insurance ("ETI") in 2016. There are higher deferred acquisition costs associated with early duration conversions to RPU or ETI, which, when converted, increases amortization expense. Amortization of deferred policy acquisition costs is impacted by persistency and the higher level of surrenders is impacting our amortization.

 

Federal Income Tax .  Federal income tax expense (benefit) was $3.5 million , $1.2 million and $4.0 million in 2016 , 2015 and 2014 , respectively, resulting in effective tax rates of 64.1% , (61.8)% and (206.2)% , respectively.  The significant changes in rates noted are the result of the tax compliance issue we identified in 2014 which impacted our effective tax rates in each year as these costs are not deductible for tax. Additionally, the Company recorded a tax expense in each year for an uncertain tax position that is affecting the tax rates. 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.

Segment Operations

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 segments generate the majority of our income.  The amount of insurance, number of policies, and average face amounts of policies issued during the periods indicated are shown below.

	Years Ended December 31,
	2016											2015
	Amount of Insurance Issued				Number of Policies Issued			Average Policy Face Amount Issued				Amount of Insurance Issued				Number of Policies Issued			Average Policy Face Amount Issued
Life	$	389,125,834			6,632			$	58,674			$	372,272,014			6,616			$	56,268
Home Service	178,485,493				26,847			6,648				185,551,760				27,876			6,656

 

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

These segments are reported in accordance with U.S. GAAP.  The Company evaluates profit and loss performance based on net income before federal income taxes.

	Income (Loss) Before Federal Income Taxes
	Years Ended December 31,
	2016				2015			2014
	(In thousands)
Life Insurance	$	5,391			(4,772	)		(4,077	)
Home Service Insurance	2,339				4,538			2,870
Other Non-Insurance Enterprises	(2,247		)		(1,709	)		(743	)
Total	$	5,483			(1,943	)		(1,950	)

Life Insurance

Our Life Insurance segment primarily issues ordinary whole life insurance and endowment policies in U.S. Dollar-denominated amounts to foreign residents in approximately 30 countries through approximately 1,525 independent marketing consultants, and domestically through over 60 independent marketing firms and consultants throughout the United States.

	Years Ended December 31,
	2016				2015			2014
	(In thousands)
Revenue:
Premiums	$	151,195			147,832			142,358
Net investment income	33,350				30,206			26,454
Realized investment losses, net	(1,685		)		(3,873	)		(182	)
Other income	882				1,008			504
Total revenue	183,742				175,173			169,134
Benefits and expenses:
Insurance benefits paid or provided:
Claims and surrenders	58,440				55,912			46,021
Increase in future policy benefit reserves	71,373				73,259			76,858
Policyholders' dividends	6,774				10,695			10,045
Total insurance benefits paid or provided	136,587				139,866			132,924
Commissions	29,235				28,336			28,863
Other general expenses	14,284				16,345			19,274
Capitalization of deferred policy acquisition costs	(26,742		)		(25,268	)		(26,242	)
Amortization of deferred policy acquisition costs	24,428				20,025			17,778
Amortization of cost of customer relationships acquired	559				641			614
Total benefits and expenses	178,351				179,945			173,211
Income (loss) before federal income tax expense	$	5,391			(4,772	)		(4,077	)

 

Premiums .  Premium revenues increased for 2016 compared to 2015 and 2014 , due to higher international renewal premiums, which have experienced strong persistency as this block of insurance ages.  First year premiums decreased slightly in the current year, which we believe is due to cutting dividend rates to make our products more profitable, but which appeared to have less of an impact that we anticipated. Sales from Colombia, Taiwan and Brazil represented the majority of the premium increase.

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Life Insurance premium breakout is detailed below.

	Years Ended December 31,
	2016				2015			2014
	(In thousands)
Premiums:
First year	$	21,434			21,541			22,142
Renewal	129,762				126,291			120,216
Total premium	$	151,196			147,832			142,358

Endowment sales represent a significant portion of new business sales internationally, as these products continue to exceed our whole life sales in the current markets.  In addition, most of our life insurance policies contain a policy loan provision, which allows the policyholder to use cash value of a policy to pay premiums.  The policy loan asset balance increased 10.8% year over year.

The following table sets forth, by country, our direct premiums from our international life insurance business for the periods indicated. Our international business and premium collections could be impacted by future changes relative to laws, regulations or economic events in the countries from which we accept applications.

	Years ended December 31,
	2016							2015							2014
	(In thousands, except for %)
Country
Venezuela	$	31,107			21.2	%		$	31,948			22.4	%		$	31,175			22.8	%
Colombia	29,643				20.2			27,589				19.3			27,472				20.1
Taiwan	18,590				12.7			18,031				12.6			16,686				12.2
Ecuador	15,456				10.5			15,527				10.9			15,364				11.2
Brazil	9,856				6.7			8,960				6.3			1,703				1.2
Other Non-U.S.	41,992				28.7			40,529				28.5			44,574				32.5
Total	$	146,644			100.0	%		$	142,584			100.0	%		$	136,974			100.0	%

 

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" on pages 10 and 17 for additional information.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

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

	Years ended December 31,
	2016							2015							2014
	(In thousands, except for %)
State
Texas	$	2,236			32.5	%		$	2,460			34.2	%		$	2,630			36.1	%
Indiana	1,211				17.6			1,372				19.1			1,363				18.7
Florida	708				10.3			685				9.5			687				9.4
Missouri	457				6.6			452				6.3			467				6.4
Kentucky	391				5.7			443				6.2			467				6.4
Other States	1,887				27.3			1,783				24.7			1,678				23.0
Total	$	6,890			100.0	%		$	7,195			100.0	%		$	7,292			100.0	%

 

We believe that our domestic business has been declining because our domestic business, unlike our international business, does not have a dedicated marketing team. Moreover, 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 and which we have ceded, in large part, to an unaffiliated insurance company under a coinsurance agreement.

Net Investment Income .  Net investment income has increased due to continued growth in average invested assets even though the annual yield has decreased 13 basis points in this segment from 2015 , as discussed in the Consolidated Results of Operations above.

	For the Years Ended December 31,
	2016				2015			2014
	(In thousands, except for %)
Net investment income	$	33,350			30,206			26,454
Average invested assets, at amortized cost	779,592				684,590			623,498
Annualized yield on average invested assets	4.28		%		4.41	%		4.24	%

Realized Investment Losses, Net .  In 2016 and 2015 , the Company recognized losses on other-than-temporary impairments totaling $2.3 million and $3.8 million, respectively, related to bond and mutual fund holdings. Realized losses of $0.2 million in 2014 were recognized due to the write-down and sale of mutual fund holdings.

Claims and Surrenders . A breakout of claims and surrender benefits is detailed below.

	For the Years Ended December 31,
	2016				2015			2014
	(In thousands)
Death claims	$	5,886			6,843			5,461
Surrender expenses	30,502				28,767			21,265
Endowment benefits	16,160				16,256			16,506
Matured endowments	2,937				1,304			565
Accident and health benefits	365				325			287
Other policy benefits	2,590				2,417			1,937
Total claims and surrenders	$	58,440			55,912			46,021

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

•

Death claims expense decreased 14.0% in 2016 compared to 2015 and increased 25.3% in 2015 compared to 2014 . No unusual trends have been noted in our claims experience, except we did experience several higher value claims in the first quarter of 2015 , which drove the 2015 increase. Mortality experience is closely monitored by the Company as a key performance indicator and these amounts were within expected levels.

•

We noted increases in surrender expense over the last several years which is primarily related to our international business and is expected to increase over time due to the aging of this block of business.  The majority of policy surrender benefits paid is attributable to our international business and historically was related to policies that have been in force over fifteen years, when surrender charges are no longer applicable. However, in 2016 the increased surrender activity is also in the earlier durations (years 1-15), which still have surrender charges. We are seeing various reasons for individuals surrendering their policies, including the sustained slow world-wide economy, individuals simply needing their money and former independent consultants moving business to other insurance carriers.

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

•	Matured endowments increased in each of the last two years and we expect this trend to continue 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 and increased as these policy liabilities also increased.

Increase in Future Policy Benefit Reserves .  Policy benefit reserves in 2016 decreased compared to the same period in 2015 , primarily as a result of the higher surrenders and slightly lower new sales as noted above.

Endowment sales totaled approximately $16.5 million , $16.4 million and $16.1 million , representing approximately 77.0% , 76.1% and 72.7% of total new first year premiums in 2016 , 2015 , and 2014 , respectively.

Policyholder Dividends .  Policyholders' dividends decreased 36.7% in 2016 compared to 2015 , due to the dividend rate actions taken by us at the end of 2015 to improve our product profitability.   The Company issues long duration participating policies to foreign residents that are expected to pay dividends to policyholders based upon actual experience.  The life company boards approve any dividends on an annual basis and may change the dividend rates as needed for business purposes. Policyholder dividends are factored into the premiums at the time the product is developed and therefore have no impact on expected profitability.

Capitalization and Amortization of Deferred Policy Acquisition Costs .  Capitalized costs increased, as commission-related costs have increased in the current year compared to 2015 .  Amortization of DAC increased in the current year by 22.0% from 2015 as we experienced increased surrender activity in the current year, including early duration elections to convert to reduced paid up ("RPU") or extended term insurance ("ETI") in 2016. There are higher deferred acquisition costs associated with early duration conversions to RPU or ETI, which, when converted, increases amortization expense. Amortization of deferred policy acquisition costs is impacted by persistency and the higher level of surrenders is impacting our amortization.

  

Commissions .  Commission expense increase or decrease is directly related to the increase or decrease in premiums.  First year policy premiums pay a higher commission rate than renewal policy premiums.

Other General Expenses .  The expenses are allocated by segment, based upon an annual expense study performed by the Company. Other general expenses decreased 12% to $14.3 million in 2016 compared to $16.3 million in 2015 , driven in part by reduced expenses related to the IRC tax compliance issue for life and annuity insurance remediation expense, which totaled $1.9 million in 2016, compared with $4.4 million in 2015, somewhat offset by higher expenses related to actuarial, tax, audit and legal services related to tax compliance and business analysis initiatives. In 2014 , amounts are higher by $7.9 million as compared to 2013 . This increase is due to the estimated remediation costs of $8.3 million associated with the tax compliance issue we identified.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Home Service Insurance

Our Home Service Insurance segment provides pre-need and final expense ordinary life insurance and annuities to middle and lower income individuals primarily in Louisiana, Mississippi and Arkansas.  Our policies in this segment are sold and serviced through funeral homes and a home service marketing distribution system utilizing over 730 employees and independent agents.

 

	Years Ended December 31,
	2016				2015			2014
	(In thousands)
Revenue:
Premiums	$	46,681			46,648			46,174
Net investment income	13,705				14,063			13,234
Realized investment gains (losses), net	(300		)		(1,586	)		116
Other income	5				86			29
Total revenue	60,091				59,211			59,553
Benefits and expenses:
Insurance benefits paid or provided:
Claims and surrenders	22,927				22,967			22,248
Increase in future policy benefit reserves	4,508				3,801			5,140
Policyholders' dividends	58				52			57
Total insurance benefits paid or provided	27,493				26,820			27,445
Commissions	15,406				15,289			15,158
Other general expenses	15,252				13,349			15,036
Capitalization of deferred policy acquisition costs	(5,990		)		(5,836	)		(5,829	)
Amortization of deferred policy acquisition costs	4,087				3,375			3,305
Amortization of cost of customer relationships acquired	1,504				1,676			1,568
Total benefits and expenses	57,752				54,673			56,683
Income before federal income tax expense	$	2,339			4,538			2,870

 

In March of 2014, we completed the acquisition of MGLIC which is a wholly owned subsidiary of SPLIC. MGLIC is licensed in Mississippi and customarily sells policies through independent funeral homes. As part of the conversion process and transitioning policy administration to our computer system, we identified some operational challenges that we are working to improve related to our business processes. The risk profile of this business is higher than the debit based agent collections since the funeral home is the agent and beneficiary to the claims in many cases. We have incorporated policyholder direct mail and contact within the MGLIC operations to help mitigate risks. Our Mississippi clients have experienced enhanced support from the affiliated companies and operational benefits.

