What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2020-08-05 compared with 2020-05-07 · 358 added, 173 removed, 636 unchanged (46% of the section changed)

3 unchanged sentences

Consolidated Balance Sheets

(In thousands) March 31, 2020 December 31, 2019

(In thousands) June 30, 2020 December 31, 2019

Assets (Unaudited)

4 unchanged sentences

Policy loans 84,171 82,005

Real estate held-for-sale (less $ 1,325 accumulated depreciation in 2020 and 2019, respectively)

Real estate held-for-sale 2,571 2,571

Other long-term investments (portion measured at fair value $ 9,079 in 2020;

4 unchanged sentences

Accrued investment income 16,884 17,453

Receivable for securities 3,320 —

Reinsurance recoverable 2,971 3,696

7 unchanged sentences

See accompanying Notes to Consolidated Financial Statements.

March 31, 2020 | 10-Q 2

June 30, 2020 | 10-Q 2

Table of Contents DRAFT 6

CITIZENS, INC.

1 unchanged sentence

Consolidated Balance Sheets, Continued

(In thousands, except share amounts) March 31, 2020 December 31, 2019

(In thousands, except share amounts) June 30, 2020 December 31, 2019

Liabilities and Stockholders' Equity (Unaudited)

28 unchanged sentences

See accompanying Notes to Consolidated Financial Statements.

March 31, 2020 | 10-Q 3

June 30, 2020 | 10-Q 3

Table of Contents DRAFT 6

CITIZENS, INC.

1 unchanged sentence

Consolidated Statements of Operations and Comprehensive Income (Loss)

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

(In thousands, except per share amounts)

2020 2019 2020 2019

Life insurance $ 40,185 42,313 80,131 83,293

19 unchanged sentences

Federal income tax expense 1,465 1,242 2,814 7,052

Net loss ( 3,584 ) ( 3,802 )

Net income (loss) ( 1,027 ) ( 4,565 ) ( 4,611 ) ( 8,367 )

Per Share Amounts:

1 unchanged sentence

Basic and diluted losses per share of Class B common stock ( 0.01 ) ( 0.04 ) ( 0.05 ) ( 0.08 )

Other Comprehensive Income (Loss):

Unrealized gains (losses) on fixed maturity securities:

Unrealized holding gains (losses) arising during period ( 42,929 ) 28,801

Reclassification adjustment for losses included in net income 132 104

Unrealized gains (losses) on fixed maturity securities, net ( 42,797 ) 28,905

Income tax expense (benefit) on unrealized gains (losses) on fixed maturity securities ( 2,727 ) 2,025

Other comprehensive income (loss) ( 40,070 ) 26,880

Total comprehensive income (loss) $ ( 43,654 ) 23,078

Other Comprehensive Income:

Unrealized gains on fixed maturity securities:

Unrealized holding gains arising during period 80,508 31,220 37,579 60,021

Reclassification adjustment for losses (gains) included in net income (loss) ( 87 ) ( 81 ) 45 23

Unrealized gains on fixed maturity securities, net 80,421 31,139 37,624 60,044

Income tax expense on unrealized gains on fixed maturity securities 5,774 2,163 3,047 4,188

Other comprehensive income 74,647 28,976 34,577 55,856

Total comprehensive income $ 73,620 24,411 29,966 47,489

See accompanying Notes to Consolidated Financial Statements.

March 31, 2020 | 10-Q 4

June 30, 2020 | 10-Q 4

Table of Contents DRAFT 6

CITIZENS, INC.

7 unchanged sentences

Accounting standards adopted January 1, 2020 — — ( 395 ) — — ( 395 )

Comprehensive loss:

Net loss — — ( 3,584 ) — — ( 3,584 )

Unrealized investment losses, net — — — ( 40,070 ) — ( 40,070 )

Total comprehensive loss — — ( 3,584 ) ( 40,070 ) — ( 43,654 )

Comprehensive income (loss):

Net income (loss) — — ( 3,584 ) — — ( 3,584 )

Unrealized investment gains (losses), net — — — ( 40,070 ) — ( 40,070 )

Total comprehensive income (loss) — — ( 3,584 ) ( 40,070 ) — ( 43,654 )

Stock-based compensation ( 53 ) — — — — ( 53 )

Balance at March 31, 2020 261,462 3,184 ( 74,948 ) 37,047 ( 11,011 ) 215,734

Comprehensive income (loss):

Net income (loss) — — ( 1,027 ) — — ( 1,027 )

Unrealized investment gains (losses), net — — — 74,647 — 74,647

Total comprehensive income (loss) — — ( 1,027 ) 74,647 — 73,620

Stock-based compensation 439 — — — — 439

Balance at June 30, 2020 $ 261,901 3,184 ( 75,975 ) 111,694 ( 11,011 ) 289,793

Balance at December 31, 2018 $ 259,793 3,184 ( 69,599 ) 5,366 ( 11,011 ) 187,733

Comprehensive income (loss):

Net loss — — ( 3,802 ) — — ( 3,802 )

Unrealized investment gains, net — — — 26,880 — 26,880

Net income (loss) — — ( 3,802 ) — — ( 3,802 )

Unrealized investment gains (losses), net — — — 26,880 — 26,880

Total comprehensive income (loss) — — ( 3,802 ) 26,880 — 23,078

1 unchanged sentence

Balance at March 31, 2019 260,876 3,184 ( 73,401 ) 32,246 ( 11,011 ) 211,894

Comprehensive income (loss):

Net income (loss) — — ( 4,565 ) — — ( 4,565 )

Unrealized investment gains (losses), net — — — 28,976 — 28,976

Total comprehensive income (loss) — — ( 4,565 ) 28,976 — 24,411

Stock-based compensation 127 — — — — 127

Balance at June 30, 2019 $ 261,003 3,184 ( 77,966 ) 61,222 ( 11,011 ) 236,432

See accompanying Notes to Consolidated Financial Statements.

March 31, 2020 | 10-Q 5

June 30, 2020 | 10-Q 5

Table of Contents DRAFT 6

CITIZENS, INC.