Premiums .  The premiums in this segment increased slightly in 2016 compared to 2015 , as renewal premiums increased while first year premiums decreased slightly as the Home Service business is a mature business. This is the same trend we saw in 2015 compared to 2014 .

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

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

	Years ended December 31,
	2016							2015							2014
	(In thousands)
State
Louisiana	$	42,605			89.6	%		$	42,537			89.4	%		$	42,057			89.2	%
Mississippi	2,450				5.2			2,564				5.4			2,631				5.6
Arkansas	1,602				3.4			1,585				3.3			1,652				3.5
Other States	883				1.8			871				1.9			832				1.7
Total	$	47,540			100.0	%		$	47,557			100.0	%		$	47,172			100.0	%

 

Direct premiums have remained relatively flat due to the maturity of this business.

Net Investment Income .  Net investment income decreased in 2016 as our average invested assets decreased as did the overall portfolio yield by 2 basis points from 2015 . MGLIC investment income included 10 months, for the period of ownership during 2014.

Net investment income for our home service insurance segment is summarized as follows:

	For the Years Ended December 31,
	2016				2015			2014
	(In thousands, except for %)
Net investment income	$	13,705			14,063			13,234
Average invested assets, at amortized cost	294,132				300,174			296,355
Annualized yield on average invested assets	4.66		%		4.68	%		4.52	%

Realized Investment Gains (Losses), Net .  In 2016 and 2015 , the Company recognized losses on other-than-temporary impairments totaling $2.0 million and $1.6 million, respectively, related to bond and mutual fund holdings. In 2014, we recorded net gains of $0.1 million resulting from gains from calls and sales related to bonds of $0.2 million less an OTTI adjustment on mutual funds of $0.1 million.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Claims and Surrenders .  A breakout of claims and surrender benefits is detailed below.

	For the Years Ended December 31,
	2016				2015			2014
	(In thousands)
Death claims	$	17,218			17,794			16,991
Surrender expenses	3,184				2,915			3,056
Endowment benefits	13				17			28
Matured endowments	455				469			379
Property claims	1,941				1,689			1,535
Accident and health benefits	98				63			233
Other policy benefits	18				19			26
Total claims and surrenders	$	22,927			22,966			22,248

•	Death claims expense decreased in 2016 compared to 2015 , after increasing in 2015 from 2014 . Death claims can fluctuate from year to year. Mortality experience is closely monitored by the Company as a key performance indicator and these amounts were within expected levels.

•	Surrender expenses are consistent with expectations for the current economic conditions.

•	Property claims increased in both 2016 and 2015 related to reported weather claims. The large increase in 2016 was primarily due to tornado activity in Louisiana earlier in the year and high winds that accompanied the severe flooding in Louisiana.

Increase in Future Policy Benefit Reserves .  The change in reserves includes estimated reserve changes related to the IRC 7702 tax compliance issue of a decrease of $0.5 million and $0.5 million in 2016 and 2015 , respectively. These reserves decreased in both periods due to a more refined estimate. Reserves increased $1.4 million in 2014 related to the tax compliance issue. Absent the change in reserves related to the IRC tax issue, the change in reserves between the periods was minimal, as premiums were relatively flat and lapse experience was comparable for all three periods presented.

Commissions .  Commission expense was comparable for all three periods presented based upon premiums collected.

Other General Expenses .  These expenses are allocated by segment based upon an annual expense study performed by the Company. The 2016 expenses related to the IRC tax compliance issue for life and annuity insurance remediation expense remained flat compared to the 2015 expense, while in 2015 the expense decreased $1.7 million due to further refinement of our estimates. Both 2016 and 2015 include higher expenses related to actuarial, tax, audit and legal services related to tax compliance and business analysis initiatives, although those costs are even greater in 2016 than in 2015 .

Capitalization and Amortization of Deferred Policy Acquisition Costs ("DAC") .  DAC capitalization is directly correlated to fluctuations in first year commissions.  Amortization of DAC was relatively level, between 2015 and 2014 , but increased by 21.1% in 2016 from 2015 .  This increase was primarily due to an increase in surrenders and the impact of updated annual GAAP assumptions. We monitor lapse rates as a key component of our insurance operations.   

Other Non-Insurance Enterprises

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

Investments

Financial stability and the prevention of capital erosion are important investment considerations for the Company.  A primary investment goal is the conservation of assets due to the long-term nature of a significant portion of our liabilities.  The administration

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

of our investment portfolios is handled internally, pursuant to board-approved investment guidelines, with all trading activity approved by a committee of each entity’s respective board of directors.  The guidelines used require that securities are of high quality and investment grade.  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 selected are generally 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. Due to the prolonged low interest rate environment, we have intentionally shortened the duration of our asset portfolio to capitalize on new investment purchases as interest rates rise. As rates rise, we plan to extend assets durations and increase investment yields.

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 assets.

	December 31, 2016							December 31, 2015
	Carrying Value				% of Total Carrying Value			Carrying Value				% of Total Carrying Value
	(In thousands)							(In thousands)
Fixed maturity securities:
U.S. Treasury and U.S. Government-sponsored enterprises	$	22,695			1.8	%		$	35,382			3.0	%
Corporate	306,134				24.3			237,248				20.3
Municipal bonds (2)	797,240				63.4			719,825				61.5
Mortgage-backed (1)	2,477				0.2			3,015				0.2
Foreign governments	126				—			131				—
Total fixed maturity securities	1,128,672				89.7			995,601				85.0
Short-term investments	508				—			251				—
Cash and cash equivalents	35,510				2.8			82,827				7.1
Other investments:
Policy loans	66,672				5.3			60,166				5.1
Equity securities	18,159				1.5			23,438				2.0
Mortgage loans	232				—			594				0.1
Real estate and other long-term investments	7,896				0.7			8,031				0.7
Total cash, cash equivalents and investments	$	1,257,649			100.0	%		$	1,170,908			100.0	%

 

(1) Includes $2.2 million and $2.6 million of U.S. Government agencies and government-sponsored enterprise for the years ended December 31, 2016 and  2015 , respectively.

(2) Includes $273.4 million and $273.1 million of securities guaranteed by third parties for the years ended December 31, 2016 and 2015 , respectively.

The current year decline in U.S. government-sponsored securities is due to call activity from this sector and reinvestment into fixed maturity corporate and municipal bond categories.  The Company has increased investments in municipals primarily related to Build America taxable bonds, essential services and corporate issuer holdings in various industry sectors.

At December 31, 2016 , investments in fixed maturity and equity securities were 91.2% of our total cash, cash equivalents and investments.  All of our fixed maturities were classified as either available-for-sale or held-to-maturity securities at December 31, 2016 and 2015 .  We had no fixed maturity or equity securities that were classified as trading securities at December 31, 2016 or 2015 .

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

As previously discussed, our investment portfolios have been impacted significantly by the low interest rate environment over the past several years.  The following table shows investment yields by segment operations as of December 31 for each year presented.

 

		Business Segment
Year		Life Insurance			Home Service			Consolidated
2016		4.28	%		4.66	%		4.28	%
2015		4.41	%		4.68	%		4.38	%
2014		4.24	%		4.52	%		4.21	%

Yields on investment assets vary between segment operations due to different portfolio mixes and durations in the segments.  The life segment previously invested more in U.S. Government securities, however over the past few years it has invested in municipal and corporate issuers and is now more similar to the home service segment which has had concentrations primarily in the municipal and corporate sectors.  

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 and Fitch Ratings.  A credit rating assigned by a 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 a NRSRO are included in the "other" category.

The following table shows the distribution of the credit ratings of our portfolio of fixed maturity securities by carrying value.

	December 31, 2016							December 31, 2015
	Carrying Value				% of Total Carrying Value			Carrying Value				% of Total Carrying Value
	(In thousands)							(In thousands)
AAA	$	88,853			7.9	%		$	76,026			7.6	%
AA	554,211				49.1			497,781				50.0
A	238,350				21.2			247,381				24.9
BBB	215,499				19.1			148,656				14.9
BB and other	31,759				2.7			25,757				2.6
Totals	$	1,128,672			100.0	%		$	995,601			100.0	%

The Company made new investments in higher-grade municipals and corporate bonds.  Non-investment grade securities are the result of downgrades of issuers or securities acquired during acquisitions of companies, as the Company does not purchase below investment grade securities.

As of December 31, 2016 , the Company held municipal securities that include third party guarantees.  Detailed below is a presentation by NRSRO rating of our municipal holdings by funding type.

 

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Municipals shown including third party guarantees

	December 31, 2016
	General Obligation							Special Revenue						Other						Total						% Based on Amortized Cost
	Fair Value				Amortized Cost			Fair Value			Amortized Cost			Fair Value			Amortized Cost			Fair Value			Amortized Cost
	(In thousands, except percentages)
AAA	$	60,942			59,272			25,755			25,123			—			—			86,697			84,395			10.7	%
AA	179,993				176,295			297,510			290,604			26,119			25,530			503,622			492,429			62.5
A	20,053				19,837			135,657			132,437			10,952			10,438			166,662			162,712			20.7
BBB	7,777				8,297			30,274			29,655			2,008			2,019			40,059			39,971			5.1
BB and other	3,265				4,262			2,251			3,476			—			—			5,516			7,738			1.0
Total	$	272,030			267,963			491,447			481,295			39,079			37,987			802,556			787,245			100.0	%

Municipals shown excluding third party guarantees

 

	December 31, 2016
	General Obligation							Special Revenue						Other						Total						% Based on Amortized Cost
	Fair Value				Amortized Cost			Fair Value			Amortized Cost			Fair Value			Amortized Cost			Fair Value			Amortized Cost
	(In thousands, except percentages)
AAA	$	34,225			34,213			4,365			4,362			—			—			38,590			38,575			4.9	%
AA	138,666				135,382			249,254			243,217			20,396			19,734			408,316			398,333			50.7
A	37,062				35,955			151,152			147,651			9,859			9,381			198,073			192,987			24.5
BBB	14,139				14,465			26,258			25,257			—			—			40,397			39,722			5.0
BB and other	47,938				47,948			60,418			60,808			8,824			8,872			117,180			117,628			14.9
Total	$	272,030			267,963			491,447			481,295			39,079			37,987			802,556			787,245			100.0	%

 

The Company held investments in special revenue bonds that were greater than 10% of fair value based upon activity as of December 31, 2016 , as shown in the table below.

Bond Issue Activity		Fair Value				Amortized Cost			% of Total Fair Value
		(In thousands)
Education		$	120,578			117,479			15.02	%
Utilities		171,103				166,283			21.32	%

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

The tables below represent the Company’s detailed exposure of municipal holdings in Louisiana, Texas and Florida, which comprise the most significant state concentrations of the total municipal portfolio as of December 31, 2016 .