1 unchanged sentence

Consolidated Statements of Cash Flows

Three Months Ended March 31,

Six Months Ended June 30,

(In thousands)

Cash flows from operating activities:

Net loss $ ( 3,584 ) ( 3,802 )

Adjustments to reconcile net loss to net cash provided by operating activities:

Net income (loss) $ ( 4,611 ) ( 8,367 )

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

Realized investment (gains) losses on sale of investments and other assets ( 142 ) ( 3,092 )

13 unchanged sentences

Other, net ( 665 ) ( 3,271 )

Net cash provided by operating activities 14,093 17,923

Net cash provided by (used in) operating activities 28,552 31,406

Cash flows from investing activities:

4 unchanged sentences

Principal payments on mortgage loans 5 4

(Increase) decrease in policy loans, net 676 ( 650 )

Increase in policy loans, net ( 2,166 ) ( 721 )

Sales of other long-term investments and real estate — 6,996

Purchases of other long-term investments ( 9,140 ) —

Sales of property and equipment — 18

Purchases of property and equipment ( 38 ) ( 388 )

1 unchanged sentence

Purchases of short-term investments — ( 2,455 )

Net cash used in investing activities ( 26,165 ) ( 28,810 )

Net cash provided by (used in) investing activities ( 22,819 ) ( 41,371 )

See accompanying Notes to Consolidated Financial Statements.

March 31, 2020 | 10-Q 6

June 30, 2020 | 10-Q 6

Table of Contents DRAFT 6

CITIZENS, INC.

1 unchanged sentence

Consolidated Statements of Cash Flows, Continued

Three Months Ended March 31,

Six Months Ended June 30,

(In thousands)

4 unchanged sentences

Net cash provided by (used in) financing activities 437 ( 959 )

Net decrease in cash and cash equivalents ( 11,261 ) ( 11,399 )

Net increase (decrease) in cash and cash equivalents 6,170 ( 10,924 )

Cash and cash equivalents at beginning of year 46,205 45,492

1 unchanged sentence

SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:

During the three months ended March 31, 2020 and 2019, various fixed maturity issuers exchanged securities with book values of $ 3.1 million and $ 8.8 million, respectively, for securities of equal value.

The Company had net unsettled security trades of $ 3.4 million at March 31, 2020 and $ 4.9 million at March 31, 2019.

During the six months ended June 30, 2020 and 2019, various fixed maturity issuers exchanged securities with book values of $ 3.1 million and $ 11.9 million, respectively, for securities of equal value.

The Company had net unsettled security trades of $ 1.8 million at June 30, 2020 and $ 5.0 million at June 30, 2019.

The Company recognized right-of-use assets of $ 12.0 million in exchange for new operating lease liabilities during the six months ended June 30, 2020.

See accompanying Notes to Consolidated Financial Statements.

March 31, 2020 | 10-Q 7

June 30, 2020 | 10-Q 7

Table of Contents DRAFT 6

CITIZENS, INC .

3 unchanged sentences

The consolidated financial statements include the accounts and operations of Citizens, Inc.

("Citizens" or the "Company"), a Colorado corporation, and its wholly-owned subsidiaries, CICA Life Insurance Company of America ("CICA"), Citizens National Life Insurance Company ("CNLIC"), CICA Life Ltd.

("CICA Ltd."), Security Plan Life Insurance Company ("SPLIC"), Security Plan Fire Insurance Company ("SPFIC"), Magnolia Guaranty Life Insurance Company ("MGLIC") and Computing Technology, Inc.

("Citizens" or the "Company"), a Colorado corporation, and its wholly-owned subsidiaries, CICA Life Insurance Company of America ("CICA"), CICA Life Ltd.

("CICA Ltd."), Citizens National Life Insurance Company ("CNLIC"), Security Plan Life Insurance Company ("SPLIC"), Security Plan Fire Insurance Company ("SPFIC"), Magnolia Guaranty Life Insurance Company ("MGLIC") and Computing Technology, Inc.

All significant inter-company accounts and interactions have been eliminated.

Citizens and its wholly-owned subsidiaries are collectively referred to as the "Company", "we", "us" or "our".

The consolidated balance sheets as of March 31, 2020, the consolidated statements of operations and comprehensive income (loss), stockholders' equity and cash flows for the three months ended March 31, 2020 and March 31, 2019 have been prepared by the Company without audit.

In the opinion of management, all normal and recurring adjustments to present fairly the financial position, results of operations, and changes in cash flows at March 31, 2020 and for comparative periods have been made.

The consolidated balance sheets as of June 30, 2020, the consolidated statements of operations and comprehensive income (loss) and stockholders' equity for the three and six months ended June 30, 2020 and June 30, 2019 and cash flows for the six months ended June 30, 2020 and June 30, 2019 have been prepared by the Company without audit.

In the opinion of management, all normal and recurring adjustments to present fairly the financial position, results of operations, and changes in cash flows at June 30, 2020 and for comparative periods have been made.

The consolidated financial statements have been prepared in accordance with U.S.

3 unchanged sentences

Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period.

We provide primarily life insurance and a small amount of health insurance policies through our insurance subsidiaries - CICA, CNLIC, CICA Ltd., SPLIC and MGLIC.

We provide primarily life insurance and a small amount of health insurance policies through our insurance subsidiaries - CICA, CICA Ltd., CNLIC, SPLIC and MGLIC.

CICA and CNLIC issued ordinary whole-life policies, credit life and disability, and accident and health related policies, throughout the Midwest and southern U.S.

2 unchanged sentences

SPLIC offers final expense and home service life insurance in Louisiana, Arkansas and Mississippi.

SPFIC, a wholly-owned subsidiary of SPLIC, writes a limited amount of property insurance in Louisiana and Arkansas.

SPFIC writes a limited amount of property insurance in Louisiana and Arkansas.

MGLIC provides industrial life policies through independent funeral homes in Mississippi.

6 unchanged sentences

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

On March 11, 2020, the World Health Organization declared the outbreak of a novel coronavirus ("COVID-19") as a global pandemic, which continues to spread throughout the United States and around the world.

The declaration of a global pandemic indicates that almost all public commerce and related business activities must be, to varying

March 31, 2020 | 10-Q 8

June 30, 2020 | 10-Q 8

Table of Contents DRAFT 6

CITIZENS, INC .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

degrees, curtailed with the goal of decreasing the rate of new infections.

This has significantly affected the equity and credit markets, and could negatively impact our assets and liabilities.

While we continue to evaluate our estimates in the above described areas, additional negative impacts may occur that could cause those estimates to be materially different and other financial impacts could occur though such potential impacts are unknown at this time.

SIGNIFICANT ACCOUNTING POLICIES

13 unchanged sentences

Accordingly, we do not recognize an allowance for credit loss against accrued interest receivable.

We initially estimate the fair value of investments in private equity funds by reference to the transaction price.

We initially estimate the fair value of investments in private equity limited partnerships by reference to the transaction price.

Subsequently, we obtain the fair value of these investments from net asset value information provided by the general partner or manager of the investments, the financial statements of which are audited annually.

These investments are included in other invested assets.

Recognition of investment income on these funds is delayed due to the availability of the related financial statements, which are generally obtained from the partnerships' general partners.

As a result, our private equity investments are generally reported on a three-month delay.

These investments are included in other long-term investments.

(2) ACCOUNTING PRONOUNCEMENTS

9 unchanged sentences

GAAP because an entity will be able to record reversals of credit losses (in situations in which the estimate of credit losses declines) in current period net income, which in turn should align the income statement recognition of credit losses with the reporting period in which changes occur.

GAAP prohibited reflecting

March 31, 2020 | 10-Q 9

CITIZENS, INC .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

those improvements in current-period earnings.

GAAP prohibited reflecting those improvements in current-period earnings.

The Company adopted this standard effective January 1, 2020 using the modified retrospective approach.

The adoption resulted in an increase in accumulated deficit of $ 0.4 million related to agents' debit balance collectability.

June 30, 2020 | 10-Q 9

Table of Contents DRAFT 6

CITIZENS, INC .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In September 2018, the FASB issued ASU No.

2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract.

This ASU requires an entity in a cloud computing arrangement (i.e., hosting arrangement) that is a service contract to follow the internal-use software guidance in ASC 350-40 to determine which implementation costs to capitalize as assets or expense as incurred.

This ASU requires an entity in a cloud computing arrangement (i.e.

hosting arrangement) that is a service contract to follow the internal-use software guidance in ASC 350-40 to determine which implementation costs to capitalize as assets or expense as incurred.

Capitalized implementation costs should be presented in the same line item on the balance sheet as amounts prepaid for the hosted service, if any (generally as an "other asset").

18 unchanged sentences

For calendar-year public companies, the changes will be effective on January 1, 2022.

In July 2020, the FASB tentatively agreed to defer the original effective date by one year.

If finalized, the new guidance will be effective for annual and interim reporting periods beginning January 1, 2023, however early adoption is permitted.

The Company is evaluating the impact this guidance will have on our consolidated financial statements.

8 unchanged sentences

In addition to the Life Insurance and Home Service Insurance business, the Company also operates other non-insurance ("Other Non-Insurance Enterprises") portions of the Company, which primarily include the Company's IT and Corporate-support functions, and are included in the tables presented below to properly reconcile the segment information with the consolidated financial statements of the Company.

March 31, 2020 | 10-Q 10

The accounting policies of the reportable segments and Other Non-Insurance Enterprises are presented in accordance with U.S.

GAAP and are the same as those used in the preparation of the consolidated financial

June 30, 2020 | 10-Q 10

Table of Contents DRAFT 6

CITIZENS, INC .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The accounting policies of the reportable segments and Other Non-Insurance Enterprises are presented in accordance with U.S.

GAAP and are the same as those used in the preparation of the consolidated financial statements.

The Company evaluates profit and loss performance based on U.S.

2 unchanged sentences

Life Insurance Home Service Insurance Other Non-Insurance Enterprises Consolidated

Three Months Ended March 31, 2020

Three Months Ended June 30, 2020

(In thousands)

1 unchanged sentence

Net investment income 11,345 3,256 314 14,915

Realized investment gains, net 391 924 133 1,448

Other income 482 — — 482

Total revenue 42,280 15,614 447 58,341

Benefits and expenses:

Insurance benefits paid or provided:

Claims and surrenders 20,888 6,866 — 27,754

Increase in future policy benefit reserves 7,384 853 — 8,237

Policyholders' dividends 1,319 9 — 1,328

Total insurance benefits paid or provided 29,591 7,728 — 37,319

Commissions 3,294 3,420 — 6,714

Other general expenses 4,446 4,591 2,102 11,139

Capitalization of deferred policy acquisition costs ( 2,716 ) ( 1,015 ) — ( 3,731 )

Amortization of deferred policy acquisition costs 5,419 642 — 6,061

Amortization of cost of insurance acquired 127 274 — 401

Total benefits and expenses 40,161 15,640 2,102 57,903

Income (loss) before federal income tax expense $ 2,119 ( 26 ) ( 1,655 ) 438

June 30, 2020 | 10-Q 11

Table of Contents DRAFT 6

CITIZENS, INC .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Life Insurance Home Service Insurance Other Non-Insurance Enterprises Consolidated

Six Months Ended June 30, 2020

(In thousands)

Premiums $ 59,881 22,932 — 82,813

Net investment income 22,825 6,588 671 30,084

Realized investment gains (losses), net 1,126 ( 793 ) ( 191 ) 142

14 unchanged sentences

Income (loss) before federal income tax expense $ 4,205 ( 2,171 ) ( 3,831 ) ( 1,797 )

March 31, 2020 | 10-Q 11

June 30, 2020 | 10-Q 12

Table of Contents DRAFT 6

CITIZENS, INC .

1 unchanged sentence

Life Insurance Home Service Insurance Other Non-Insurance Enterprises Consolidated

Three Months Ended March 31, 2019

Three Months Ended June 30, 2019

(In thousands)

1 unchanged sentence

Net investment income 11,612 3,325 378 15,315

Realized investment gains, net 5,457 484 20 5,961

Realized investment gains (losses), net 68 152 ( 3,089 ) ( 2,869 )

Other income 614 1 1 616

12 unchanged sentences

Total benefits and expenses 44,553 15,477 159 60,189

Loss before federal income tax expense $ ( 119 ) ( 335 ) ( 2,869 ) ( 3,323 )

June 30, 2020 | 10-Q 13

Table of Contents DRAFT 6

CITIZENS, INC .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Life Insurance Home Service Insurance Other Non-Insurance Enterprises Consolidated

Six Months Ended June 30, 2019

(In thousands)

Premiums $ 63,054 23,214 — 86,268

Net investment income 21,781 6,411 919 29,111

Realized investment gains (losses), net 5,525 636 ( 3,069 ) 3,092

Other income 797 2 2 801

Total revenue 91,157 30,263 ( 2,148 ) 119,272

Benefits and expenses:

Insurance benefits paid or provided:

Claims and surrenders 38,478 11,579 — 50,057

Increase in future policy benefit reserves 19,832 1,939 — 21,771

Policyholders' dividends 2,585 20 — 2,605

Total insurance benefits paid or provided 60,895 13,538 — 74,433

Commissions 9,049 7,219 — 16,268

Other general expenses 12,663 10,402 3,016 26,081

Capitalization of deferred policy acquisition costs ( 7,722 ) ( 2,518 ) — ( 10,240 )

Amortization of deferred policy acquisition costs 11,494 1,714 — 13,208

Amortization of cost of insurance acquired 260 577 — 837

Total benefits and expenses 86,639 30,932 3,016 120,587

Income (loss) before federal income tax expense $ 4,518 ( 669 ) ( 5,164 ) ( 1,315 )

March 31, 2020 | 10-Q 12

June 30, 2020 | 10-Q 14

Table of Contents DRAFT 6

CITIZENS, INC .