	December 31, 2016
	General Obligation							Special Revenue						Other						Total
	Fair Value				Amortized Cost			Fair Value			Amortized Cost			Fair Value			Amortized Cost			Fair Value			Amortized Cost
	(In thousands)
Louisiana securities including third party guarantees
AA	$	8,590			8,563			19,068			18,309			—			—			27,658			26,872
A	5,308				5,147			5,679			5,640			—			—			10,987			10,787
BBB	—				—			375			379			—			—			375			379
BB and other	—				—			363			357			—			—			363			357
Total	$	13,898			13,710			25,485			24,685			—			—			39,383			38,395
Louisiana securities excluding third party guarantees
AA	$	11,182			11,003			17,168			16,634			—			—			28,350			27,637
A	2,207				2,182			4,813			4,709			—			—			7,020			6,891
BBB	—				—			1,105			1,042			—			—			1,105			1,042
BB and other	509				525			2,399			2,300			—			—			2,908			2,825
Total	$	13,898			13,710			25,485			24,685			—			—			39,383			38,395

 

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 December 31, 2016 , total holdings of municipal securities in Louisiana represented 4.9% of all municipal holdings based upon fair value. 

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

 The Company also holds 23.8% of its municipal holdings in Texas issuers.

 

	December 31, 2016
	General Obligation							Special Revenue						Total
	Fair Value				Amortized Cost			Fair Value			Amortized Cost			Fair Value			Amortized Cost
	(In thousands)
Texas securities including third party guarantees
AAA	$	58,867			57,248			15,738			15,257			74,605			72,505
AA	57,964				57,238			31,762			31,052			89,726			88,290
A	1,200				1,203			16,830			16,245			18,030			17,448
BBB	—				—			7,311			6,755			7,311			6,755
BB and other	532				532			875			2,106			1,407			2,638
Total	$	118,563			116,221			72,516			71,415			191,079			187,636
Texas securities excluding third party guarantees
AAA	$	33,241			33,223			1,526			1,525			34,767			34,748
AA	61,728				59,814			35,139			34,169			96,867			93,983
A	6,282				6,146			21,008			20,225			27,290			26,371
BBB	2,809				2,726			7,867			7,308			10,676			10,034
BB and other	14,503				14,312			6,976			8,188			21,479			22,500
Total	$	118,563			116,221			72,516			71,415			191,079			187,636

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

The Company also holds 11.4% of its municipal holdings in Florida issuers.

	December 31, 2016
	General Obligation							Special Revenue						Other						Total
	Fair Value				Amortized Cost			Fair Value			Amortized Cost			Fair Value			Amortized Cost			Fair Value			Amortized Cost
	(In thousands)
Florida securities including third party guarantees
AAA	$	539			519			3,790			3,637			—			—			4,329			4,156
AA	—				—			58,497			57,630			3,869			3,914			62,366			61,544
A	—				—			13,281			12,926			10,952			10,438			24,233			23,364
BB and other	—				—			486			481			—			—			486			481
Total	$	539			519			76,054			74,674			14,821			14,352			91,414			89,545
Florida securities excluding third party guarantees
AA	$	539			519			40,547			39,871			3,322			3,363			44,408			43,753
A	—				—			30,401			29,765			9,859			9,381			40,260			39,146
BB and other	—				—			4,042			3,992			—			—			4,042			3,992
Total	$	539			519			76,054			74,674			14,821			14,352			91,414			89,545

There were no other states or individual issuer holdings that represented or exceeded 10% of the total municipal portfolio as of December 31, 2016 .

Impairment Considerations Related to Investments in Fixed Maturity and Equity Securities

We evaluate the carrying value of our fixed maturity and equity securities at least quarterly.   The Company monitors all debt and equity securities on an on-going basis relative to changes in credit ratings, market prices, earnings trends and financial performance, in addition to specific region or industry reviews. The assessment of whether impairments have occurred is based on a case-by-case evaluation of underlying reasons for the decline in fair value.  The Company determines other-than-temporary impairment (“OTTI”) 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 OTTI has occurred, the amount of the OTTI recognized in earnings depends on whether the Company intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis.  If the Company intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis, an OTTI 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 is required to sell the security before recovery of its amortized cost basis, the OTTI will be separated into the following:  a) the amount representing the credit loss; and b) the amount related to all other factors.  The amount of the total OTTI related to the credit loss is recognized in earnings.  The amount of the total OTTI related to other factors is recognized in other comprehensive income, net of applicable taxes.  The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.  The new amortized cost is not adjusted for subsequent recoveries in fair value.

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In 2016 and 2015 , the Company recognized losses on other-than-temporary impairments totaling $4.3 million and $5.4 million , respectively, related to bond and mutual fund holdings. In 2014, impairments of $0.4 million were recorded as a result of our OTTI analysis. Based upon our analysis of whether declines in fair value below cost are temporary or other-than-temporary, management believes that our investments in fixed maturity investments at December 31, 2016 were not impaired, and no additional other-than-temporary losses need to be recorded. Information on realized gains and losses by category, including OTTI, is set forth in our consolidated financial statements, Note 2 - Investments, in the "Notes to the Consolidated Financial Statements."

Gross unrealized losses on fixed maturities available-for-sale amounted to $9.2 million as of December 31, 2016 and $7.9 million as of December 31, 2015 .  This increase in gross unrealized losses was due to an increase in the interest rate environment in the fourth quarter of 2016 , following a fairly significant drop in rates during the first three quarters of 2016 .  There were $0.1 million and $0.6 million of gross unrealized losses on equity securities as of December 31, 2016 and 2015 .  Information on unrealized gains and losses by category is set forth in our consolidated financial statements, Note 2 - Investments, in the "Notes to the Consolidated Financial Statements."

Reinsurance

As is customary among insurance companies, our insurance company subsidiaries reinsure with other companies portions of the life insurance risks they underwrite.  A primary purpose of reinsurance agreements is to enable an insurance company to reduce the amount of risk on any particular life and, by reinsuring the amount exceeding the maximum amount the insurance company is willing to retain, to insure individuals in amounts larger than it could without such agreements.  Even though a portion of the risk may be reinsured, our insurance company subsidiaries remain liable to perform all the obligations imposed by the policies issued by them and could be liable if their reinsurers were unable to meet their obligations under the reinsurance agreements.

We believe we have established appropriate reinsurance coverage based upon our net retained insured liabilities compared to our surplus.

The effect of reinsurance on premiums is as follows.

	For the Years Ended December 31,
	2016				2015			2014
	(In thousands)
Direct premiums	$	201,074			197,337			191,438
Reinsurance assumed	151				353			421
Reinsurance ceded	(3,349		)		(3,210	)		(3,327	)
Net premiums	$	197,876			194,480			188,532

Our insurance subsidiaries monitor the solvency of their reinsurers in seeking to minimize the risk of loss in the event of default by a reinsurer.  The primary reinsurers of our insurance subsidiaries are large, well-capitalized entities.

The effect of reinsurance on life insurance in force is as follows.

	For the Years Ended December 31,
	2016				2015			2014
	(In millions)
Direct written life insurance inforce	$	4,998			4,958			4,911
Reinsurance assumed	23				37			269
Reinsurance ceded	(523		)		(517	)		(517	)
Net life insurance inforce	$	4,498			4,478			4,663

Virtually all of the Company's non-credit accident and health insurance has been reinsured and is administered by Unified Life Insurance Company, an unaffiliated party.  The reinsurance recoverables under this agreement are collateralized by assets held in a trust for the benefit of the reinsured policies.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

The Company monitors the credit ratings of our life and property reinsurers.  The ratings by A.M. Best Company range from B+ (Good) to A+ (Superior).

SPFIC has first and second event catastrophe reinsurance coverage of $10.0 million per event and a retention level of $500,000 per event.  Thus, the first $500,000 of incurred claims and any claims in excess of $10.0 million are SPFIC's responsibility.  The reinsurance premium for first event catastrophe reinsurance was $828,000 , $873,000 and $967,000 in 2016 , 2015 and 2014 , respectively.

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 and is provided by a variety of sources.

Our liquidity requirements 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 there were no liquidity issues in 2016 or 2015 .  Our investments consist of 72.1% of marketable debt securities and 1.5% of equity 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 $102.3 million , $87.2 million and $97.9 million for the years ended December 31, 2016 , 2015 and 2014 , respectively.  We have traditionally also had significant cash flows from both scheduled and unscheduled fixed maturity security calls, maturities, redemptions, and prepayments, which totaled $70.4 million , $95.6 million and $71.4 million in 2016 , 2015 and 2014 .  These cash flows, for the most part, are reinvested in fixed income securities.  Net cash outflows from investment activity totaled $152.1 million , $58.0 million and $104.0 million for the years ended December 31, 2016 , 2015 and 2014 , respectively.  The outflows from investing activities for the year ended December 31, 2016 , primarily related to the investment of excess cash and cash equivalents generated from operations during 2016 , in addition to the investment of excess cash held at the end of 2015.  The Company's cash flows from financing activities were $2.5 million in 2016 , $3.0 million in 2015 and $2.1 million in 2014 .

See "Parent Company Liquidity and Capital Resources" below for a discussion of additional Parent Company liquidity.

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 $ 14.4 million, net of tax for probable liabilities and expenses associated with this tax compliance matter, which represents management’s best estimate and we have disclosed an estimated range related to probable liabilities and expenses of $7.5 million to $44.8 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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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.

The NAIC has established minimum capital requirements in the form of RBC.  RBC considers 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 an 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 risk-based capital fall below 200%, a series of remedial actions by the affected company would be required.

At December 31, 2016 , all of our insurance subsidiaries were above the required minimum RBC levels.

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

In the second quarter of 2016, Citizens, Inc. purchased Class A Common shares from CTI with an approximate fair value of $0.8 million.

Contractual Obligations and Off-balance Sheet Arrangements

We have committed to the following contractual obligations as of December 31, 2016 , with the payments due by the period indicated below:

Contractual Obligation		Total				Less than 1 Year			1 to 3 Years			3 to 5 Years			More than 5 Years
		(In thousands)
Operating leases		$	1,255			481			553			221			—
Future policy benefit reserves:
Life insurance		1,060,906				389			2,185			21,422			1,036,910
Annuities		69,578				33,286			14,919			6,432			14,941
Accident and health		1,022				1,022			—						—
Total future policy benefit reserves		1,131,506				34,697			17,104			27,854			1,051,851
Policy claims payable:
Life insurance		8,830				8,830			—			—			—
Accident and health		208				208			—			—			—
Casualty		500				391			109			—			—
Total policy claims payable		9,538				9,429			109			—			—
Total purchase obligations		—				—			—			—			—
Total contractual obligations		$	1,142,299			44,607			17,766			28,075			1,051,851

The payments related to the future policy benefits and policy claims payable reflected in the table above have been projected utilizing assumptions based upon our historical experience and anticipated future experience.

The Company does not have off-balance sheet arrangements at December 31, 2016 and, therefore, does not expect any future effects on the Company's financial condition related to any such arrangements.  We do not utilize special purpose entities as investment vehicles, nor are there any such entities in which we have an investment that engages in speculative activities of any nature, and we do not use such investments to hedge our investment positions.