3 unchanged sentences

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

Three Months Ended March 31, 2020 2019

Three Months Ended June 30, 2020 2019

(In thousands, except per share amounts)

9 unchanged sentences

Basic and diluted loss per share of Class B common stock ( 0.01 ) ( 0.04 )

Six Months Ended June 30, 2020 2019

(In thousands, except per share amounts)

Basic and diluted earnings per share:

Net loss $ ( 4,611 ) ( 8,367 )

Net loss allocated to Class A common stock $ ( 4,565 ) ( 8,283 )

Net loss allocated to Class B common stock ( 46 ) ( 84 )

Net loss $ ( 4,611 ) ( 8,367 )

Weighted average shares of Class A outstanding - basic 49,322 49,229

Weighted average shares of Class A outstanding - diluted 49,506 49,280

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

Basic and diluted loss per share of Class A common stock $ ( 0.09 ) ( 0.17 )

Basic and diluted loss per share of Class B common stock ( 0.05 ) ( 0.08 )

CAPITAL AND SURPLUS

2 unchanged sentences

National Association of Insurance Commissioners ("NAIC") and the Bermuda Monetary Authority ("BMA").

All insurance subsidiaries exceeded the minimum capital requirements at June 30, 2020.

June 30, 2020 | 10-Q 15

Table of Contents DRAFT 6

CITIZENS, INC .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

is a wholly-owned subsidiary of Citizens and is domiciled in Bermuda.

6 unchanged sentences

Since CICA Ltd.

failed to meet the TCL at March 31, 2020, we have complied with applicable regulations and notified the BMA in writing and will file a report with the BMA within the required timeframe to provide details of the circumstances leading to the failure and a plan to rectify the failure.

Subsequent to March 31, 2020, the fair value of our assets has increased and we estimate that CICA Ltd.

is above the TCL threshold at April 30, 2020.

However, due to continued uncertainty surrounding the impacts of COVID-19, there could be scenarios that require the Company to either inject capital into CICA Ltd.

or issue a parental guarantee.

March 31, 2020 | 10-Q 13

CITIZENS, INC .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

failed to meet the TCL at March 31, 2020, we complied with applicable regulations by notifying the BMA in writing and filing a report with the BMA within the required timeframe to provide details of the circumstances leading to the failure.

We have had several detailed discussions with the BMA during the second quarter of 2020 and continue to provide details on CICA Ltd.’s financial performance, interest rate sensitivities and corporate strategies.

At June 30, 2020, CICA Ltd.

was above the TCL threshold and although we continue to hold discussions with the BMA, there has been no capital or management action required.

(5) INVESTMENTS

The Company invests primarily in fixed maturity securities, which totaled 90.5 % of total invested assets at March 31, 2020, as shown below.

The Company invests primarily in fixed maturity securities, which totaled 89.2 % of total cash and invested assets at June 30, 2020, as shown below.

Carrying Value

(In thousands, except for %)

March 31, 2020 December 31, 2019

June 30, 2020 December 31, 2019

Amount % Amount %

7 unchanged sentences

Total cash and invested assets $ 1,586,584 100.0 % $ 1,526,459 100.0 %

June 30, 2020 | 10-Q 16

Table of Contents DRAFT 6

CITIZENS, INC .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following tables represent the amortized cost, gross unrealized gains and losses and fair value of fixed maturities as of the dates indicated.

March 31, 2020

June 30, 2020

(In thousands)

13 unchanged sentences

Total fixed maturity securities $ 1,295,628 129,000 7,311 1,417,317

March 31, 2020 | 10-Q 14

CITIZENS, INC .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019

1 unchanged sentence

Fixed maturity securities:

Available-for-sale securities:

Available-for-sale:

Treasury securities $ 9,709 1,638 — 11,347

10 unchanged sentences

Total fixed maturity securities $ 1,293,853 85,661 1,555 1,377,959

June 30, 2020 | 10-Q 17

Table of Contents DRAFT 6

CITIZENS, INC .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(In thousands)

March 31, 2020 December 31, 2019

June 30, 2020 December 31, 2019

Equity securities:

7 unchanged sentences

Equity securities are measured at fair value with the change in fair value recorded through net income.

The Company recognized net realized losses of $ 1.1 million on equity securities held for the three months ended March 31, 2020 and gains of $ 0.6 million for the period ended March 31, 2019.

The Company recognized net realized gains of $ 1.3 million and $ 0.2 million on equity securities held for the three and six months ended June 30, 2020 and gains of $ 0.2 million and $ 0.8 million for the same periods ended June 30, 2019.

In the first quarter of 2019, the Company sold its former corporate office in Austin, Texas for a gross sales price of $ 7.5 million, resulting in a gain on the sale of $ 5.5 million.

The building was owned by CICA within our Life Insurance segment.

An impairment loss of $ 3.1 million was recorded during the second quarter of 2019 related to our Citizens Academy training facility property located near Austin, Texas.

It was determined during the quarter that the property met the held-for-sale criteria.

As a result, this investment was reclassified from real estate held for investment to real estate held-for-sale.

This resulted in an impairment loss of $ 3.1 million as the carrying amount of the property was written down to the net realizable value.

This investment is considered a Level 3 asset in the fair value hierarchy and is reported within other non-insurance enterprises.

The Company monitors all fixed maturity 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.

4 unchanged sentences

and (d) the payment structure of the security.

The Company's best estimate of expected future cash flows used to determine the credit loss amount is a quantitative and qualitative

March 31, 2020 | 10-Q 15

CITIZENS, INC .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company's best estimate of expected future cash flows used to determine the credit loss amount is a quantitative and qualitative process.

Quantitative review includes information received from third-party sources such as financial statements, pricing and rating changes, liquidity and other statistical information.

7 unchanged sentences

The effective interest rate on these fixed maturity securities was not changed.

June 30, 2020 | 10-Q 18

Table of Contents DRAFT 6

CITIZENS, INC .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Amounts previously recognized in accumulated other comprehensive income as of January 1, 2020 relating to improvements in cash flow expected to be collected will be accreted into income over the remaining life of the asset.

Recoveries of amounts previously written off relating to improvements in cash flows after January 1, 2020 will be recorded in earnings when received.

For the three months ended March 31, 2020, the Company recorded no credit valuation losses on fixed maturity securities and recognized no fixed maturity investment impairments for the three months ended March 31, 2019.

The following table presents the fair values and gross unrealized losses of fixed maturity securities that are not deemed to have credit losses, aggregated by investment category and length of time that individual securities have been in a continuous loss position at March 31, 2020.

March 31, 2020 Less than 12 months Greater than 12 months Total

For the three and six months ended June 30, 2020, the Company recorded no credit valuation losses on fixed maturity securities and recognized no fixed maturity investment impairments for the three and six months ended June 30, 2019.

June 30, 2020 Less than 12 months Greater than 12 months Total

(In thousands, except for # of securities) Fair

15 unchanged sentences

Total fixed maturities $ 160,498 6,947 174 $ 1,893 364 3 $ 162,391 7,311 177

The COVID-19 pandemic has severely impacted equity and credit markets, leading to net unrealized losses of $ 40.1 million at March 31, 2020.

In each category of our fixed maturity securities described below, we do not intend

March 31, 2020 | 10-Q 16

CITIZENS, INC .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

to sell our investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases.

While the losses are currently unrealized, we continue to monitor all fixed maturity securities on an on-going basis and future information may become available which could result in an allowance being recorded.

In each category of our fixed maturity securities described below, we do not intend to sell our investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases.

While the losses are currently unrealized, we continue to monitor all fixed maturity securities on an on-going basis as future information may become available which could result in an allowance being recorded.

States and political subdivisions.

The Company's investments in states and political subdivisions were purchased at a premium, relative to their face amount, and the contractual cash flows are guaranteed by the respective state or political subdivision.

Accordingly, it is expected that the securities will not be settled at a price less than the amortized costs bases of the Company's investments.

Accordingly, it is expected that the securities will not be settled at a price less than the amortized cost bases of the Company's investments.

We did not recognize credit losses on corporate securities with unrealized losses that were due to interest rate sensitivity and changes in credit spreads.

2 unchanged sentences

We have assessed our exposure in the energy sector and believe our investments have access to sufficient liquidity to meet their debt obligations.

We believe that the auto industry will benefit from the recent Federal Reserve program which expanded its corporate bond-buying program to include a primary market facility that specifies that companies recently downgraded from investment grade to the first-tier of junk bonds will be eligible for this relief.

The auto industry has been able to issue debt during the quarter which has increased their liquidity significantly.

The automobile sector is included in the Consumer subtotal above.

June 30, 2020 | 10-Q 19

Table of Contents DRAFT 6

CITIZENS, INC .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Asset-backed.

Our asset-backed securities are primarily senior tranches of pools of aircraft leases to airlines around the world.

If an airline were to go bankrupt and default on its lease, the trust would repossess the plane and relet or sell it.

If an airline was to go bankrupt and default on its lease, the trust would repossess the plane and relet or sell it.

There have been no defaults on leases to date, however the leases contain a feature that allows lessors to defer their lease payments for three months, with the funds recaptured with interest when payments resume.

1 unchanged sentence

We do not expect to realize any losses for these securities and see the current valuations as a result of general market conditions.

Currently all of these securities are rated at investment grade.

The following table presents the fair values and gross unrealized losses of fixed maturity securities that are not deemed to have other than temporary impairment ("OTTI"), aggregated by investment category and length of time that individual securities have been in a continuous loss position at December 31, 2019.

Currently all of these securities are rated investment grade.

The following table presents the fair values and gross unrealized losses of fixed maturity securities that are not deemed to have other than temporary impairments ("OTTI"), aggregated by investment category and length of time that individual securities have been in a continuous loss position at December 31, 2019.

December 31, 2019 Less than 12 months Greater than 12 months Total

16 unchanged sentences

Total fixed maturities $ 125,756 1,261 133 $ 5,721 294 14 $ 131,477 1,555 147

March 31, 2020 | 10-Q 17

We have reviewed the securities in an unrealized loss position for the period ended December 31, 2019 and determined that no OTTI exists that has not been recognized based on our evaluation of the credit worthiness of the issuers and the fact that we do not intend to sell the investments nor is it likely that we will be required to sell the securities before recovery of their amortized costs bases which may be maturity.

The amortized cost and fair value of fixed maturity securities at June 30, 2020 by contractual maturity are shown in the table below.

Actual maturities may differ from contractual maturities because borrowers may have the right to

June 30, 2020 | 10-Q 20

Table of Contents DRAFT 6

CITIZENS, INC .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The amortized cost and fair value of fixed maturity securities at March 31, 2020 by contractual maturity are shown in the table below.

Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

call or prepay obligations with or without call or prepayment penalties.

Securities not due at a single maturity date have been reflected based upon final stated maturity.

March 31, 2020 Amortized

June 30, 2020 Amortized

(In thousands)

6 unchanged sentences

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

Three Months Ended

Fixed Maturity Securities, Available-for-Sale March 31,

Three Months Ended Six Months Ended

Fixed Maturity Securities, Available-for-Sale June 30, June 30,

(In thousands) 2020 2019 2020 2019

2 unchanged sentences

Gross realized losses $ 19 182 57 365

The Company sold 1 available-for-sale fixed maturity security during the three months ended March 31, 2020 and sold 10 available-for-sale fixed maturity securities during the three months ended March 31, 2019.

No equity securities were sold during the three months ended March 31, 2020 and 2019.

The Company sold five and six available-for-sale fixed maturity securities during the three and six months ended June 30, 2020 and sold ten and twenty available-for-sale fixed maturity securities during the three and six months ended June 30, 2019.

No equity securities were sold during the three and six months ended June 30, 2020 and 2019.

(6) FAIR VALUE MEASUREMENTS

4 unchanged sentences

Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our view of market assumptions in the absence of observable market information.

We utilize valuation techniques that maximize the use of

March 31, 2020 | 10-Q 18

CITIZENS, INC .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

observable inputs and minimize the use of unobservable inputs.

We utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.

All assets and liabilities carried at fair value are required to be classified and disclosed in one of the following three categories:

6 unchanged sentences

Treasury securities and actively traded mutual fund and stock investments.

June 30, 2020 | 10-Q 21

Table of Contents DRAFT 6

CITIZENS, INC .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Level 2 includes those financial instruments that are valued by independent pricing services or broker quotes.

5 unchanged sentences

Real estate held-for-sale is in this category.

There were no securities in this category at March 31, 2020.

March 31, 2020 | 10-Q 19

CITIZENS, INC .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

There were no securities in this category at June 30, 2020.