 

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Parent Company Liquidity and Capital Resources

Citizens is a holding company and has had minimal operations of its own.  Our assets consist of the capital stock of our subsidiaries, cash, fixed income securities, mutual funds and investment real estate.  Our cash flows depend primarily upon the availability of statutorily permissible payments, primarily payments under management agreements from our 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.  We historically have not relied upon dividends from subsidiaries for our cash flow needs.  However, CICA and SPLIC both dividend available funds from time to time in relation to new acquisition target strategies.  

As of December 31, 2016 , Citizens had fixed maturities available for sale of $51.4 million and cash of $14.7 million , which represents additional liquidity for future acquisitions, liquidity support for the life insurance companies and for general corporate purposes.

Additionally, a substantial portion of our international policyholders invest their policy cash dividends and benefits in our Class A common stock through our Stock Investment Plan (the “Plan”).  Once a policyholder elects to participate in the Plan, their policy benefits can be used to purchase Citizens Class A common stock through the Plan in the open market.  In addition, our existing holders of Class A common stock, our employees and our independent consultants are eligible to participate in the Plan.  If fewer policyholders elect to participate in the Plan, or if our international premium collections were to decrease as a result of regulatory or marketing impediments, the trading volume of our Class A common stock may decline from its present levels.

Critical Accounting Policies

The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect reported amounts and related disclosures.  Management considers an accounting estimate to be critical if: (1) it requires assumptions to be made that were uncertain at the time the estimate was made; and (2) changes in the estimate, or different estimates that could have been selected, could have a material effect on our consolidated results of operations or financial condition.  While we believe that our estimates, assumptions and judgments are reasonable, they are based on information presently available.  Actual results may differ significantly.  Additionally, changes in our assumptions, estimates or assessments as a result of unforeseen events or otherwise could have a material impact on our financial position or results of operations.

Management has discussed the development and selection of its critical accounting estimates with the Audit Committee of the Board of Directors, and the Audit Committee has reviewed the disclosure presented below relating to them.  See Footnote No. 1, “Summary of Significant Accounting Policies,” of the Notes to our Financial Statements for further information on our critical accounting policies.

Our critical accounting policies are as follows:

Policy Liabilities

Future policy benefit reserves have been computed by the net level premium method with assumptions as to investment yields, dividends on participating business, mortality and withdrawals based upon our experience.  The preparation of financial statements requires management to make estimates and assumptions that affect the reported amount of policy liabilities and the increase in future policy benefit reserves.  Management's judgments and estimates for future policy benefit reserves provide for possible unfavorable deviation.

We continue to use the original assumptions (including a provision for the risk of adverse deviation) in subsequent periods to determine the changes in the liability for future policy benefits (the "lock-in concept”) unless a premium deficiency exists.  Management monitors these assumptions and has determined that a premium deficiency did not exist as of December 31, 2016 .  Management believes that our policy liabilities and increase in future policy benefit reserves as of the years ended December 31, 2016 , 2015 and 2014 are based upon assumptions, including a provision for the risk of adverse deviation, that do not warrant revision.

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Deferred Policy Acquisition Costs

Acquisition costs, consisting of commissions and policy issuance, underwriting and agency expenses that relate to and vary with the successful production of new business, are deferred.  These deferred policy acquisition costs are amortized primarily over the premium-paying period of the policies, using the same assumptions as were used in computing liabilities for future policy benefits.

We utilize the factor method to determine the amount of costs to be capitalized and the ending asset balance.  The factor method is based on the ratio of premium revenue recognized for the policies in force at the end of each reporting period compared to the premium revenue recognized for policies in force at the beginning of the reporting period. The factor method ensures that policies which lapsed or surrendered during the reporting period are no longer included in the deferred policy acquisition costs calculation.  The factor method limits the amount of deferred costs to its estimated realizable value, provided actual experience is comparable to that contemplated in the factors.

Inherent in the capitalization and amortization of deferred policy acquisition costs are certain management judgments about what acquisition costs are deferred, the ending asset balance and the annual amortization.  Approximately 94.0% of our capitalized deferred acquisition costs are attributed to first year excess commissions.  The remaining 6.0% are attributed to costs that vary with and are directly related to the successful acquisition of new insurance business.  Those costs generally include costs related to the production, underwriting and issuance of new business.

DAC is subject to recoverability testing at the time of policy issuance and loss recognition testing on an annual basis, or when an event occurs that might require loss recognition testing. If loss recognition or impairment is necessary, DAC would be written off to the extent that anticipated future premiums and investment income is insufficient to cover expect future policy benefits and expenses. Loss recognition testing that considers, among other things, actual experience and projected future experience calculates the available premium (gross premium less the benefit and expense portion of premium) for the next 50  years.  The available premium per policy and the deferred policy acquisition costs per policy are then calculated. The deferred policy acquisition costs are then evaluated for recoverability using best estimate assumptions. Management believes that our deferred policy acquisition costs and related amortization for the years ended December 31, 2016 , 2015 and 2014 limits the amount of deferred costs to its estimated realizable value.  This belief is based upon the analysis performed on capitalized expenses that vary with and are directly related to the acquisition of new and renewal insurance business, utilization of the factor method and recoverability testing at the time of policy issuance and the annual loss recognition testing.

Cost of Customer Relationships Acquired

Cost of Customer Relationships Acquired ("CCRA") is established when we purchase a block of insurance.  CCRA is amortized primarily over the emerging profit of the related policies using the same assumptions as were used in computing liabilities for future policy benefits.  We utilize various methods to determine the amount of the ending asset balance, including a static model and a dynamic model.  Inherent in the amortization of CCRA are certain management judgments about the ending asset balance and the annual amortization.  The assumptions used are based upon interest, mortality and lapses at the time of purchase.

A recoverability test that considers, among other things, actual experience and projected future experience is performed at least annually.  These annual recoverability tests initially calculate the available premium (gross premium less benefit and expense portion of premium) for the next 50 years.  The CCRA is then evaluated for recoverability utilizing best estimate assumptions.  Management believes our CCRA and related amortization is recoverable for the years ended December 31, 2016 , 2015 and 2014 .  This belief is based upon the analysis performed on estimated future results of the block and our annual recoverability testing.

Goodwill

Current accounting guidance requires that goodwill balances be reviewed for impairment at least annually or more frequently if events occur or circumstances change that would indicate that a triggering event has occurred.  A reporting unit is defined as an operating segment on one level below an operating segment.  Most of the Company's reporting units, for which goodwill has been allocated, are equivalent to the Company's operating segment, as there is no discrete financial information reviewed and analyzed by management for the separate components of the segment or all of the components of the segment have similar economic characteristics.

The goodwill impairment test follows a multi-step process as defined under current accounting guidance.  An initial review may be performed whereby the assessment is based upon qualitative factors before performing the first test step. In the first step, the

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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 fair value of the reporting unit is allocated to all of the assets and liabilities of the reporting unit to determine an implied goodwill value. If the carrying amount of the reporting unit goodwill exceeds the implied goodwill value, an impairment loss is recognized in an amount equal to that excess.

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.

Valuation of Investments in Fixed Maturity and Equity Securities

The evaluation of securities for impairments is a quantitative and qualitative process, which is subject to risks and uncertainties and is intended to determine whether declines in the fair value of investments should be recognized in current period earnings.  The risks and uncertainties include changes in general economic conditions, the issuer's financial condition or future prospects, the effects of changes in interest rates or credit spreads and the expected recovery period.

Based upon current accounting guidance, investment securities must be classified as held-to-maturity, available-for-sale or trading.  Management determines the appropriate classification at the time of purchase.  The classification of securities is significant since it directly impacts the accounting for unrealized gains and losses on securities.  Fixed maturity securities are classified as held-to-maturity and carried at amortized cost when management has the positive intent and the Company has the ability to hold the securities to maturity.  Securities not classified as held-to-maturity are classified as available-for-sale and are carried at fair value, with the unrealized holding gains and losses, net of tax, reported in other comprehensive income and do not affect earnings until realized.

The Company evaluates all securities on a quarterly basis, and more frequently when economic conditions warrant additional evaluations, for determining if an OTTI exists pursuant to the accounting guidelines. In evaluating the possible impairment of securities, consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial conditions and near-term prospects of the issuer, and the ability and intent of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.  In analyzing an issuer's financial condition, the Company may consider whether the securities are issued by the Federal government or its agencies, by government-sponsored agencies, or whether downgrades by bond rating agencies have occurred, and reviews of the issuer's financial condition.

If management determines that an investment experienced an OTTI, management must then determine the amount of OTTI to be recognized in earnings.  If management 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 less any current period loss, the OTTI will be separated into the amount representing the credit loss and the amount related to all other factors.  The amount of OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings.  The amount of OTTI related to other factors will be recognized in other comprehensive income, net of applicable taxes.  The previous amortized cost basis less the OTTI recognized in earnings will become the new amortized cost basis of the investment.  If management intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current period credit loss, the OTTI will be recognized in earnings equal to the entire difference between the investment's amortized cost basis and its fair value at the balance sheet date.  Any recoveries related to the value of these securities are recorded as an unrealized gain (as other comprehensive income (loss) in shareholders' equity) and not recognized in income until the security is ultimately sold.

The Company from time to time may dispose of an impaired security in response to asset/liability management decisions, future market movements, business plan changes, or if the net proceeds can be reinvested at a rate of return that is expected to recover the loss within a reasonable period of time.

Premium Revenue and Related Expenses

Premiums on life and accident and health policies are reported as earned when due or, for short duration contracts, over the contract period on a pro rata basis.  Benefits and expenses are associated with earned premiums so as to result in recognition of profits over the estimated life of the contracts.  This matching is accomplished by means of provisions for future benefits and the capitalization and amortization of deferred policy acquisition costs.

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Annuities are accounted for in a manner consistent with accounting for interest bearing financial instruments.  Our primary annuity products do not include fees or other such charges.

Tax Accounting

A deferred tax asset or deferred tax liability is recorded only if a determination is made that it is more-likely-than-not that the tax treatment on which the deferred tax item depends will be sustained in the event of an audit.  These determinations inherently involve management's judgment.  In addition, the Company must record a tax valuation allowance with respect to deferred tax assets if it is more-likely-than-not that the tax benefit will not be realized.  This valuation allowance is in essence a contra account to the deferred tax asset.  Management must determine the portion of the deferred tax asset and resulting tax benefit that may not be realized based upon judgment of expected outcomes.  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 will be required to record a valuation allowance in future reporting periods.  Such a charge could have a material adverse effect on our results of operations, financial condition and capital position.

Contingencies

An estimated loss from a contingency is accrued and charged to results of operations only if both of the following conditions are met:

1.	Information available prior to the issuance of the financial statements indicates that it is probable (virtual certainty is not required) that an asset has been impaired or a liability incurred as of the date of the financial statements; and

2.	The amount of the loss can be reasonably estimated.

Reasonable estimation of a possible loss does not require estimating a single amount of the loss. It requires that a loss be accrued if it can be estimated within a range. If an amount within the range is a better estimate than any other amount within the range, that amount is accrued. If no amount within the range is a better estimate than any other amount, the minimum amount in the range is accrued.

A gain contingency is an uncertain situation that will be resolved in the future, possibly resulting in a gain. We do not allow the recognition of a gain contingency prior to settlement of the underlying event. If we were to have a gain contingency, we would disclose it in the notes to the financial statements.

Recent Accounting Pronouncements

See Item 8.  Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements, Note 1. Accounting Pronouncements.

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Item 7A.	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.

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

 

	December 31, 2016										December 31, 2015
	Amortized Cost				Fair Value			Net Unrealized Gains (Losses)			Amortized Cost			Fair Value			Net Unrealized Gains (Losses)
	(In thousands)
Fixed maturities, available-for-sale	$	860,473			881,668			21,195			714,137			735,648			21,511
Fixed maturities, held-to-maturity	247,004				252,545			5,541			259,953			264,966			5,013
Total fixed maturities	$	1,107,477			1,134,213			26,736			974,090			1,000,614			26,524
Total equity securities	$	17,765			18,159			394			23,727			23,438			(289	)

 

Market Risk Related to Interest Rates

Our exposure to interest rate changes results from our significant holdings of fixed maturity investments, policy loans and mortgage loans on real estate, all of which comprised over 95.0% of our cash and investment portfolio as of December 31, 2016 .  These investments are mainly exposed to changes in U.S. Treasury rates.  Our fixed maturities investments include U.S. Government-sponsored enterprises, U.S. Government bonds, securities issued by government agencies, state and municipal bonds, and corporate bonds.  Approximately 70.8% of the fixed maturities we owned at market value on December 31, 2016 are state and political subdivisions which are primarily municipal holdings. These holdings are diversified over several states though approximately 40% of our state and municipal securities are concentrated in three states - Texas, Florida and Louisiana.

Changes in interest rates typically have a sizable effect on the fair value of our debt and equities securities. The interest rate of the ten-year U.S. Treasury bond increased to 2.45% at December 31, 2016 , from 2.27% at December 31, 2015 . Net unrealized gains on fixed maturity securities totaled $26.7 million at December 31, 2016 , compared to $26.5 million at December 31, 2015 , remaining fairly level as bond interest rates have generally lagged the rise in the U.S. Treasury rates.

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To manage interest 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 on an annual basis with respect to our fixed maturities investments using hypothetical test scenarios that assume either upward or downward shifts in the prevailing interest rates.  The Company performed an analysis of fair value changes using assumed 100 basis point upward shifts in interest rates, noting that the fair value of our fixed maturity investment portfolio of $1,134.2 million would decrease approximately $56.9 million to a fair value of $1,077.3 million upon a 100 basis point increase.  The following table shows the effects on the fair values of our fixed maturity investments based upon these scenarios.

	Fair Values of Fixed Maturity Investments Changes in Interest Rates in Basis Points
	0				+100			+200			+300
	(In thousands)
Assumed fair value	$	1,134,212			1,077,316			1,022,114			963,322

While the test scenarios are for illustrative purposes only and do not reflect our expectations regarding future interest rates or the performance of fixed-income markets, it is a near-term change that illustrates the potential impact of such events.  Due to the composition of our book of insurance business, we believe it is unlikely we would encounter large surrender activity due to an interest rate increase that would force us to dispose of our fixed maturities at a loss.

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

There are no fixed maturities or other investments that we classify as trading instruments.  Approximately 77.7% of fixed maturities were held in available-for-sale and 22.3% in held-to-maturity based upon fair value at December 31, 2016 .  At December 31, 2016 and 2015 , we had no investments in derivative instruments, subprime loans or CDOs (collateralized debt obligations).

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 1.5% of our total investments at December 31, 2016 , with 94.4% invested in diversified equity and bond mutual funds.

Item 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Reference is made to the financial statements, the notes thereto, and the report of our independent registered public accounting firm, as listed on the table of contents.

All other schedules have been omitted as the required information is inapplicable or the information required is presented in the financial statements or the notes thereto filed elsewhere herein.

Item 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

 

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Item 9A.	CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

We have established disclosure controls and procedures to ensure, among other things, material information relating to our Company, including its consolidated subsidiaries, is communicated to senior management, including our officers who certify our financial reports, and to the Board of Directors to allow for timely decisions regarding required disclosure.

 

Our Chief Executive Officer ("CEO") and our Chief Financial Officer ("CFO") are responsible for establishing and maintaining our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")).  Based upon an evaluation at the end of the period, the Chief Executive Officer and Chief Financial Officer concluded that, in light of the material weaknesses described below, our disclosure controls and procedures were not effective as of the end of the period covered by this annual report.

 

(b) Management Report on Internal Control over Financial Reporting

Management of our Company is responsible for establishing and maintaining adequate internal control over financial reporting.  Management assessed the effectiveness of internal control over financial reporting based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO").  Based on this assessment, management has concluded that our internal control over financial reporting as of December 31, 2016 was not effective due to the material weaknesses described below.

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Management has identified the following deficiencies that it believes constituted material weaknesses in our internal control over financial reporting as of December 31, 2016:

•

Management determined that the Company had ineffective data validation and management review controls over key spreadsheets and system-generated reports. These reports included data and information utilized in the preparation of financial statements and disclosures. We determined that several control deficiencies that exist aggregated to a material weakness related to the design and operating effectiveness of our controls to ensure that key spreadsheets and system-generated reports were properly reviewed for completeness and accuracy. In addition, certain management review controls were not performed at a sufficiently precise level to identify errors that may result in a material misstatement of the financial statements.

•

The Company outsourced to third party service providers the valuation of certain insurance reserves and the computation of income taxes. Management has concluded that the Company’s data validation controls over data provided to and received from third party service providers and management review controls were not designed with appropriate levels of precision or sensitivity to ensure that a material misstatement would be prevented or detected in a timely manner.

•

Management determined that a material weakness exists due to a lack of appropriate internal staff competency and expertise related to complex tax and actuarial computations. This lack of competency impacted the precision, depth and timeliness of management review controls in these areas, resulting in the possibility that a material misstatement in these computations may not have been prevented or detected in a timely manner.

Our independent registered public accounting firm, Ernst & Young LLP, has issued an attestation report on the effectiveness of our internal control over financial reporting.  The report is included in item 9A(c) of this annual report.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

(c) Attestation Report of Independent Registered Public Accounting Firm

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders of Citizens, Inc. and subsidiaries:

We have audited Citizens, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). Citizens, Inc. and subsidiaries’ management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying “Management Report on Internal Control over Financial Reporting”. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses have been identified and included in management’s assessment:

• Ineffective data validation and management review controls

• Ineffective supervision of third-party service organizations

• Ineffective staff competency and expertise

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the 2016 consolidated financial statements of Citizens, Inc. and subsidiaries. These material weaknesses were considered in determining the nature, timing and extent of audit tests applied in our audit of the 2016 financial statements, and this report does not affect our report dated April 27, 2017 , which expressed an unqualified opinion on those financial statements.

In our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria, Citizens, Inc. and subsidiaries has not maintained effective internal control over financial reporting as of December 31, 2016 , based on the COSO criteria.

/s/ Ernst & Young LLP

San Antonio, Texas

April 27, 2017

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

(d) Changes in Internal Control over Financial Reporting

With the exception of the remediation efforts described below, there were no other changes in the Company’s internal control over financial reporting during the annual period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

During 2016, management identified an ineffective control design related to our information technology ("IT") change management process resulting in a material weakness. Management learned that unauthorized programming changes could be put into the IT production environment and would possibly not be detected, due to a design deficiency in established monitoring controls. As of December 31, 2016, the material weakness was fully remediated by implementing a new IT change management control process.

We also have initiated the following remediation efforts to address the identified material weaknesses described above and to enhance our overall financial control environment, though these efforts cannot be considered fully remediated until the applicable remedial controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively:

•	Management intends to expand and enhance control procedures during 2017, in all process areas, related to data validation and management review controls.

•	Management intends to assess effectiveness of current third party service provider relationships during 2017 and increase the precision and sensitivity of data validation controls over data provided to and received from third party service providers.

•	Management is planning to add additional high level resources to both the Actuarial and Financial Reporting functions during 2017 to increase expertise and develop a more effective review process in these areas.

Management believes the foregoing remedial efforts will effectively remediate the identified material weaknesses but may make further changes deemed appropriate as they implement and monitor the effectiveness of these and other processes, procedures and controls. If not remediated, these control deficiencies could result in material misstatements to the Company’s financial statements.

Item 9B.    OTHER INFORMATION

 

None

PART III

The information in this Part III indicated below is incorporated by reference from our definitive proxy statement pursuant to General Instruction G(3) of Form 10-K. We plan to file our definitive proxy statement within 120 days after December 31, 2016.

Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Item 10 of this report incorporates by reference the information in our definitive proxy statement under the headings “Election of Directors,” “Executive Officers,” “Section 16(a) Beneficial Ownership Reporting Compliance,” “Code of Ethics,” “Shareholder Proposals” and “Audit Committee.”

Item 11. EXECUTIVE COMPENSATION

Item 11 of this report incorporates by reference the information in our definitive proxy statement under the headings “Compensation,” “Governance” and “Compensation Committee Report.”

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Item 12 of this report incorporates by reference the information in our definitive proxy statement under the headings “Securities Authorized for Issuance under Equity Compensation Plans,” and “Control of the Company.”

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Item 13 of this report incorporates by reference the information in our definitive proxy statement under the headings “Control of the Company” and “Governance.”

Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

Item 14 of this report incorporates by reference the information in our definitive proxy statement under the heading “Principal Accounting Fees and Services.”

PART IV

Item 15.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES

 

(a)	(1) and (2)   Filings as Part of this Report

The financial statements and schedules listed on the following index to financial statements and financial statement schedules are filed under Item 8 as part of this Form 10-K.

(b)	(3)   Exhibits – See the Exhibit Index

Index to Consolidated Financial Statements and Financial Statement Schedules	Page Reference
Report of independent registered public accounting firm	61
Consolidated statements of financial position at December 31, 2016 and 2015	62
Consolidated statements of comprehensive income (loss) - years ended December 31, 2016, 2015 and 2014	64
Consolidated statements of stockholders' equity - years ended December 31, 2016, 2015 and 2014	65
Consolidated statements of cash flows - years ended December 31, 2016, 2015 and 2014	66
Notes to consolidated financial statements	68
Schedule II – Condensed Financial Information of Registrant	109
Schedule III – Supplementary Insurance Information	112
Schedule IV – Reinsurance	113

All other schedules have been omitted because the required information is inapplicable or the information required is presented in the financial statements or the notes thereto filed elsewhere herein.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Citizens, Inc.:

We have audited the accompanying consolidated statements of financial position of Citizens, Inc. and subsidiaries as of December 31, 2016 and 2015, and the related consolidated statements of operations and comprehensive income (loss), stockholders' equity and cash flows for each of the three years in the period ended December 31, 2016. Our audits also included the financial statement schedules listed in the Index at Item 15(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Citizens, Inc. and subsidiaries at December 31, 2016 and 2015, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Citizens Inc.’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated April 27, 2017 expressed an adverse opinion thereon.

 

/s/ Ernst & Young LLP

San Antonio, Texas

April 27, 2017

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Consolidated Statements of Financial Position December 31, (In thousands)
Assets		2016				2015
Investments:
Fixed maturities available-for-sale, at fair value (cost:  $860,473 and $714,137 in 2016 and 2015, respectively)		$	881,668			735,648
Fixed maturities held-to-maturity, at amortized cost (fair value:  $252,545 and $264,966 in 2016 and 2015, respectively)		247,004				259,953
Equity securities available-for-sale, at fair value (cost:  $17,765 and $23,727 in 2016 and 2015, respectively)		18,159				23,438
Mortgage loans on real estate		232				594
Policy loans		66,672				60,166
Real estate held for investment (less $1,083 and $1,721 accumulated depreciation in 2016 and 2015, respectively)		5,919				7,956
Real estate held for sale (less $1,008 accumulated depreciation in 2016)		1,939				—
Other long-term investments		38				75
Short-term investments		508				251
Total investments		1,222,139				1,088,081
Cash and cash equivalents		35,510				82,827
Accrued investment income		17,903				15,406
Reinsurance recoverable		3,862				4,166
Deferred policy acquisition costs		167,790				163,692
Cost of customer relationships acquired		19,415				21,585
Goodwill		17,255				17,255
Other intangible assets		966				971
Deferred tax asset		76,869				67,145
Property and equipment, net		7,890				6,338
Due premiums, net (less $1,600 and $1,490 allowance for doubtful accounts in 2016 and 2015, respectively)		12,852				11,819
Prepaid expenses		299				162
Other assets		918				1,304
Total assets		$	1,583,668			1,480,751

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Consolidated Statements of Financial Position December 31, Continued (In thousands, except share amounts)
Liabilities and Stockholders' Equity		2016				2015
Liabilities:
Policy liabilities:
Future policy benefit reserves:
Life insurance		$	1,059,722			987,373
Annuities		69,578				64,933
Accident and health		1,022				1,118
Dividend accumulations		20,897				18,465
Premiums paid in advance		48,198				43,220
Policy claims payable		9,538				9,653
Other policyholders' funds		7,744				7,518
Total policy liabilities		1,216,699				1,132,280
Commissions payable		3,540				2,757
Current federal income tax payable		81,270				71,982
Payable for securities in process of settlement		3,061				2,457
Other liabilities		29,998				24,349
Total liabilities		1,334,568				1,233,825
Commitments and contingencies (Notes 5 and 8)
Stockholders' equity:
Common stock:
Class A, no par value, 100,000,000 shares authorized 52,215,852 shares issued and outstanding 2016 and 2015, including shares in treasury of 3,135,738 in 2016 and 2015		259,383				259,383
Class B, no par value, 2,000,000 shares authorized, 1,001,714 shares issued and outstanding in 2016 and 2015		3,184				3,184
Accumulated deficit		(16,248		)		(18,217	)
Accumulated other comprehensive income:
Unrealized gains on securities, net of tax		13,792				13,587
Treasury stock, at cost		(11,011		)		(11,011	)
Total stockholders' equity		249,100				246,926
Total liabilities and stockholders' equity		$	1,583,668			1,480,751

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Consolidated Statements of Operations and Comprehensive Income (Loss) Years ended December 31, (In thousands, except share amounts)
	2016								2015						2014
Revenues:
Premiums:
Life insurance					$	191,254						187,686						181,857
Accident and health insurance					1,546							1,599						1,557
Property insurance					5,076							5,195						5,118
Net investment income					48,560							45,782						41,062
Realized investment losses, net					(1,985		)					(5,459	)					(19	)
Other income					955							1,465						650
Total revenues					245,406							236,268						230,225
Benefits and expenses:
Insurance benefits paid or provided:
Claims and surrenders					81,367							78,879						68,269
Increase in future policy benefit reserves					75,881							77,060						81,998
Policyholders' dividends					6,832							10,747						10,102
Total insurance benefits paid or provided					164,080							166,686						160,369
Commissions					44,641							43,625						44,021
Other general expenses					33,356							33,287						36,591
Capitalization of deferred policy acquisition costs					(32,732		)					(31,104	)					(32,071	)
Amortization of deferred policy acquisition costs					28,515							23,400						21,083
Amortization of cost of customer relationships acquired					2,063							2,317						2,182
Total benefits and expenses					239,923							238,211						232,175
Income (loss) before federal income tax expense					5,483							(1,943	)					(1,950	)
Federal income tax expense					3,514							1,200						4,020
Net income (loss)					1,969							(3,143	)					(5,970	)
Per Share Amounts:
Basic and diluted earnings (losses) per share of Class A common stock	$	0.04							(0.06	)					(0.12	)
Basic and diluted earnings (losses) per share of Class B common stock	0.02								(0.03	)					(0.06	)
Other comprehensive income (loss):
Unrealized gains (losses) on available-for-sale securities:
Unrealized holding gains (losses) arising during period					(1,659		)					(24,217	)					29,328
Reclassification adjustment for losses included in net income					1,974							5,415						20
Unrealized gains (losses) on available-for-sale securities, net					315							(18,802	)					29,348
Income tax expense (benefit) on unrealized gains (losses) on available-for-sale securities					110							(6,539	)					10,293
Other comprehensive income (loss)					205							(12,263	)					19,055
Total comprehensive income (loss)					$	2,174						(15,406	)					13,085

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Consolidated Statements of Stockholders' Equity
For the Years Ended December 31, 2016, 2015, 2014
(In thousands)
	Common Stock							Accumulated deficit			Accumulated other comprehensive income (loss)			Treasury stock			Total Stockholders' equity
	Class A				Class B
Balance at December 31, 2013	$	259,383			3,184			(12,542	)		6,795			(11,011	)		245,809
Cumulative effect of correction of prior years errors - Note 1	—				—			3,438			—			—			3,438
Balance at January 1, 2014, as adjusted	259,383				3,184			(9,104	)		6,795			(11,011	)		249,247
Comprehensive income:
Net loss	—				—			(5,970	)		—			—			(5,970	)
Unrealized investment gains, net	—				—			—			19,055			—			19,055
Total comprehensive income	—				—			(5,970	)		19,055			—			13,085
Balance at December 31, 2014, as adjusted	259,383				3,184			(15,074	)		25,850			(11,011	)		262,332
Comprehensive loss:
Net loss	—				—			(3,143	)		—			—			(3,143	)
Unrealized investment losses, net	—				—			—			(12,263	)		—			(12,263	)
Total comprehensive loss	—				—			(3,143	)		(12,263	)		—			(15,406	)
Balance at December 31, 2015, as adjusted	259,383				3,184			(18,217	)		13,587			(11,011	)		246,926
Comprehensive income:
Net income	—				—			1,969			—			—			1,969
Unrealized investment gains, net	—				—			—			205			—			205
Total comprehensive income	—				—			1,969			205			—			2,174
Balance at December 31, 2016	$	259,383			3,184			(16,248	)		13,792			(11,011	)		249,100

Consolidated Statements of Stockholders' Equity, Continued Years Ended December 31, 2016, 2015, 2014 (In thousands)
A summary of the number of shares of common stock of Class A, Class B and treasury stock issued is as follows:
	Common Stock						Treasury
	Class A			Class B			Stock
Balance at December 31, 2014	52,216			1,002			(3,136	)
Balance at December 31, 2015	52,216			1,002			(3,136	)
Balance at December 31, 2016	52,216			1,002			(3,136	)

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Consolidated Statements of Cash Flows Years Ended December 31, (In thousands)
	2016				2015			2014
Cash flows from operating activities:
Net income (loss)	$	1,969			(3,143	)		(5,970	)
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized losses on investments and other assets	1,985				5,459			19
Net deferred policy acquisition costs	(4,217		)		(7,704	)		(10,988	)
Amortization of cost of customer relationships acquired	2,063				2,317			2,182
Depreciation	806				779			1,116
Amortization of premiums and discounts on investments	14,676				12,021			9,738
Deferred federal income tax benefit	(9,834		)		3,515			(78,880	)
Change in:
Accrued investment income	(2,497		)		(1,949	)		(1,110	)
Reinsurance recoverable	304				259			(31	)
Due premiums	(1,033		)		(1,042	)		432
Future policy benefit reserves	74,583				76,901			81,918
Other policyholders' liabilities	7,521				6,059			8,840
Federal income tax payable	9,287				(6,837	)		78,207
Commissions payable and other liabilities	6,434				617			13,003
Other, net	224				(99	)		(542	)
Net cash provided by operating activities	102,271				87,153			97,934
Cash flows from investing activities:
Sale of fixed maturities, available-for-sale	20,638				—			3,074
Maturities and calls of fixed maturities, available-for-sale	56,032				75,231			50,405
Maturities and calls of fixed maturities, held-to-maturity	14,405				20,395			20,991
Purchase of fixed maturities, available-for-sale	(234,964		)		(134,126	)		(128,906	)
Purchase of fixed maturities, held-to-maturity	(5,507		)		(55,360	)		(18,032	)
Sale of equity securities, available-for-sale	5,100				43,163			15,029
Calls of equity securities, available-for-sale	822				150			200
Purchase of equity securities, available-for-sale	—				(602	)		(36,297	)
Principal payments on mortgage loans	362				34			43
Increase in policy loans, net	(6,506		)		(6,134	)		(5,164	)
Sale of other long-term investments	37				60			2
Purchase of other long-term investments and real estate	(75		)		—			(4	)
Purchase of property and equipment	(2,214		)		(590	)		(481	)
Sale of property and equipment	59				—			—
Maturity of short-term investments	256				—			—
Purchase of short-term investments	(522		)		(255	)		—
Cash used in acquisition, net	—				—			(4,810	)
Net cash used in investing activities	(152,077		)		(58,034	)		(103,950	)

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Consolidated Statements of Cash Flows Years Ended December 31, Continued (In thousands)
	2016				2015			2014
Cash flows from financing activities:
Annuity deposits	$	8,673			8,103			7,243
Annuity withdrawals	(6,184		)		(5,103	)		(5,112	)
Net cash provided by financing activities	2,489				3,000			2,131
Net increase (decrease) in cash and cash equivalents	(47,317		)		32,119			(3,885	)
Cash and cash equivalents at beginning of year	82,827				50,708			54,593
Cash and cash equivalents at end of year	$	35,510			82,827			50,708
Supplemental Disclosure of Operating Activities:
Cash paid during the year for income taxes	$	4,061			4,522			4,670

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	For the Years Ended December 31,
	2016				2015			2014
					(As adjusted)			(As adjusted)
	(In thousands)
Balance at beginning of period	$	163,692			155,859			145,101
Capitalized	32,732				31,104			32,071
Amortized	(28,515		)		(23,400	)		(21,083	)
Effects of unrealized (gains) losses	(119		)		129			(230	)
Balance at end of period	$	167,790			163,692			155,859

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	Amount
	(In thousands)
Year:
2017	$	1,791
2018	1,658
2019	1,495
2020	1,349
2021	1,220
Thereafter	12,461
	19,974
Effects of unrealized (gains) losses on CCRA	(559		)
Total	$	19,415

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		Net Amount
		(In thousands)
Balance at January 1, 2015 and 2016		$	17,255
Acquisition		—
Adjustments		—
Balance at December 31, 2016		$	17,255

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	Years Ended December 31,
		2016				2015			2014
						(As adjusted)			(As adjusted)
	(In thousands, except per share amounts)
Basic and diluted earnings per share:
Numerator:
Net income (loss)		$	1,969			(3,143	)		(5,970	)
Net income (loss) allocated to Class A common stock		$	1,949			(3,112	)		(5,910	)
Net income (loss) allocated to Class B common stock		20				(31	)		(60	)
Net income (loss)		$	1,969			(3,143	)		(5,970	)
Denominator:
Weighted average shares of Class A outstanding - basic and diluted		49,080				49,080			49,080
Weighted average shares of Class B outstanding - basic and diluted		1,002				1,002			1,002
Total weighted average shares outstanding - basic and diluted		50,082				50,082			50,082
Basic and diluted earnings (losses) per share of Class A common stock		$	0.04			(0.06	)		(0.12	)
Basic and diluted earnings (losses) per share of Class B common stock		0.02				(0.03	)		(0.06	)

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1.	Information available prior to the issuance of the financial statements indicates that it is probable (virtual certainty is not required) that an asset has been impaired or a liability incurred as of the date of the financial statements; and

2.	The amount of the loss can be reasonably estimated.

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	Years ended December 31,
	2016				2015			2014
	(In thousands)
Investment income on:
Fixed maturities	$	43,637			39,570			36,670
Equity securities	851				2,909			1,986
Mortgage loans on real estate	24				36			42
Policy loans	5,277				4,614			4,172
Long-term investments	305				247			287
Other	89				53			45
Total investment income	50,183				47,429			43,202
Investment expenses	(1,623		)		(1,647	)		(2,140	)
Net investment income	$	48,560			45,782			41,062

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	Years ended December 31,
	2016				2015			2014
	(In thousands)
Proceeds	$	5,100			43,163			15,029
Gross realized gains	$	291			634			118
Gross realized losses	$	35			599			169

	Years ended December 31,
	2016				2015			2014
	(In thousands)
Realized investment gains (losses):
Sales, calls and maturities:
Fixed maturities	$	2,024			(111	)		359
Equity securities	303				37			49
Net realized gains (losses)	2,327				(74	)		408
Other-than-temporary impairments ("OTTI")
Fixed maturities	(3,970		)		(2,998	)		—
Equity securities	(342		)		(2,387	)		(427	)
Realized loss on OTTI	(4,312		)		(5,385	)		(427	)
Net realized investment losses	$	(1,985	)		(5,459	)		(19	)

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•	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.

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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 instrument.  The estimated fair values of financial instruments presented below are not necessarily indicative of the amounts the Company might realize in actual market transactions.  The carrying amount and fair value for the financial assets and liabilities on the consolidated balance sheets at each year-end were as follows:

 

	December 31, 2016							December 31, 2015
	Carrying Value				Fair Value			Carrying Value			Fair Value
	(In thousands)							(In thousands)
Financial assets:
Fixed maturities, held-to-maturity	$	247,004			252,545			259,953			264,966
Mortgage loans	232				269			594			617
Policy loans	66,672				66,672			60,166			60,166
Short-term investments	508				508			251			251
Cash and cash equivalents	35,510				35,510			82,827			82,827
Financial liabilities:
Annuities - investment contracts	$	50,952			52,173			47,222			46,905

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	Years ended December 31,
	2016				2015			2014
	(In thousands)
Policy claims payable at January 1	$	9,653			9,560			9,488
Less:  reinsurance recoverable	543				950			686
Net balance at January 1	9,110				8,610			8,802
Acquisition of MGLIC	—				—			40
Add claims incurred, related to:
Current year	26,000				26,911			24,541
Prior years	(493		)		(197	)		(33	)
	25,507				26,714			24,508
Deduct claims paid, related to:
Current year	18,681				19,584			17,691
Prior years	6,805				6,630			7,049
	25,486				26,214			24,740
Net balance December 31	9,131				9,110			8,610
Plus:  reinsurance recoverable	407				543			950
Policy claims payable, December 31	$	9,538			9,653			9,560

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Special Property Insurance (Allied and Fire)

The following table presents incurred claims development as of December 31, 2016, net of reinsurance, as well as cumulative claim frequency and the total of incurred-but-not-reported liabilities plus expected development on reported claims included within the net incurred claims amounts. This information is presented for the last five years as these claims rarely pay out over a longer period of time. Claims data for 2012 through 2015 is supplementary information to the consolidated financial statements and is unaudited.

																						As of December 31, 2016
		Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance																				Total of Incurred-but-Not-Reported Liabilities Plus Expected Development on Reported Claims				Cumulative Number of Reported Claims
		Years ended December 31,
Accident Year		2012				2013				2014				2015				2016
(In thousands)		(Unaudited)
2012		$	2,511			$	2,445			$	2,448			$	2,440			$	2,440			$	—			898
2013						2,058				1,977				1,970				1,964				—				328
2014										1,744				1,650				1,575				—				254
2015														1,777				1,731				10				356
2016																		2,071				175				463
Total																		$	9,781

		Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
		Years ended December 31,
Accident Year		2012				2013				2014				2015				2016
(In thousands)		(Unaudited)
2012		$	2,144			$	2,428			$	2,440			$	2,440			$	2,440
2013						1,751				1,964				1,964				1,964
2014										1,361				1,556				1,560
2015														1,410				1,637
2016																		1,680
Total																		9,281
All outstanding liabilities before 2012, net of reinsurance																		—
Liabilities for claims and claim adjustment expenses, net of reinsurance																		$	500

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	Years ended December 31,
	2016				2015			2014
	(In thousands)
Premiums from short-duration contracts:
Direct	$	6,927			7,223			7,209
Assumed	—				—			—
Ceded	(828		)		(873	)		(967	)
Net premiums earned	6,099				6,350			6,242
Premiums from long-duration contracts:
Direct	194,147				190,114			184,229
Assumed	151				353			421
Ceded	(2,521		)		(2,337	)		(2,360	)
Net premiums earned	191,777				188,130			182,290
Total premiums earned	$	197,876			194,480			188,532
Claims and surrenders assumed	$	237			414			466
Claims and surrenders ceded	$	(877	)		(1,013	)		(1,108	)

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	Years ended December 31,
	2016				2015			2014
Combined Statutory Net Income (Loss)	(In thousands)
Life insurance operations	$	11,987			(7,972	)		(5,821	)
Property insurance operations	401				607			749
Total statutory net income (loss)	$	12,388			(7,365	)		(5,072	)

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	Lease Commitments
	(In thousands)
Less than 1 year	$	481
1 year to 3 years	553
3 years to 5 years	221
More than 5 years	—
Total	$	1,255

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	Year ended December 31, 2016
	Life Insurance				Home Service			Other Non-Insurance Enterprises			Consolidated
	(In thousands)
Revenues:
Premiums	$	151,195			46,681			—			197,876
Net investment income	33,350				13,705			1,505			48,560
Realized investment losses, net	(1,685		)		(300	)		—			(1,985	)
Other income	882				5			68			955
Total revenue	183,742				60,091			1,573			245,406
Benefits and expenses:
Insurance benefits paid or provided:
Claims and surrenders	58,440				22,927			—			81,367
Increase in future policy benefit reserves	71,373				4,508			—			75,881
Policyholders' dividends	6,774				58			—			6,832
Total insurance benefits paid or provided	136,587				27,493			—			164,080
Commissions	29,235				15,406			—			44,641
Other general expenses	14,284				15,252			3,820			33,356
Capitalization of deferred policy acquisition costs	(26,742		)		(5,990	)		—			(32,732	)
Amortization of deferred policy acquisition costs	24,428				4,087			—			28,515
Amortization of cost of customer relationships acquired	559				1,504			—			2,063
Total benefits and expenses	178,351				57,752			3,820			239,923
Income (loss) before income tax expense	$	5,391			2,339			(2,247	)		5,483

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	December 31,
	2016				2015
	(In thousands)
Assets:
Life Insurance	$	1,130,288			1,011,487
Home Service Insurance	374,986				389,478
Other Non-Insurance Enterprises	78,394				79,786
Total assets	$	1,583,668			1,480,751

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Geographic Information

The following table sets forth the Company's annual total of earned premiums from geographic area for the years indicated:

	Years ended December 31,
	2016				2015			2014
	(In thousands)
Area:
United States	$	54,430			54,753			54,464
Venezuela	31,107				31,948			31,175
Colombia	29,643				27,589			27,472
Taiwan	18,590				18,031			16,686
Ecuador	15,456				15,527			15,364
Brazil	9,856				8,960			8,517
Other foreign countries	41,992				40,529			37,760
Net reinsurance	(3,198		)		(2,857	)		(2,906	)
Total	$	197,876			194,480			188,532

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	Years Ended December 31,
	2016							2015 (a)							2014 (a)
	Amount				%			Amount				%			Amount				%
	(In thousands)
Expected tax expense (benefit)	$	1,919			35.0	%		$	(680	)		35.0	%		$	(682	)		35.0	%
Release of valuation allowance previously held in other comprehensive income	—				—			(42		)		2.2			(21		)		1.1
Taxable stock sales	263				4.8			—				—			—				—
Tax-exempt interest and dividends-received deduction	(553		)		(10.1	)		(746		)		38.4			(862		)		44.2
Adjustment of prior year taxes	29				0.5			(317		)		16.3			1				(0.1	)
Effect of graduated rates	(57		)		(1.0	)		(71		)		3.7			(89		)		4.6
Effect of uncertain tax position	1,672				30.5			1,890				(97.3	)		2,136				(109.5	)
Nondeductible costs to remediate tax compliance issue	241				4.4			1,152				(59.3	)		3,514				(180.2	)
Other	—				—			14				(0.8	)		23				(1.3	)
Total income tax expense	$	3,514			64.1	%		$	1,200			(61.8	)%		$	4,020			(206.2	)%

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	December 31,
	2016				2015 (a)
	(In thousands)
Deferred tax assets:
Future policy benefit reserves	$	123,101			116,246
Net operating and capital loss carryforwards	—				583
Accrued expenses	104				121
Investments	6,803				3,848
State income tax credits	119				123
Other	56				165
Total gross deferred tax assets	130,183				121,086
Deferred tax liabilities:
Deferred policy acquisition costs, cost of customer relationships acquired and intangible assets	(44,709		)		(45,417	)
Unrealized gains on investments available-for-sale	(7,556		)		(7,428	)
Accrued policyholder dividends	(815		)		(984	)
Other	(234		)		(112	)
Total gross deferred tax liabilities	(53,314		)		(53,941	)
Net deferred tax asset	$	76,869			67,145

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	Years ended December 31,
	2016				2015			2014
	(In thousands)
Balance at January 1,	$	78,079			81,459			1,539
Additions based on tax positions related to the current year	3,546				3,608			10,132
Additions for tax positions of prior years	4,706				1,570			71,327
Reductions for tax positions of prior years	(569		)		(8,558	)		(1,539	)
Balance December 31,	$	85,762			78,079			81,459

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Note 10: Other Comprehensive Income (Loss)

The changes in the components of other comprehensive income (loss) are reported net of the effects of income taxes of 35% in 2016 , 2015 and 2014 , as indicated below.

	Amount				Tax Effect			Amount
	(In thousands)
Year ended December 31, 2016
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the period	$	(1,608	)		563			(1,045	)
Reclassification adjustment for (gains) losses included in net income (1)	1,974				(691	)		1,283
Effects on DAC and CCRA	(51		)		18			(33	)
Other comprehensive income (loss)	$	315			(110	)		205
Year ended December 31, 2015
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the period	$	(24,545	)		8,591			(15,954	)
Reclassification adjustment for (gains) losses included in net income	5,415				(1,895	)		3,520
Effects on DAC and CCRA	328				(115	)		213
Change in tax valuation allowance	—				(42	)		(42	)
Other comprehensive income (loss)	$	(18,802	)		6,539			(12,263	)
Year ended December 31, 2014
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the period	$	29,643			(10,375	)		19,268
Reclassification adjustment for (gains) losses included in net income	20				(7	)		13
Effects on DAC and CCRA	(315		)		110			(205	)
Change in tax valuation allowance	—				(21	)		(21	)
Other comprehensive income (loss)	$	29,348			(10,293	)		19,055

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	Fourth Quarter				Third Quarter (a)			Second Quarter (a)			First Quarter (a)
	(In thousands, except per share amounts)
2016
Revenues	$	67,903			61,741			61,237			54,525
Benefits and expenses	68,277				57,134			58,678			55,834
Federal income tax expense (benefit)	(490		)		1,845			1,077			1,082
Net income (loss)	116				2,762			1,482			(2,391	)
Net income (loss) available to common shareholders	116				2,762			1,482			(2,391	)
Basic earnings (losses) per share of Class A common stock	—				0.06			0.03			(0.05	)
Basic earnings (losses) per share of Class B common stock	—				0.03			0.01			(0.02	)
Diluted earnings (losses) per share of Class A common stock	—				0.06			0.03			(0.05	)
Diluted earnings (losses) per share of Class B common stock	—				0.03			0.01			(0.02	)

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Note 14: Subsequent Events

We have evaluated for subsequent events as defined by the accounting guidance through the date of financial statement issuance.  

On February 15, 2017, the Company sold its Markham building in Little Rock, Arkansas for a gross sales price of $3.25 million, resulting in a gain on sale of $1.0 million.

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.

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Financial Schedules

Schedule II Condensed Financial Information of Registrant CITIZENS, INC. (Parent Company) Balance Sheets
	At December 31,
	2016				2015 (a)
	(In thousands)
Assets
Investment in subsidiaries (1)	$	173,877			171,038
Fixed maturities available-for-sale, at fair value	51,028				54,208
Fixed maturities held-to-maturity, at amortized cost	357				364
Equity securities available-for-sale, at fair value	1,030				979
Mortgage loans on real estate	—				341
Real estate and other long-term investments	5,920				6,021
Short-term investments	508				—
Cash	14,673				15,756
Accrued investment income	757				791
Accounts receivable from subsidiaries (1)	2,658				2,958
Property and equipment	746				95
Other assets	237				84
Total assets	$	251,791			252,635
Liabilities and Stockholders' Equity
Liabilities:
Accrued expense and other liabilities	$	2,691			5,709
Total liabilities	$	2,691			5,709
Stockholders' equity:
Common stock:
Class A	$	259,383			259,383
Class B	3,184				3,184
Accumulated retained deficit	(16,248		)		(18,217	)
Unrealized investment gains on securities held by parent and subsidiaries, net of tax	13,792				13,587
Treasury stock	(11,011		)		(11,011	)
Total stockholders' equity	249,100				246,926
Total liabilities and stockholders' equity	$	251,791			252,635

  ⁽¹⁾ Eliminated in consolidation.

 

 (a) Certain previously reported information has been corrected to reflect immaterial corrections to the financial statements. For more information, refer to Note 1.

See accompanying report of independent registered public accounting firm.

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Financial Schedules

Schedule II, Continued Condensed Financial Information of Registrant CITIZENS, INC. (Parent Company) Statements of Operations
	Years Ended December 31,
	2016				2015 (a)			2014 (a)
	(In thousands)
Revenues:
Management service fees (1)	$	33,748			31,328			27,497
Investment income	1,491				1,499			1,361
Other	49				58			1
Realized investment gains, net	—				—			46
Total revenues	35,288				32,885			28,905
Expenses:
General	33,807				29,609			25,572
Taxes, licenses and fees	996				918			902
Federal income tax expense (benefit)	(196		)		523			558
Total expenses	34,607				31,050			27,032
Income before equity in income of consolidated subsidiaries	681				1,835			1,873
Equity in loss of consolidated subsidiaries	1,288				(4,978	)		(7,843	)
Net income (loss)	$	1,969			(3,143	)		(5,970	)

  ⁽¹⁾ Eliminated in consolidation.

  (a) Certain previously reported information has been corrected to reflect immaterial corrections to the financial statements. For more information, refer to Note 1.

See accompanying report of independent registered public accounting firm.

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Financial Schedules

Schedule II, Continued Condensed Financial Information of Registrant CITIZENS, INC. (Parent Company) Statements of Cash Flows
	Years Ended December 31,
	2016				2015 (a)			2014 (a)
	(In thousands)
Cash flows from operating activities:
Net income (loss)	$	1,969			(3,143	)		(5,970	)
Adjustments to reconcile net income to net cash provided by operating activities:
Realized investment losses (gains), net	—				—			(46	)
Equity in loss of consolidated subsidiaries	(1,288		)		4,978			7,843
Accrued expenses and other liabilities	(3,018		)		483			(29	)
Amortization of premiums and discounts on investments	911				984			789
Depreciation	162				155			169
Accrued investment income	35				(14	)		(148	)
Decrease (increase) in receivable from subsidiaries and other assets	300				(627	)		69
Other, net	149				110			(471	)
Net cash provided by (used in) operating activities	(780		)		2,926			2,206
Cash flows from investing activities:
Purchase of fixed maturities, held-to-maturity	—				—			—
Purchase of fixed maturities, available-for-sale	(6,615		)		(4,559	)		(11,949	)
Maturities of fixed maturities, available-for-sale	8,015				2,645			2,271
Purchase of equity securities, available-for-sale	—				—			—
Sale of other long-term investments and property and equipment	371				16			—
Purchase of other long-term investments and property and equipment	(740		)		(88	)		—
Purchase of short-term investments	(522		)		—			—
Net cash provided by (used in) investment activities	509				(1,986	)		(9,678	)
Cash flows from financing activities:
Dividend from subsidiary	—				—			5,250
Purchase of the Company's stock from affiliates	(812		)		—			—
Net cash provided by (used in) financing activities	(812		)		—			5,250
Net increase (decrease) in cash	(1,083		)		940			(2,222	)
Cash at beginning of year	15,756				14,816			17,038
Cash at end of year	$	14,673			15,756			14,816

  (a) Certain previously reported information has been corrected to reflect immaterial corrections to the financial statements. For more information, refer to Note 1.

See accompanying report of independent registered public accounting firm.

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Financial Schedules

Schedule III Supplementary Insurance Information
	At December 31,
	2016				2015 (a)
	(In thousands)
Deferred policy acquisition cost:
Life Insurance	$	132,704			130,389
Home Service Insurance	35,086				33,303
Other Non-Insurance Enterprises	—				—
Total consolidated deferred policy acquisition costs	$	167,790			163,692
Future policy benefit reserves and policy claims payable:
Life Insurance	$	871,136			798,534
Home Service Insurance	268,724				264,543
Other Non-Insurance Enterprises	—				—
Total consolidated future policy benefit reserves and policy claims payable	$	1,139,860			1,063,077
Unearned premiums:
Life Insurance	$	915			959
Home Service Insurance	239				247
Other Non-Insurance Enterprises	—				—
Total consolidated unearned premiums	$	1,154			1,206
Other policy claims and benefits payable:
Life Insurance	$	73,860			66,222
Home Service Insurance	1,825				1,775
Other Non-Insurance Enterprises	—				—
Total consolidated other policy claims and benefits payable	$	75,685			67,997

  (a) Certain previously reported information has been corrected to reflect immaterial corrections to the financial statements. For more information, refer to Note 1.

See accompanying report of independent registered public accounting firm.

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Financial Schedules

For the Company's short duration premiums (property), written premium is not materially different from earned premium, therefore only earned premiums are detailed in Schedule IV.

Schedule IV Reinsurance
	Direct Amount				Ceded to Other Companies			Assumed From Other Companies			Net Amount			% of Amount Assumed to Net
	(In thousands)
Year ended December 31, 2016
Life insurance in force	$	4,997,641			522,821			22,915			4,497,735			0.5	%
Premiums:
Life insurance	193,604				2,501			151			191,254
Accident and health insurance	1,566				20			—			1,546
Property insurance	5,904				828			—			5,076
Total premiums	$	201,074			3,349			151			197,876			0.1	%
Year ended December 31, 2015
Life insurance in force	$	4,958,369			516,933			36,766			4,478,202			0.8	%
Premiums:
Life insurance	189,644				2,311			353			187,686
Accident and health insurance	1,625				26			—			1,599
Property insurance	6,068				873			—			5,195
Total premiums	$	197,337			3,210			353			194,480			0.2	%
Year ended December 31, 2014
Life insurance in force	$	4,910,662			516,643			268,641			4,662,660			5.8	%
Premiums:
Life insurance	183,764				2,328			421			181,857
Accident and health insurance	1,589				32			—			1,557
Property insurance	6,085				967			—			5,118
Total premiums	$	191,438			3,327			421			188,532			0.2	%

See accompanying report of independent registered public accounting firm.

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized.

 

		CITIZENS, INC.
Date:	April 27, 2017	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

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Geoffrey M. Kolander, as his or her attorney-in-fact and agent, with full power of substitution, for him or her in any and all capacities, hereby giving and granting to said attorney-in-fact and agent full power and authority to do and perform all and every act and thing whatsoever requisite and necessary to be done in and about the premises as fully, to all intents and purposes, as he might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorney-in-fact and agent may or shall lawfully do, or cause to be done, in connection with the proposed filing by Citizens, Inc., with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, of an annual report on Form 10-K for the fiscal year ended December 31, 2016 , including but not limited to, such full power and authority to do the following:  (i) execute and file such annual report; (ii) execute and file any amendment or amendments thereto; (iii) receive and respond to comments from the Securities and Exchange Commission related in any way to such annual report or any amendment or amendments thereto; and (iv) execute and deliver any and all certificates, instruments or other documents related to the matters enumerated above, as the attorney-in-fact in his sole discretion deems appropriate.

Dated:   April 27, 2017

 

/s/ Harold E. Riley		/s/ Robert B. Sloan, Jr.
Harold E. Riley, Chairman Emeritus		Dr. Robert B. Sloan, Jr., Chairman
/s/ E. Dean Gage		/s/ Grant G. Teaff
Dr. E. Dean Gage, Director		Grant G. Teaff, Director
/s/ Terry S. Maness		/s/ Gerald W. Shields
Dr. Terry S. Maness, Director		Gerald W. Shields, Director
/s/ Dottie S. Riley		/s/ Frank A. Keating
Dottie S. Riley, Director		Frank A. Keating, Director
/s/ Steven F. Shelton
Steven F. Shelton, Director

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EXHIBITS

Exhibit No.		The following exhibits are filed herewith:
3.1		Restated and Amended Articles of Incorporation (a)
3.2		Second Amended and Restated Bylaws dated June 7, 2016 (b)
4.1		Amendment to State Series A-1 and A-2 Senior Convertible Preferred Stock (c)
10.1†		Employment Agreement, dated as of January 16, 2017, by and between Citizens, Inc. and Geoffrey M. Kolander (d)
10.2†		Employment Agreement, dated as of January 16, 2017, by and between Citizens, Inc. and Kay E. Osbourn (e)
10.3†		Employment Agreement, dated as of January 16, 2017, by and between Citizens, Inc. and David S. Jorgensen (f)
11		Statement re: Computation of per share earnings (see financial statements)
21		Subsidiaries of the Registrant*
23		Consent of Independent Registered Public Accounting Firm - Ernst & Young LLP*
24		Power of Attorney (g)
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.

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(c)	Filed on July 15, 2004, with the Registrant's Current Report on Form 8-K as Exhibit 4.1, and incorporated herein by reference.

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

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

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

(g)	The Power of Attorney is incorporated in the signature page enclosed herein.

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