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

March 31, 2020 Level 1 Level 2 Level 3 Total

June 30, 2020 Level 1 Level 2 Level 3 Total

(In thousands)

20 unchanged sentences

The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the balance sheet.

March 31, 2020 | 10-Q 20

June 30, 2020 | 10-Q 22

Table of Contents DRAFT 6

CITIZENS, INC .

23 unchanged sentences

Fixed maturity securities, available-for-sale.

At March 31, 2020, our fixed maturity securities, valued using a third-party pricing source, totaled $ 1.3 billion for Level 2 assets and comprised 97.5 % of total reported fair value of our financial assets.

At June 30, 2020, our fixed maturity securities, valued using a third-party pricing source, totaled $ 1.4 billion for Level 2 assets and comprised 97.1 % of total reported fair value of our financial assets.

The Level 1 and Level 2 valuations are reviewed and updated quarterly through testing by comparisons to separate pricing models, other third-party pricing services, and back tested to recent trades.

In addition, we obtain information annually relative to the third-party pricing models and review model parameters for reasonableness.

There were no Level 3 assets at March 31, 2020.

For the three months ended March 31, 2020, there were no material changes to the valuation methods or assumptions used to determine fair values, and no broker or third-party prices were changed from the values received.

There were no Level 3 assets at June 30, 2020.

For the six months ended June 30, 2020, there were no material changes to the valuation methods or assumptions used to determine fair values, and no broker or third-party prices were changed from the values received.

Equity securities.

1 unchanged sentence

Other long-term investments.

We have invested in a private equity fund that invests in privately-originated, performing senior secured debt primarily in middle market North America-based companies.

Our unfunded commitment as of March 31, 2020 is $ 37.0 million.

This investment is not redeemable because distributions from the funds will be received when underlying investments of the funds are liquidated.

We initially estimate the fair value of investments in private equity limited partnerships by reference to the transaction price.

We hold an investment in a private equity fund that invests in privately-originated, performing senior secured debt primarily in middle market North America-based companies.

Our unfunded commitment as of June 30, 2020 is $ 35.9 million.

This investment is not redeemable because distributions from the funds will be received when the underlying investments of the funds are liquidated.

The fund has a 10 year term but this life could be extended at the fund manager’s discretion in one year increments.

We hold an investment in a term asset-backed securities liquidity facility private equity fund, established by the U.S.

Federal Reserve, that provides financing to U.S.

company market participants for levered asset purchases with a

June 30, 2020 | 10-Q 23

Table of Contents DRAFT 6

CITIZENS, INC .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

focus on asset-backed, commercial mortgage and collateralized loan obligation markets.

Our unfunded commitment for this fund as of June 30, 2020 is $ 14.9 million.

This investment is not redeemable because distributions from the funds will be received when the underlying investments of the funds are liquidated.

The fund is expected to be liquidated in 3 years but this life could be extended at the fund manager's discretion in one year increments.

2 unchanged sentences

Such reclassifications are reported as transfers in and out of Level 3 at the beginning fair value for the reporting period in which the changes occur.

There were no transfers in or out of Level 3 during the three months ended March 31, 2020.

March 31, 2020 | 10-Q 21

CITIZENS, INC .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

There were no transfers in or out of Level 3 during the six months ended June 30, 2020.

FINANCIAL INSTRUMENTS NOT CARRIED AT FAIR VALUE

2 unchanged sentences

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

March 31, 2020 December 31, 2019

June 30, 2020 December 31, 2019

(In thousands) Carrying

9 unchanged sentences

Mortgage loans are secured principally by residential properties.

Weighted average interest rates for these loans were approximately 6.4 % at March 31, 2020 and December 31, 2019.

At March 31, 2020, maturities ranged from 19 to 22 years.

Management estimated the fair value using an annual interest rate of 6.25 % at March 31, 2020.

Weighted average interest rates for these loans were approximately 6.4 % at June 30, 2020 and December 31, 2019.

At June 30, 2020, maturities ranged from 8 to 20 years.

Management estimated the fair value using an annual interest rate of 6.25 % at June 30, 2020.

Our mortgage loans are considered Level 3 assets in the fair value hierarchy.

Policy loans.

Policy loans had a weighted average annual interest rate of 7.7 % at March 31, 2020 and December 31, 2019, and no specified maturity dates.

Policy loans had a weighted average annual interest rate of 7.7 % at June 30, 2020 and December 31, 2019, and no specified maturity dates.

The aggregate fair value of policy loans approximates the carrying value reflected on the consolidated balance sheets.

These loans typically carry an interest rate that corresponds to the crediting rate applied to the related policy and contract reserves.

Policy loans are an integral part of the life insurance policies we have in force, cannot be valued separately and are not marketable.

2 unchanged sentences

Annuity liabilities.

The fair value of the Company's liabilities under annuity contract policies, which are considered Level 3 liabilities, was estimated at March 31, 2020 using discounted cash flows based upon spot rates ranging from 1.28 % to 2.34 % adjusted for various risk adjustments and 1.67 % to 3.02 % at December 31, 2019.

The fair value of liabilities under all insurance contracts are taken into consideration in the overall management of interest rate risk, which seeks to minimize exposure to changing interest rates through the matching of investment maturities with amounts due under insurance contracts.

March 31, 2020 | 10-Q 22

The fair value of the Company's liabilities under annuity contract policies, which are considered Level 3 liabilities, was estimated at June 30, 2020 using discounted cash flows based upon spot rates ranging from 0.40 % to 2.39 % adjusted for various risk adjustments and 1.67 % to 3.02 % at December 31, 2019.

The fair value of liabilities under all insurance contracts are taken into consideration in the overall management of interest rate risk,

June 30, 2020 | 10-Q 24

Table of Contents DRAFT 6

CITIZENS, INC .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes the carrying amounts of other long-term investments not carried at fair market value.

which seeks to minimize exposure to changing interest rates through the matching of investment maturities with amounts due under insurance contracts.

The following table summarizes the carrying amounts of other long-term investments.

Carrying Value

(In thousands)

March 31, 2020 December 31, 2019

June 30, 2020 December 31, 2019

Other long-term investments:

21 unchanged sentences

source income generated by the novated policies to remediate the noncompliance matter described above.

With the continued uncertainty that remains, including the acceptance of the submitted withholding tax returns, IRS review of our submission, and future negotiations, our estimated liability was approximately $ 10.0 million, after tax, as of March 31, 2020 related to the projected agreement with the IRS.

With the continued uncertainty that remains, including the acceptance of the submitted withholding tax returns, IRS review of our submission, and future negotiations, our estimated liability was approximately $ 10.0 million, after tax, as of June 30, 2020 related to the projected agreement with the IRS.

The probability weighted range of financial estimates relative to this issue is $ 7.4 million to $ 52.5 million, after tax.

1 unchanged sentence

Accruals for loss contingencies are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated.

The process of determining our best estimate and the estimated range was a complex undertaking including insight from external consultants and involved management’s judgment based upon a variety of factors known at the time.

The process of determining our best estimate and the estimated range is a complex undertaking including insight from external consultants and involved management’s judgment based upon a variety of factors known at the time.

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 and the methodology applicable to the calculation of the tax liabilities for policies.

Given the range of potential outcomes and the significant variables assumed in establishing our estimates, actual amounts incurred may exceed our reserve and could exceed the high end of our estimated range of liabilities and expenses.

To the extent the amount reserved by the Company is insufficient to meet the actual amount of our liabilities and expenses, or if our estimates of those liabilities and expenses change in the future, our financial condition and results of operations may be materially

March 31, 2020 | 10-Q 23

To the extent the amount reserved by the Company is insufficient to meet the actual amount of our liabilities and expenses, or if our estimates of those liabilities and

June 30, 2020 | 10-Q 25

Table of Contents DRAFT 6

CITIZENS, INC .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

adversely affected.

expenses change in the future, our financial condition and results of operations may be materially adversely affected.

Management believes that based upon current information, we have recorded the best estimate liability to date.

8 unchanged sentences

is subject to Subpart F of the IRC and is included in Citizens’ taxable income.

For the three months ended March 31, 2020, the Subpart F income inclusion generated $0.7 million of federal income tax expense.

For the three and six months ended June 30, 2020, the Subpart F income inclusion generated $ 0.7 million and $ 1.4 million of federal income tax expense, respectively.

A reconciliation between the U.S.

corporate income tax rate and the effective income tax rate is as follows:

Three Months Ended March 31, 2020 2019

Three Months Ended June 30, 2020 2019

(In thousands, except for %) Amount % Amount %

9 unchanged sentences

Total federal income tax expense $ 1,465 334.6 % $ 1,242 ( 37.3 ) %

A reconciliation of federal income tax expense above is computed by applying the federal income tax rate of 21 % in 2020 and 2019 to income before federal income tax expense.

Six Months Ended June 30, 2020 2019

(In thousands, except for %) Amount % Amount %

Federal income tax expense:

Expected tax expense (benefit) $ ( 377 ) 21.0 % $ ( 276 ) 21.0 %

Foreign income tax rate differential ( 1,039 ) 57.8 % ( 111 ) 8.4 %

Tax-exempt interest and dividends-received deduction ( 78 ) 4.3 % ( 118 ) 9.0 %

Annualized effective tax rate adjustment 846 ( 47.1 ) % 3,264 ( 248.2 ) %

Adjustment of prior year taxes ( 88 ) 4.9 % — — %

Effect of uncertain tax position 2,043 ( 113.7 ) % 2,416 ( 183.7 ) %

Subpart F income 1,392 ( 77.5 ) % 1,595 ( 121.4 ) %

Other 115 ( 6.4 ) % 282 ( 21.4 ) %

Total federal income tax expense $ 2,814 ( 156.7 ) % $ 7,052 ( 536.3 ) %

June 30, 2020 | 10-Q 26

Table of Contents DRAFT 6

CITIZENS, INC .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Income tax expense consists of:

Three Months Ended March 31, 2020 2019

Six Months Ended June 30, 2020 2019

(In thousands)

3 unchanged sentences

Total federal income tax expense $ 2,814 7,052

March 31, 2020 | 10-Q 24

CITIZENS, INC .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The components of deferred federal income taxes are as follows:

1 unchanged sentence

(In thousands)

March 31, 2020 December 31, 2019

June 30, 2020 December 31, 2019

Deferred tax assets:

3 unchanged sentences

Deferred intercompany loss 2,901 3,539

Fixed assets 482 —

Lease liability 2,627 238

9 unchanged sentences

Net deferred tax liability $ ( 15,320 ) ( 12,428 )

The Company leases home office space in Austin, Texas for Citizens and in Bermuda for CICA Ltd.

as well as several district office locations related to our Home Service Insurance segment across Louisiana, Mississippi and Arkansas, which are classified as operating leases.

Certain operating leases include renewal options that extend the lease terms.

The exercise of lease renewal options is at our sole discretion when it is reasonably certain that we will exercise such option .

Leases with an initial term of 12 months or less are immaterial to the consolidated financial statements and are recognized as lease expense on a straight-line basis over the lease term and not recorded on the consolidated balance sheet.

See our Annual Report on Form 10-K for the year ended December 31, 2019 for a comprehensive discussion of leases.

June 30, 2020 | 10-Q 27

Table of Contents DRAFT 6

CITIZENS, INC .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company has $ 12.5 million of undiscounted lease liability remaining as of June 30, 2020.

The Company evaluates its estimated incremental borrowing rate, which is derived from information available at lease commencement date, in determining present value of lease payments.

The table below summarizes the number of weighted-average years remaining in our operating lease liabilities.

Lease Term June 30, 2020

Weighted-average remaining lease term (in years)

Operating leases 9.6

We recorded the lease right-of-use asset in Other Assets and the lease liability in Other Liabilities on our consolidated balance sheets.

Cash payments related to lease liabilities were $ 0.3 million and $ 0.7 million for the three and six months ended June 30, 2020 and were reported in operating cash flows.

Maturities of our remaining operating lease liabilities as of June 30, 2020 are as follows:

(In thousands) Operating Lease Payments

Maturity of Lease Liabilities

After 2024 8,160

Total lease payments 14,165

Interest expense ( 1,659 )

Present value of lease liabilities $ 12,506

In January 2019, the Company entered into a long-term lease agreement with an unrelated party for its new home office in Austin, Texas.

The leased area is now under construction to our specifications, which requires the Company to recognize the related lease right of use asset and liability of $ 12.0 million.

The building is expected to be completed in the fourth quarter of 2020.

The Company does not engage in lease agreements among related parties.

(10) RELATED PARTY TRANSACTIONS

The Company has various routine related party transactions in conjunction with our holding company structure, such as a management service agreement related to costs incurred, a tax sharing agreement between entities, and inter-company dividends and capital contributions.

There were no changes related to these relationships during the three months ended March 31, 2020.

There were no changes related to these relationships during the six months ended June 30, 2020.

See our Annual Report on Form 10-K for the year ended December 31, 2019 for a comprehensive discussion of related party transactions.

1 unchanged sentence

The Company has evaluated the impact of subsequent events as defined by the accounting guidance through the date this report was issued.

The Harold E.

Riley Trust ("Trust") is the beneficial owner of 100% of our Class B common stock.

The Trust documents provided that upon Mr.

Riley's death, which occurred in 2017, the Class B common stock would transfer from the Trust to the Harold E.

Riley Foundation, a charitable organization established under 501(c)(3) of the Internal Revenue Code (the "Foundation").

Because the Class B common stock elects a simple majority of our Board of Directors, this transfer would constitute an acquisition of control by the Foundation, which requires regulatory approvals.

In April 2020, the Company was notified by the Colorado Division of Insurance that it was going to recommend that the Colorado Insurance Commissioner approve the Form A filing of the Trust and the Foundation that would allow the Trust to transfer ownership of all of its Class B common stock to the Foundation.

Since Citizens, Inc.

is domiciled in Colorado, we believe that once the Colorado Division of Insurance approves the transfer of the shares from the Trust to the Foundation, the insurance regulators in Louisiana, Texas and Mississippi, the states in which

March 31, 2020 | 10-Q 25

June 30, 2020 | 10-Q 28

Table of Contents DRAFT 6

CITIZENS, INC .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

our subsidiaries are domiciled, will also approve the transfer.

The regulatory approval of the transfer of the Class B shares from the Trust to the Foundation triggers the first of two clauses constituting a “change in control” in the Employment Agreement by and between the Company and Geoffrey M.

Kolander, our Chief Executive Officer and President.

Kolander is terminated by the Company without cause or resigns from the Company within 18 months following his receipt of written notice of the regulatory approval, he will be entitled to a cash severance totaling $ 8.8 million and full vesting of all outstanding Restricted Stock Units held by Mr.

See “Executive Employment Agreement” beginning on page 36 and “Potential Payments Upon Termination or Change-in-Control” beginning on page 38 of the Company’s definitive proxy statement on Schedule 14A, filed with the SEC on April 23, 2020 for a full description of Mr.

Kolander’s employment agreement and the change-in-control payments.

March 31, 2020 | 10-Q 26

CHANGE IN CONTROL

On July 29, 2020, a change in control of the Company occurred, and the Harold E.

Riley Foundation (the “Foundation”), a charitable organization established under 501(c)(3) of the Internal Revenue Code, is now the owner of 100 % of the Company’s Class B common stock.

Prior to the change in control, the Harold E.

Riley Trust (the “Trust”) was the beneficial owner of 100 % of the Company’s Class B common stock.

The Trust documents provided that upon Harold Riley’s death, which occurred in 2017, the Class B common stock would transfer from the Trust to the Foundation.

Because the Class B common stock elects a simple majority of the Board of Directors of the Company, this transfer constitutes an acquisition of control by the Foundation, which requires prior regulatory approvals by the insurance regulators of Colorado, Louisiana, Mississippi and Texas, the states in which the Company's insurance subsidiaries are domiciled.

On July 29, 2020, Colorado’s stipulated requirements from their order dated May 21, 2020 relating to the approval of acquisition of control by the Foundation were fulfilled.

Accordingly, Colorado, Louisiana, Mississippi and Texas insurance regulators have all now approved the acquisition of control of the Company by the Foundation.

Additionally, the Bermuda Monetary Authority has provided its consent of the change in control.

Thus, all regulatory approvals and requirements have been met to effectuate the change in control to the Foundation.

Upon receipt of notice of the requisite regulatory approvals for the change in control, the Company transferred the Class B common stock from the Trust, as record holder, to the Foundation and, as such, control over the Company’s Class B common stock is now being exercised by the Foundation.

RESIGNATION OF CHIEF EXECUTIVE OFFICER

On July 29, 2020, following the change in control of the Company, Mr.

Kolander notified the Company of his intention to resign from his position as Chief Executive Officer and President and as a member of the Board of Directors, and terminated the Employment Agreement by and between the Company and Mr.

Kolander dated January 1, 2019 (the “2019 Employment Agreement”).

Pursuant to Sections 1(e) and 6(g) of the 2019 Employment Agreement, Mr.

Kolander terminated the 2019 Employment Agreement due to a “change in control,” which occurred upon the regulatory approval of the transfer of the shares of the Company’s Class B common stock from the Trust to the Foundation.

Kolander’s resignation and separation from employment and a member of the Board of Directors will be effective no later than August 10, 2020.

In connection with Mr.

Kolander’s resignation and separation from employment, Mr.

Kolander signed a Chief Executive Officer Separation of Service and Consulting Agreement (the “Separation and Consulting Agreement”) with the Company and the Release attached as Exhibit “A” thereto, each dated July 29, 2020.

Kolander signed the Release, pursuant to Sections 6(g) and (h) of the Employment Agreement, Mr.

Kolander will be entitled to the cash severance amount set forth in Sections 6(g) and (h) of the 2019 Employment Agreement (which equals $ 8.8 million), less required withholdings and deductions.

Additionally, all outstanding Restricted Stock Units held by Mr.

Kolander will be fully vested on the date that Mr.

Kolander resigns and separates from employment.

The cash severance amount will be paid on the date that is six months and one day following the date that Mr.

Kolander resigns and separates from employment.

Thus the financial impact to the Company will occur in the third quarter of 2020 and the related expense will be recognized.

To assist in the orderly transition of his duties and responsibilities, Mr.

Kolander entered into the Separation and Consulting Agreement with the Company.

Under the Separation and Consulting Agreement, Mr.

Kolander agreed to provide leadership transition guidance and business continuity assistance to the Company as a consultant from the separation date through December 31, 2020.

Kolander will provide no more than 14 hours of consulting services per week at a rate of $ 14,000 per week.

The consulting period can be terminated by either party upon 30 days written notice.

The above summary of the Separation and Consulting Agreement is qualified by reference in its entirety to the Separation and Consulting Agreement, which was filed as an exhibit to our Current Report on Form 8-K filed on July 30, 2020 .

June 30, 2020 | 10-Q 29

Table of Contents DRAFT 6

CITIZENS, INC .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

APPOINTMENT OF INTERIM CHIEF EXECUTIVE OFFICER

On July 29, 2020, the Board of Directors appointed Gerald W.

Shields, a member of the Company’s Board of Directors, as Interim Chief Executive Officer, to be effective upon Mr.

Kolander’s separation from employment.

Following his appointment, Mr.

Shields will continue to serve as Vice Chairman of the Board of Directors, but will step down from the Audit Committee, the Compensation Committee and the Executive Committee as of such date.

June 30, 2020 | 10-Q 30

Table of Contents DRAFT 6

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements