What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2020-08-05 compared with 2020-05-07 · 329 added, 254 removed, 435 unchanged (57% of the section changed)

9 unchanged sentences

• Securities market disruption or volatility and related effects such as decreased economic activity that affect our investment portfolio;

• An unusually high level of claims, lapses or surrenders in our insurance operations, which could affect our liquidity and cash flow;

• Decreased premium revenue and cash flow from disruption to our distribution channel of independent agents, customer self-isolation, travel limitations, business restrictions and decreased economic activity;

• An unusually high level of claims, lapses or surrenders in our insurance operations, which could affect our liquidity and cash flow;

• Inability of our workforce to perform necessary business functions.

8 unchanged sentences

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 $1.7 billion of assets at March 31, 2020 and approximately $4.7 billion of direct insurance in force.

We had approximately $1.8 billion of assets at June 30, 2020 and approximately $4.6 billion of direct insurance in force.

Our core insurance operations include:

1 unchanged sentence

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;

• Home Service Insurance segment - final expense and limited liability property policies sold to middle and lower income households in Louisiana, Mississippi and Arkansas, through employee and independent agents in our home service distribution channel and through funeral homes.

March 31, 2020 | 10-Q 27

• Home Service Insurance segment - final expense and limited liability property policies sold to middle and lower income households in Louisiana, Mississippi and Arkansas, through independent agents in our home service insurance distribution channel and through funeral homes.

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As part of the continued strategic review of our operations, effective August 2020, we began to operate our Home Service Insurance segment through independent agents, rather than employee agents, which involved converting employee agents to independent agents.

For an additional discussion of the potential impacts on the business from the conversion, see Part II, Item 1A – Risk Factors .

STRATEGIC INITIATIVES

1 unchanged sentence

In 2017, the Company's executive management team, in cooperation with its Board of Directors, began a strategic realignment of its Life and Home Service Insurance segments in order to set a course for long-term profitable growth.

In the past three years, we have modernized and executed this broad transformation plan and accomplished the following:

• Stabilized our core business by adding new leadership at both the director and C-suite level, resolving legacy regulatory issues and significantly improving financial controls, and modernizing technology and improving our operational infrastructure;

• Evaluated product offerings, geographies and producers in order to align them with our values and play to our strengths, including eliminating unprofitable products, deploying new products, exiting high-risk markets (such as Brazil) and improving sales and marketing tactics;

• Focused and enabled operations in order to scale agile methodologies, train operational leaders and redesign the underwriting team to put the customer at the core of the process.

Carrying that momentum forward, we enter 2020 with clearly defined priorities:

• We are focused on continuing to build operational excellence, as our high impact and values-based culture takes root.

• We are focused on growth initiatives within the markets in which we operate, as we set targets for growing premium revenues and implementing growth strategies.

• We are focused on new capabilities that will create business opportunities aligned with our essential purpose.

During 2020, we are focused on the following clearly defined priorities:

• continuing to build operational excellence, as our high impact and values-based culture takes root,

• growth initiatives within the markets in which we operate, as we set targets for growing premium revenues and implementing growth strategies, and

• building new capabilities that will create business opportunities aligned with our essential purpose.

As we seek to optimize value for the Company, its customers and its collaborators, we believe our efforts will continue to put the Company on a stronger financial footing and drive sustainable growth.

CURRENT FINANCIAL HIGHLIGHTS

While our results of operations for the three months ended March 31, 2020 were impacted by the onset of the COVID-19 pandemic in the Unites States and other places where we do business, it is difficult to quantify the full impact that COVID-19 had on our business in the quarter.

Towards the end of the quarter, we began to see quarantines, “stay-at-home” orders and similar mandates for many individuals to substantially restrict daily activities and for many businesses to curtail or cease normal operations, and the volatile economic, business and financial market conditions resulting therefrom.

Due to significant declines in equity and credit markets, we recorded $38.5 million of unrealized investment losses during the quarter, which was the primary reason that our stockholders' equity declined by 17% from December 31, 2019.

Investments in the notes to our consolidated financial statements for a discussion of these unrealized losses.

We describe below areas of our results in which we believe our business may have been impacted by COVID-19 during the quarter.

We are closely monitoring developments related to the COVID-19 pandemic to assess its impact on our future business.

Our results of operations for the three months ended June 30, 2020 were negatively impacted by the acceleration in intensity of the COVID-19 pandemic in the U.S.

and other countries where we do business.

While it is difficult to quantify the full impact that the COVID-19 pandemic had on our business in the second quarter, we believe that the COVID-19 pandemic primarily negatively impacted our product sales (and thus first year premium revenue), claims in our Home Service Insurance segment and net investment income.

In the three months ended March 31, 2020, our first year premiums in the Life Insurance segment had increased 19% over the same prior year period.

We believe these increases were primarily due to our strategic initiatives to make changes in our products and distribution, including investments made in our sales and marketing activities and increased sales of higher average premium policies.

First year premiums in our Life Insurance segment declined 40.5% in the three months ended June 30, 2020 from the same period in 2019.

We believe this was due primarily to the disruption in our sales processes and challenging economic conditions during the COVID-19 pandemic.

Prior to the second quarter of 2020, claims experience in our Home Service Insurance segment had fluctuated from period to period but were within the range of expected levels.

We believe that because of the demographics of our policyholders in our Home Service Insurance segment and their reduced ability to sequester and avoid an airborne contagion, the COVID-19 pandemic had a negative impact on claims in that segment, driving the 32% increase in claims for the second quarter of 2020 compared to the same period in 2019.

The COVID-19 pandemic also negatively impacted our net investment income during the second quarter.

Continued economic turmoil due to the COVID-19 pandemic has led to historically low treasury yields.

Although we have begun to diversify into other asset classes, our investment portfolio is weighted heavily towards fixed maturity assets.

While the stabilization in equity and fixed maturity markets from March 31, 2020 to June 30, 2020 resulted in a marked improvement in our shareholders' equity in the same period, the low treasury yields made identifying and executing on attractive risk-adjusted purchases for our fixed maturity portfolio more difficult.

Thus while we recorded $80.3 million in unrealized investment gains and $1.4 million in realized investment gains during the second quarter, contributing to a 34.3% increase in our shareholders’ equity from March 31, 2020, our net

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MANAGEMENT'S DISCUSSION & ANALYSIS

investment income and portfolio yield declined from recent quarters.

Investments in the notes to our consolidated financial statements for a discussion of these unrealized gains.

We continued to see quarantines, “stay-at-home” orders and similar mandates for many individuals and businesses requiring them to substantially restrict daily activities and to curtail or cease normal operations, in both Texas and Louisiana, where our home offices are located, and globally where we do business.

In response, we began accelerating operational changes and sales practices in order to account for the impact of the COVID-19 pandemic and to ensure business continuity while adhering to federal and local government work guidelines.

These changes included the following.

• implemented virtual sales training for international agents

• prioritized sales of lower face amount policies with reduced underwriting requirements

• discontinued and replaced certain products that no longer fall within acceptable levels of risk

• adopted new practices to virtually serve customers

• implemented new payment methods

◦ announced our international policyholders can now pay U.S.

Dollar-denominated premiums in their local currencies, along with a transaction fee to minimize currency fluctuations and our exchange rate risks

◦ expanded digital payment options to policyholders in our Home Service Insurance segment

• revised resource structure to improve virtual collection efforts in historical door-to-door collection model

• continued remote working arrangements

We describe below in more detail areas of our results in which we believe our business may have been impacted by the COVID-19 pandemic during the quarter.

We do foresee some adverse impact to near-term sales activity, premiums, claims, policy benefits, invested assets and regulatory capital as a result of the COVID-19 pandemic.

Although the extent to which the COVID-19 pandemic may impact our future financial results and business remains uncertain as of the date of this Form 10-Q, we are closely monitoring developments related to the COVID-19 pandemic to assess its impact on our future results and business.

For an additional discussion of the potential impacts on our business from the COVID-19 pandemic, see Part II, Item 1A – Risk Factors .

March 31, 2020 | 10-Q 28

We had net loss of $1.0 million and $4.6 million in the three and six months ended June 30, 2020, respectively, compared to a net loss of $4.6 million and $8.4 million in the respective prior year periods, leading to a $0.07 and $0.08 per share improvement, respectively.

Our total revenues of $58.3 million for the three months ended June 30, 2020 increased 2.6% from $56.9 million in the prior year period, and decreased by 4.4%, from $119.3 million in the first six months of 2019 to $114.1 million in the six months ended June 30, 2020.

The decrease in the six month period was primarily due to lower premiums, which were affected by the COVID-19 pandemic as discussed above.

In the three month period, the lower premiums were offset by realized investment gains in the current period versus a one-time realized loss related to a real estate transaction in the prior year period, as described below.

Our total cost for benefits and expenses continued to decrease despite the higher claims, due in part to our strategic efforts to lower general expenses.

This resulted in overall better net income in the three and six months ended June 30, 2020 compared to the prior periods.

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We had a net loss of $3.6 million in the first three months ended March 31, 2020, compared to a net loss of $3.8 million in the prior year period, leading to a $0.01 per share improvement.

Our total revenues of $55.7 million in the first three months ended March 31, 2020 decreased 11% from the prior year period, primarily due to realized investment losses in the current period versus a one-time realized gain in the prior year period, as described below.

The decline in revenue was offset by a decrease in total benefits and expenses and lower taxes, resulting in the overall better operating results in the three months ended March 31, 2020.

Financial highlights for the three months ended March 31, 2020 compared to the same period in 2019 were:

• Insurance premiums declined 2.7% for the first quarter of 2020 compared to the same period in 2019, totaling $41.3 million and $42.5 million, respectively.

First year premiums in our Life Insurance segment increased 19.4% for the first quarter of 2020 compared to the same period in 2019 as we continue to benefit from changes in our products and distribution, including investments made in our sales and marketing activities and increased sales of higher average premium policies.

Even though first year premiums increased, the decline in overall premiums was driven by fewer renewal premiums in our Life Insurance segment.

The decrease in renewal premiums reflects the changes we have made to our products and distribution, primarily:

Financial highlights for the three and six months ended June 30, 2020 compared to the same periods in 2019 were:

REVENUE HIGHLIGHTS

• For the three months ended June 30, 2020, insurance premiums declined 5.3% to $41.5 million from $43.8 million for the same period in 2019.

The decline was driven primarily by lower first year and renewal premiums in our Life Insurance segment.

First year premiums in our Life Insurance segment declined 40.6% from the second quarter of 2019 as our sales processes were materially disrupted by the COVID-19 pandemic.

The decrease in renewal premiums primarily reflects the changes we have made to our products and distribution, primarily:

(1) in 2017, we repriced certain products in response to a prolonged low interest rate environment and (2) we terminated agreements with independent producers who did not align with our vision, values and culture, both of which decreased persistency.

Towards the end of the quarter, both first year and renewal premiums may have been negatively impacted in both our Life Insurance and Home Service Insurance segments due to COVID-19, although the direct impact to our first quarter results is difficult to quantify.

• Net investment income increased 10.0% for the first quarter of 2020 compared to the same period of 2019, totaling $15.2 million and $13.8 million, respectively.

The increase was driven by a growing asset base derived from cash flows from our insurance operations, improvements in cash management, and a strategic focus on achieving greater yields while maintaining a prudent risk profile for our investment portfolio.

We were able to achieve strong portfolio returns despite facing a historically difficult investment environment during the quarter.

The average yield on the consolidated portfolio as of the three months ended March 31, 2020 was an annualized rate of 4.31% compared to 4.08% for the same period in 2019.

• Realized investment losses of $1.3 million were recorded for the first quarter of 2020 as we faced an historically difficult investment environment.

We recorded realized losses of $1.1 million related to fair value changes in our equity securities owned at March 31, 2020, which were primarily the result of market fluctuations resulting from the onset of the COVID-19 pandemic.

A realized gain of $5.5 million was recorded in the first quarter of 2019 related to the sale of our former corporate headquarters in Austin, Texas.

• Claims and surrenders expense increased 14.8% for the first quarter of 2020 compared to the same period in 2019.

The increase was driven primarily by an increase in surrender benefits and matured endowments in the Life Insurance segment.

We are closely monitoring claim volumes to evaluate whether there is a delay in reporting or filing for benefits as a result of the COVID-19 pandemic.

• The change in future policy benefit reserves decreased 23.0% for the first quarter of 2020 compared to the same period in 2019 driven primarily by the release of reserves resulting from increased surrenders and matured endowments in the Life Insurance segment during the period.

• General expenses decreased 18.8% for the first quarter of 2020 compared to the same period in 2019 as we continue to execute on our strategic cost savings initiatives.

The decrease was driven primarily by lower audit, consulting and employee-related expenses.

March 31, 2020 | 10-Q 29

• For the six months ended June 30, 2020, insurance premiums declined 4.0% to $82.8 million from $86.3 million for the same period in 2019.

The decline was driven by lower renewal premiums in our Life Insurance segment for the six months and lower first year premiums for the second quarter of 2020.

• Net investment income declined 2.6% for the second quarter ended June 30, 2020 compared to the same period of 2019, totaling $14.9 million and $15.3 million, respectively.

The COVID-19 pandemic negatively impacted our second quarter performance as explained above.

• We recorded realized gains of $1.4 million during the second quarter of 2020 related to fair value changes in our equity securities owned on June 30, 2020, as equity markets rebounded sharply during the period as compared to March 31, 2020.

An impairment loss of $3.1 million was recorded during the second quarter of 2019 in our Other Non-Insurance enterprises related to our Citizens Academy training facility located near Austin, Texas.

BENEFITS AND EXPENSES HIGHLIGHTS

• Claims and surrenders expense increased 2.7% for the second quarter of 2020 and 8.3% for the six months ended June 30, 2020 compared to the same periods in 2019.

The increase was driven primarily by an increase in matured endowments in the Life Insurance segment during the six months, which were within expected levels, and higher COVID-19 related claims in the second quarter in our Home Service Insurance segment.

We are closely monitoring claim volumes to evaluate whether there is a delay in reporting or filing for benefits as a result of the COVID-19 pandemic in both of our segments.

• Future policy benefit reserves decreased 13.0% for the second quarter of 2020 and 18.7% for the six months ended June 30, 2020 compared to the same periods in 2019, driven primarily by the release of reserves resulting from increased matured endowments in the Life Insurance segment and increased claims in the Home Service Insurance segment during the period.

• As a result of lower product sales in the second quarter primarily due to the impact of the COVID-19 pandemic, capitalization of deferred policy acquisition costs decreased, as these costs are directly related to first year premium production.

• General expenses decreased 6.8% for the second quarter of 2020 and 13.3% for the six months ended June 30, 2020, compared to the same periods in 2019.

The reduction for both periods was driven primarily by reduced audit and consulting expenses, while first half expenses were also positively impacted by reduced stock compensation expenses during the first quarter.

After addressing prior deficiencies in our internal control environment, we are benefiting from reductions in external audit fees and outside consulting expenses.

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7 unchanged sentences

The amount of insurance, number of policies, and average face amounts of ordinary life policies issued during the periods indicated are shown below.

Three Months Ended March 31, 2020 2019

Six Months Ended June 30, 2020 2019

Issued Number of

5 unchanged sentences

Home Service Insurance 65,239,577 9,230 7,068 84,521,648 11,674 7,240

The number of policies issued increased 4.1% and decreased 12.5%, respectively, for the Life Insurance and Home Service Insurance segments for the three months ended March 31, 2020 compared to the same period in 2019.

The increase in new business applications in our Life Insurance segment was driven by the investments we have made in our sales and marketing activities and the achievement of better alignment with our independent consultants on vision, value and strategy.

Despite the growth in the number of policies issued, the onset of the COVID-19 pandemic could have caused our policies issued to be less than they otherwise would have been.

Home Service production in the first quarter of 2020 was negatively affected by the impact of COVID-19, as a couple of our offices in Louisiana were forced to temporarily close during the month of March.

In response to COVID-19, we have made changes to our Home Service Insurance operations and collection processes.

These include, but are not limited to, eliminating face to face interactions between our agents and our customers and offering our customers payment options such as debit/credit cards and traditional mail that obviate such personal interaction.

We continue to monitor the impact of COVID-19 on our business and foresee additional operational changes coming.

March 31, 2020 | 10-Q 30

The number of policies issued decreased 11.2% and 20.9%, respectively, for the Life Insurance and Home Service Insurance segments for the six months ended June 30, 2020 compared to the same period in 2019.

The decrease in new business applications in both our Life Insurance and Home Service Insurance segments was driven primarily by disruptions in our sales practices caused by the COVID-19 pandemic.

The number of new business applications for our Life Insurance segment declined during April and May of this year and increased in June of this year as compared to the number of new business applications in the same months in 2019.

The increase in June of this year, compared to April and May, was primarily due to adjustments to our business operations and sales practices to account for the impact of the COVID-19 pandemic, such as focused training on virtual selling and strategically prioritizing selling lower face amount policies as many of our markets remain in lockdown.

Lower face amount policies typically have less underwriting requirements and, in some cases, may not require the completion of medical tests, which would otherwise be difficult to obtain during the COVID-19 pandemic.

Due to these adjustments, average policy face amount declined by 5.5% during the six months ended June 30, 2020 compared to the same period in 2019 for the Life Insurance segment.

Home Service Insurance segment production for the first six months of 2020 was negatively affected by the impact of the COVID-19 pandemic, as a couple of our offices in Louisiana were forced to temporarily close during the month of March and because we discontinued and replaced certain products that no longer fall within acceptable levels of risk and rolled out new policies offering value to the policyholder without disproportionate exposure to the Company.

Additionally, certain product offerings that require extensive person to person sales interaction were temporarily ceased during the second quarter.

Other changes to our Home Service Insurance operations and collection processes were made, including limiting or reducing face to face interactions between our agents and our policyholders and emphasizing to our policyholders the availability of payment options such as debit/credit cards and traditional mail that obviate such personal interaction.

We continue to monitor the impact of the COVID-19 pandemic on our business and may have to implement additional operational changes.

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3 unchanged sentences

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

Three Months Ended

Three Months Ended Six Months Ended

June 30, June 30,

(In thousands) 2020 2019 2020 2019

3 unchanged sentences

Net investment income 14,915 15,315 30,084 29,111

Realized investment gains (losses), net (1,306) 5,961

Realized investment gains, net 1,448 (2,869) 142 3,092

Other income 482 616 1,024 801

1 unchanged sentence

Premium Income.

Premium income derived from life, accident and health, and property insurance sales decreased 2.7% for the first quarter of 2020 compared to the same period in 2019.

While first year premiums in our Life Insurance segment increased by 19.4% for the first quarter of 2020 as compared to the same period in 2019, the overall decrease in premium income was driven primarily by a decline in renewal premiums in our Life Insurance segment for the reasons described above in “Current Financial Highlights”.

Premium income derived from life, accident and health, and property insurance sales decreased 5.3% and 4.0% for the second quarter and six months ended June 30, 2020 compared to the same periods in 2019.

The overall decrease in premium income was driven primarily by a decline throughout the first six month of 2020 in renewal premiums for the reasons described above in “Current Financial Highlights” and a COVID-19-related decline in first year premiums during the second quarter, in our Life Insurance segment.

See the detail distribution of premiums within Segment Operations discussed below.

1 unchanged sentence

Net investment income performance is summarized as follows.

March 31, December 31, March 31,

June 30, December 31, June 30,

(In thousands, except for %) 2020 2019 2019

2 unchanged sentences

Annualized yield on average invested assets 4.29 % 4.36 % 4.30 %

The annualized yield increased during the first three months of 2020 compared to the same period in 2019, despite a steep decline in overall market yields.

We have been successful in achieving higher yields while maintaining a prudent risk profile for our portfolio despite facing an increasingly challenging investment environment.

The annualized yield during the first quarter decreased slightly compared to the three months ended December 31, 2019.

The investment environment during the first quarter of 2020 was especially challenging as noted previously.

Although COVID-19-related market dislocations did result in us holding more cash than usual during the quarter, we were also able to execute on attractive risk-adjusted opportunities as we realized an average yield of 5.33% on our March purchases.

As part of the ongoing process of managing our portfolio and optimizing performance, we are continuing to identify and consider new asset classes.

March 31, 2020 | 10-Q 31

The annualized yield slightly decreased during the first six months of 2020 compared to the same period in 2019, as overall market yields for fixed maturity securities declined to historic lows during the first six months of 2020.

As a substantial proportion of our fixed maturity investments continue to be called or mature, we faced challenges in the second quarter in finding investments with comparable yields in the continued low interest rate environment.

In addition, concerns about potential negative COVID-19-related impacts on our liquidity, while not ultimately realized, resulted in us holding more cash than usual during the first half of 2020, which negatively impacted yields.

As part of the ongoing process of managing our portfolio and optimizing performance, we are continuing to identify, consider, and invest in new asset classes.

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Investment income from fixed maturity securities accounted for approximately 88.1% of total investment income for the three months ended March 31, 2020.

Three Months Ended

Investment income from fixed maturity securities accounted for approximately 88.0% of total investment income for the six months ended June 30, 2020.

Three Months Ended Six Months Ended

June 30, June 30,

(In thousands) 2020 2019 2020 2019

8 unchanged sentences

Net investment income $ 14,915 15,315 30,084 29,111

Fixed maturity securities income increased 10.8% for three months ended March 31, 2020, compared to the same period in 2019.

Fixed maturity securities income decreased 1.7% for the second quarter of 2020 and increased 4.3% for the six months ended June 30, 2020, compared to the same periods in 2019.

We continue to adjust our investment management strategy to increase our investment yields while maintaining a prudent risk profile.

2 unchanged sentences

Realized Investment Gains (Losses), Net.

We recorded realized losses of $1.1 million due to fair value changes related to equity securities still owned at March 31, 2020, due to the decline in equity markets from the impact of COVID-19.

We recorded a realized gain of $5.5 million in the first quarter of 2019 relating to the sale of our former corporate headquarters.

We recorded realized gains of $1.3 million during the second quarter of 2020 related to fair value changes in our equity securities owned at June 30, 2020, as equity markets rebounded sharply during the second quarter as compared to the first quarter.

An impairment loss of $3.1 million was recorded for the second quarter of 2019 in connection with classifying the Citizens Academy training facility near Austin, Texas as real estate held-for-sale.

BENEFITS AND EXPENSES

Three Months Ended

Three Months Ended Six Months Ended

June 30, June 30,

(In thousands) 2020 2019 2020 2019

11 unchanged sentences

Total benefits and expenses $ 57,903 60,189 115,860 120,587

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2 unchanged sentences

A detail of claims and surrender benefits is provided below.

Three Months Ended

Three Months Ended Six Months Ended

June 30, June 30,

(In thousands) 2020 2019 2020 2019

8 unchanged sentences

Total claims and surrenders $ 27,754 27,024 54,203 50,057

• Death claims increased 1.6% for the three months ended March 31, 2020 compared to the same period in 2019.

Mortality experience is closely monitored by the Company and the activity is within expected levels.

• Surrenders increased 23.8% for the three months ended March 31, 2020 compared to the same period in 2019.

Surrenders represented less than 1% of total direct ordinary whole life insurance in force of $4.7 billion as of March 31, 2020.

The increase in surrender expense is primarily related to our international business.

A significant portion of surrenders relate to policies that have been in force over fifteen years and no longer have associated surrender charges.

• Matured endowments increased 40.0% for the three months ended March 31, 2020 compared to the same period in 2019.

• Death claims increased 18.6% and 9.7% for the second quarter and six months ended June 30, 2020 compared to the same periods in 2019.

The increase was concentrated in our Home Service Insurance segment and primarily reflected differing socioeconomic levels and related ability to mitigate exposure to COVID-19 for policyholders in this segment.

Mortality experience and the COVID-19 impacts will continue to be closely monitored by the Company.

• Surrenders decreased 20.5% and 1.9% for the second quarter and six months ended June 30, 2020 compared to the same periods in 2019.

Surrenders represented less than 2% of total direct ordinary whole life insurance in force of $4.6 billion as of June 30, 2020.

The decrease in surrender expense is primarily related to our international business, and reflects changes in the relative maturities of our policies and resulting tendency to surrender in the second quarter of 2020 compared to recent quarters.

In addition, we saw an unusually high percentage of policyholders in our Life Insurance segment select the reduced paid up insurance ("RPU") option instead of surrendering their policies in the second quarter of 2020.

• Matured endowments increased 66.9% and 55.6% for the second quarter and six months ended June 30, 2020 compared to the same periods in 2019.

We anticipated this increase based upon the dates of when our endowment contracts were sold and their expected maturities as set forth in the contracts.

Increase in Future Policy Benefit Reserves.

The change in future policy benefit reserves decreased 23.0% for the three months ended March 31, 2020 compared to the same period in 2019 as a result of changes in surrender and maturity activity between periods.

Commission expense for the three months ended March 31, 2020 was slightly lower compared to the same period in 2019.

The change in future policy benefit reserves decreased 13.0% and 18.7% for the second quarter and six months ended June 30, 2020 compared to the same periods in 2019 as a result of changes in maturity activity between periods.

Commission expense for the second quarter and six months ended June 30, 2020 was slightly lower compared to the same periods in 2019 and primarily reflects the impact of the COVID-19 pandemic on our new sales generation, especially in the second quarter of 2020.

Commission expense fluctuates directly with changes in first year and renewal premiums.

Other General Expenses.

Expenses for the three months ended March 31, 2020 decreased 18.8% compared to the same period in 2019, driven primarily by lower audit, consulting and employee-related expenses.

Expenses for the second quarter and six months ended June 30, 2020 decreased 6.8% and 13.3% compared to the same periods in 2019, driven primarily by lower audit, consulting and employee-related expenses.

We continue to execute on our strategic cost savings initiatives.

Capitalization and Amortization of Deferred Policy Acquisition Costs.

Costs capitalized include certain commissions, policy issuance costs, and underwriting and agency expenses that relate to successful sales efforts for insurance contracts.

Capitalized costs increased during the first quarter of 2020 compared to the same period in 2019 as we experienced an increase in first year premium production.

Commissions paid on renewal premiums are significantly lower than those paid on first year business.

Amortization of deferred policy acquisition costs was basically flat during the first quarter of 2020 compared to the same period last year.

These costs are impacted by persistency and surrenders, and they may fluctuate from quarter to quarter.

Federal Income Tax.

Tax expense decreased for the three months ended March 31, 2020 compared to the same period in 2019 resulting in effective tax rates of (60.3)% and 289.3%, respectively.

For the three months ended March 31, 2019, the Company's federal income tax expense was impacted by the gain realized on the sale of our former corporate headquarters.

The Company's tax rate was impacted by differences between our effective tax rate and the statutory tax rate resulting from income and expense items that are treated differently for financial reporting

March 31, 2020 | 10-Q 33

Costs capitalized include certain commissions, policy issuance costs, and underwriting and agency expenses that relate to successful sales efforts for insurance

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and tax purposes.

Capitalized costs decreased during the second quarter and the six months ended June 30, 2020 compared to the same periods in 2019 as we experienced a decrease in first year premium production as previously noted.

Amortization of deferred policy acquisition costs was lower during the second quarter and the six months ended June 30, 2020 compared to the same periods last year.

Amortization is impacted by persistency, surrenders, and new sales production and thus they may fluctuate from quarter to quarter.

Federal Income Tax.

Tax expense decreased for the six months ended June 30, 2020 compared to the same period in 2019 resulting in effective tax rates of (156.7)% and (536.3)%, respectively.

For the six months ended June 30, 2019, the Company's federal income tax expense was impacted by the gain realized on the sale of our former corporate headquarters.

In addition, CICA Ltd., a wholly-owned subsidiary of Citizens, is considered a controlled foreign corporation for federal tax purposes and CICA Ltd.'s activity gives rise to taxable income in the U.S.

8 unchanged sentences

The following table shows income (loss) before federal income taxes by segments during the periods indicated.

Three Months Ended

Three Months Ended Six Months Ended

June 30, June 30,

(In thousands) 2020 2019 2020 2019

6 unchanged sentences

Our Life Insurance segment issues ordinary whole life insurance in the U.S.

Dollar-denominated amounts to foreign residents.

Dollar-denominated amounts to non-U.S.

These contracts are designed to provide a fixed amount of insurance coverage over the life of the insured and can include rider benefits to provide additional increasing or decreasing coverage and annuity benefits to enhance accumulations.

3 unchanged sentences

and domestically through our CICA and CNLIC insurance subsidiaries.

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INTERNATIONAL SALES

7 unchanged sentences

• persistency experience and mortality rates that are comparable to U.S.

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MANAGEMENT'S DISCUSSION & ANALYSIS

INTERNATIONAL PRODUCTS

11 unchanged sentences

Once a policyowner pays the annual premium and the policy is issued, the owner becomes entitled to policy cash dividends as well as annual premium benefits if the annual premium benefit was elected.

According to the policy language, the policyowner has several options with regard to the policy dividends and annual premium benefits, which include, among other things, electing to receive cash crediting such amounts towards the payment of premiums on the policy, leaving such amounts on deposit with the Company to accumulate at a defined interest rate or assigning them to a third-party.

The policyowner has several options with regard to the policy dividends and annual premium benefits, which include, among other things, electing to receive cash crediting such amounts towards the payment of premiums on the policy, leaving such amounts on deposit with the Company to accumulate at a defined interest rate or assigning them to a third-party.

Under the "assigned to a third-party" provision, the Company has historically allowed policyowners, after receiving a copy of the Citizens, Inc.

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Computershare administers the CISIP in accordance with the terms and conditions of the CISIP, which is available on the Computershare website and as part of the Company’s registration statement on file with the SEC.

See the Risk Factors disclosed in Part I.

of our Annual Report on Form 10-K for the year ended December 31, 2019, which are incorporated herein, for additional information.

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MANAGEMENT'S DISCUSSION & ANALYSIS

The following table sets forth, by country, our direct premiums from the top five premium producing countries in our international life insurance business for the three months ended March 31, 2020 and 2019 as indicated below.

Three Months Ended

The following table sets forth, by country, our direct premiums from the top five premium producing countries in our international life insurance business for the six months ended June 30, 2020 and 2019 as indicated below.

Three Months Ended Six Months Ended

June 30, June 30,

(In thousands) 2020 2019 2020 2019

Colombia $ 5,981 6,142 11,869 12,102

Taiwan 4,974 4,765

Venezuela 4,937 5,426 9,890 10,731

Taiwan 3,882 4,346 8,856 9,111

Ecuador 3,227 3,575 6,338 6,813

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Other Non-U.S.

9,347 9,698 17,548 18,175

Total $ 29,807 31,866 58,757 61,592

We reported declines in premiums during the first quarter of 2020 compared to the same period in 2019 due primarily to a decrease in renewal premiums.

We continue to monitor key indicators in these markets.

Overall, four of our top five countries listed above experienced a decline in premium levels from the first quarter of March 31, 2020 compared to the same period in 2019.

While first year premiums increased in the first quarter of 2020 compared to the prior year period, overall premiums declined for the reasons described above in "Current Financial Highlights".

Our international business and premium collections also 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 and by marketing or operational changes made by the Company to comply with those laws or regulations.

See the Risk Factors disclosed in Part I.

of our Annual Report on Form 10-K for the year ended December 31, 2019, which are incorporated herein, for additional information.

March 31, 2020 | 10-Q 36

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

We reported declines in premiums during the second quarter and the six months ended June 30, 2020 compared to the same periods in 2019 due primarily to a decrease in first year premiums in the second quarter as previously noted, and lower renewal premiums throughout the first half of 2020.

We continue to monitor key indicators in these markets including COVID-19 pandemic impacts.

All of our top five countries listed above experienced a decline in premium levels during the second quarter and six months ended June 30, 2020 compared to the same periods in 2019.

Renewal premiums declined for the reasons described above in "Current Financial Highlights".

DOMESTIC SALES

Most of our domestic inforce business results from blocks of business of insurance companies we have acquired over the past 20 years.

Most of our domestic inforce business results from blocks of business of insurance companies we have acquired over the years.

We discontinued new sales of domestic ordinary whole life and endowment life insurance products within our Life Insurance segment in 2017 while we evaluate our domestic life strategy;

therefore, the majority of the premium recorded is related to renewal business.

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MANAGEMENT'S DISCUSSION & ANALYSIS

The results of operations for the Life Insurance segment for the periods indicated are as follows:

Three Months Ended

Three Months Ended Six Months Ended

June 30, June 30,

(In thousands) 2020 2019 2020 2019

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Total benefits and expenses 40,161 44,553 80,633 86,639

Income before federal income tax expense $ 2,086 4,637

Premium revenues declined 3.5% for the first quarter of 2020 compared to the same period in 2019 due to a decrease in renewal business.

While first year premiums from our international business increased 19.4% during the first quarter of 2020 compared to the same period in 2019 as we have invested heavily in our sales and marketing activities and achieved better alignment with our independent consultants on vision, value and strategy, renewal premiums decreased for the reasons described above in “Current Financial Highlights”.

Since the first quarter of 2019, we have experienced progressive improvement in our new business production for our international business.

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MANAGEMENT'S DISCUSSION & ANALYSIS

Income (loss) before federal income tax expense $ 2,119 (119) 4,205 4,518

Premium revenues declined 6.5% and 5.0% for the second quarter and six months ended June 30, 2020 compared to the same periods in 2019 due to a decrease in renewal business throughout the first half of 2020 and a decline in first year premiums during the second quarter primarily related to the impact of the COVID-19 pandemic.

We have taken and will continue to take countermeasures to reduce the impact of the COVID-19 pandemic on our premiums, including emphasizing virtual selling and tailoring our sales efforts to products whose sales processes are less impacted by the pandemic.

Life insurance premium breakout is detailed below.

Three Months Ended

Three Months Ended Six Months Ended

June 30, June 30,

(In thousands) 2020 2019 2020 2019

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Net Investment Income .

Net investment income increased primarily due to the growth in average invested assets and a strategic focus on increasing yields in a prudent manner.

Three Months Ended Year Ended Three Months Ended

March 31, December 31, March 31,

Net investment income declined in the second quarter of 2020 compared to the same period in 2019 primarily due to the impact of the COVID-19 pandemic and the resulting historically low market yields

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MANAGEMENT'S DISCUSSION & ANALYSIS

available to us for reinvestment, and the need to hold more cash than usual.

Net investment income increased during the first half of 2020 compared to the same period in 2019 primarily due to the growth in average invested assets and a strategic focus on increasing yields in a prudent manner.

June 30, December 31, June 30,

(In thousands, except for %) 2020 2019 2019

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Annualized yield on average invested assets 4.34 % 4.41 % 4.32 %

The annualized yield in the first quarter of 2020 increased markedly compared to the first quarter of 2019.

We are continually adjusting our investment management strategy to identify opportunities to improve our yields while maintaining risk discipline.

The annualized yield in the first six months of 2020 increased slightly compared to the same period in 2019.

We are continually adjusting our investment management strategy to identify opportunities to improve our yields while maintaining a prudent risk profile.

This continues to be a challenge in the current low interest rate environment.

The annualized yield in the first quarter of 2020 declined compared to the three months ended December 31, 2019 as we faced a continued low interest rate environment and a particularly challenging investment environment during the first quarter of the year.

The annualized yield in the first six months of 2020 declined compared to the three months ended December 31, 2019 as we faced a particularly challenging investment environment this year.

Realized Investment Gains (Losses), Net.

The realized gain for the first quarter of 2020 was primarily due to a $0.9 million gain on an equity purchase made during the quarter as we were able to take advantage of the market dislocation to identify attractive risk-adjusted opportunities, as previously noted.

The realized gain for the second quarter and first six months ended June 30, 2020 were primarily due to the appreciation in the value of a preferred stock exchange traded fund purchase we made during the first quarter as we were able to take advantage of the market dislocation to identify an attractive risk-adjusted opportunity.

We recorded a realized gain of $5.5 million during the first quarter of 2019 related to the sale of our former corporate headquarters in Austin, Texas.

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MANAGEMENT'S DISCUSSION & ANALYSIS

Claims and Surrenders.

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

The following table represents the amount of claims and surrenders incurred within the Life Insurance segment for the first quarter of 2020 compared to the same period in 2019.

Three Months Ended

Neither death claims nor surrenders were materially impacted by the COVID-19 pandemic.

The decline in surrender benefits in the second quarter reflects changes in the relative maturities of our policies as previously noted.

The following table shows the claims and surrenders incurred within the Life Insurance segment for the six months ended June 30, 2020 compared to the same period in 2019.

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Three Months Ended Six Months Ended

June 30, June 30,

(In thousands) 2020 2019 2020 2019

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Total claims and surrenders $ 20,888 21,316 41,048 38,478

• Death claims expense was favorable for the first quarter of 2020 compared with the same period in 2019.

• Death claims expense was favorable for the second quarter and six months ended June 30, 2020 compared with the same periods in 2019.

Mortality experience is closely monitored by the Company as a key performance indicator and these amounts were within expected levels.

We are closely monitoring claim volumes to evaluate whether there is a delay in reporting or filing for benefits as a result of the COVID-19 pandemic.

• Surrenders increased 27.4% for the first quarter of 2020 compared to the same period in 2019.

As we have a mature book of business, the majority of policy surrender benefits paid are for policies in the later durations of their terms, after the surrender charges have been reduced or have ended.

• Surrenders decreased 19.7% and 0.2% for the second quarter and six months ended June 30, 2020 compared to the same periods in 2019, reflecting changes in the relative maturities of our policies as noted above and more policyholders selecting the RPU option.

• Endowment benefits primarily result from the election by policyholders of a product feature providing an annual guaranteed benefit.

This is a fixed benefit over the life of the contract, thus this expense will vary with new sales and persistency of the business.

• Matured endowments increased 40.7% for the first quarter of 2020 compared to the same period in 2019, as a large number of our endowment contracts reached maturity in the current period.

• Matured endowments increased 69.1% and 57.2% for the second quarter and six months ended June 30, 2020 compared to the same periods in 2019, as a large number of our endowment contracts reached maturity in the current period.

We anticipate this trend will continue as endowment products sold reach their stated maturities.

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

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MANAGEMENT'S DISCUSSION & ANALYSIS

Increase in Future Policy Benefit Reserves.

The decrease in policy benefit reserves for the first quarter of 2020 compared to the same period last year was due primarily to increases in surrender and maturity activity in the current period as described above.

The lower increase in policy benefit reserves for the second quarter and six months ended June 30, 2020 compared to the same periods last year was due primarily to increases in maturity activity in the current period as described above.

Policyholders' Dividends.

Policyholders' dividends were slightly higher for the first quarter of 2020 compared to the same period in 2019.

The increase was due to changes in persistency and production.

Commission expense increased slightly during the first quarter of 2020 as we experienced higher first year premiums compared to the same period last year.

Policyholders' dividends were slightly lower for the second quarter and six months ended June 30, 2020 compared to the same periods in 2019.

The decrease was due to changes in persistency and production.

Commission expense decreased substantially during the second quarter and six months ended June 30, 2020 as we experienced lower first year premiums compared to the same periods in 2019.

Commission expense is driven primarily, but not exclusively, by new business as commission rates paid are higher on first year premium sales.

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Expenses are allocated by segment based upon an annual expense study performed by the Company.

Expenses decreased for the first quarter of 2020 due to lower audit, consulting and employee-related expenses compared to the same period last year.

Expenses decreased for the second quarter and six months ended June 30, 2020 due to lower audit, consulting and employee-related expenses compared to the same periods in 2019.

Capitalization of Deferred Policy Acquisition Costs.

Capitalized costs fluctuate in direct relation to commissions, increasing for the first quarter of 2020, based upon first year and renewal premiums and commissions paid compared to the same period in 2019.

Capitalized costs fluctuate in direct relation to commissions, decreasing for the second quarter and six months ended June 30, 2020, based upon first year and renewal premiums and commissions paid compared to the same periods in 2019.

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Amortization of Deferred Policy Acquisition Costs.

Amortization costs fluctuate with changes in first year premium activity, surrenders, and persistency in general.

As previously described, persistency is monitored closely by the Company.

As previously noted, persistency is monitored closely by the Company.

HOME SERVICE INSURANCE

We operate in the Home Service Insurance market through our subsidiaries SPLIC, MGLIC and SPFIC, and focus on the life insurance needs of the middle and lower income markets, primarily in Louisiana, Mississippi and Arkansas.

Our policies are sold and serviced through a home service marketing distribution system of employee-agents who work full time on a debit route system and through funeral homes that sell policies, collect premiums and service policyholders.

Our policies are sold and serviced through a home service insurance marketing distribution system of agents who work on a debit route system and through funeral homes that sell policies, collect premiums and service policyholders.

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

Three Months Ended

Three Months Ended Six Months Ended

June 30, June 30,

(In thousands) 2020 2019 2020 2019

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We provide $30,000 maximum coverage on any one dwelling and contents, while content only coverage and dwelling only coverage is limited to $20,000, respectively.

March 31, 2020 | 10-Q 40

We provide final expense ordinary life insurance and annuity products primarily to middle and lower income individuals and families in Louisiana, Mississippi and Arkansas, a demographic that has been disproportionally impacted by the COVID-19 pandemic.

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MANAGEMENT'S DISCUSSION & ANALYSIS

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

The results of operations for the Home Service Insurance segment for the periods indicated are as follows:

Three Months Ended

Three Months Ended Six Months Ended

June 30, June 30,

(In thousands) 2020 2019 2020 2019

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Loss before federal income tax expense $ (26) (335) (2,171) (669)

Premiums were down slightly for the first quarter of 2020 compared to the same period in 2019 as sales of new policies and in-person premium collections were negatively impacted during March by COVID-19-related temporary office closures and social distancing requirements, as noted in our “Current Financial Highlights” above and in our Risk Factors discussed in Part II, Item 1 A herein.

Premiums declined for the second quarter and six months ended June 30, 2020 compared to the same periods in 2019 as sales of new policies and in-person premium collections were negatively impacted by COVID-19-related temporary office closures and social distancing requirements, as noted in our “Current Financial Highlights” above and in our Risk Factors discussed in Part II, Item 1A herein.

Net Investment Income.

Net investment income for our Home Service Insurance segment increased compared to the same period last year as both yields and average invested assets increased from the previous period.

Annualized yield on invested assets also increased during the first quarter of 2020 compared to the three months ended December 31, 2019.

We continue to be successful as we endeavor to improve our portfolio performance in

March 31, 2020 | 10-Q 41

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

a prudent manner, despite the continuing challenging investment environment.

Net investment income for the six months ended June 30, 2020 increased compared to the same period in 2019 as average invested assets rose from the previous period.

Annualized yield on invested assets declined during the six months ended June 30, 2020 compared to the same period in 2019 as we faced challenges in locating attractive risk-adjusted opportunities in the current low interest rate environment.

Net investment income yield for our Home Service Insurance segment is summarized below.

Three Months Ended Year Ended Three Months Ended

March 31, December 31, March 31,

Six Months Ended Year Ended Six Months Ended

June 30, December 31, June 30,

(In thousands, except for %) 2020 2019 2019

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Annualized yield on average invested assets 4.40 % 4.45 % 4.46 %

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Realized Investment Gains (Losses), Net.

Realized net losses for the three months ended March 31, 2020 were primarily related to equity securities fair value adjustments of $1.6 million, as we faced an historically challenging equities market in the first quarter.

Realized net losses for the six months ended June 30, 2020 were primarily related to equity securities fair value adjustments of $0.8 million during the period, as we faced an historically challenging equities market in the first quarter of 2020.

Claims and Surrenders.

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

Three Months Ended

As discussed above, the overall increase in claims and surrenders during the three and six months ended June 30, 2020 compared to the same periods in 2019 was due primarily to the increase in death claims due to the COVID-19 pandemic.

Claims and surrenders expense is summarized as follows:

Three Months Ended Six Months Ended

June 30, June 30,

(In thousands) 2020 2019 2020 2019

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• Death claims expense fluctuates based upon reported claims.

We experienced a small increase in reported claims in the first quarter compared to the same period in 2019.

Mortality experience is closely monitored by the Company as a key performance indicator and amounts were within expected levels.

• Surrender benefits decreased for the first quarter of 2020, but were within anticipated ranges based on management expectations.

• Property claims increased in the first quarter of 2020 as we experienced significantly higher average claim payouts and more claim activity compared to the same period last year.

Commission expense decreased for the first quarter of 2020 compared to the same period in 2019, consistent with premium collection levels.

We experienced an increase in reported claims and the average dollar amount of claims in the second quarter and six months ended June 30, 2020 compared to the same periods in 2019, due in part to the COVID-19 pandemic as indicated above.

Mortality experience is closely monitored by the Company as a key performance indicator and amounts were within the range of expected levels.

• Surrender benefits decreased for the second quarter and six months ended June 30, 2020 but were within anticipated ranges based on management expectations.

• Property claims increased in the second quarter and six months ended June 30, 2020 as we experienced higher average claim payouts and more claim activity compared to the same periods last year.

Commission expense decreased for the second quarter and six months ended June 30, 2020 compared to the same period in 2019, consistent with premium collection levels.

Other General Expenses.

Expenses are allocated by segment based upon an annual expense study performed by the Company.

Expenses decreased for the three months ended March 31, 2020 compared to the same period in 2019 due primarily to lower audit and employee-related expenses.

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CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

Expenses decreased for the second quarter and six months ended June 30, 2020 compared to the same periods in 2019 due primarily to lower audit and employee-related expenses.

Capitalization of Deferred Policy Acquisition Costs ("DAC").

Capitalized costs decreased for the first quarter of 2020 compared to the same period in 2019.

Capitalized costs decreased for the second quarter and six months ended June 30, 2020 compared to the same periods in 2019.

DAC capitalization is directly correlated to fluctuations in new business and commissions.

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This 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 loss.

Losses reported for the three months ended March 31, 2020 and 2019, respectively, are also impacted by general expenses.

Losses reported for the second quarter and six months ended June 30, 2020 and 2019, respectively, are also impacted by general expenses.

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MANAGEMENT'S DISCUSSION & ANALYSIS

The administration of our investment portfolios is handled by our management and a third-party investment manager pursuant to board-approved investment guidelines, with all trading activity approved by each board of Citizens and its insurance subsidiaries.

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The invested assets are intended to mature in accordance with the average maturity of our insurance products and provide the cash flow for our insurance company subsidiaries to meet their respective policyholder obligations.

The following table shows the carrying value of each invested asset and the percentage to total invested assets.

Carrying Value March 31, 2020 December 31, 2019

The following table shows the carrying value of each invested asset and the percentage to total cash and invested assets.

Carrying Value June 30, 2020 December 31, 2019

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

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

(1) Includes $186.4 million and $188.1 million of of securities guaranteed by third parties at March 31, 2020 and December 31, 2019, respectively.

(1) Includes $168.7 million and $188.1 million of securities guaranteed by third parties at June 30, 2020 and December 31, 2019, respectively.

(2) Includes $141.6 million and $130.1 million of U.S.

Government-sponsored enterprises at March 31, 2020 and December 31, 2019, respectively.

March 31, 2020 | 10-Q 43

Government-sponsored enterprises at June 30, 2020 and December 31, 2019, respectively.

Cash and cash equivalents increased as of June 30, 2020 compared to December 31, 2019 due to timing of cash inflows and investments of cash into marketable securities.

At June 30, 2020, investments in fixed maturity and equity securities were 90.6% of our total invested assets.

All of our fixed maturities were classified as available-for-sale securities at June 30, 2020 and December 31, 2019.

We had no fixed maturity or equity securities that were classified as trading securities at June 30, 2020 or December 31, 2019.

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MANAGEMENT'S DISCUSSION & ANALYSIS

Cash and cash equivalents decreased as of March 31, 2020 compared to December 31, 2019 due to timing of cash inflows and investments of cash into marketable securities.

At March 31, 2020, investments in fixed maturity and equity securities were 91.8% of our total invested assets.

All of our fixed maturities were classified as available-for-sale securities at March 31, 2020 and December 31, 2019.

We had no fixed maturity or equity securities that were classified as trading securities at March 31, 2020 or December 31, 2019.

The following table shows the distribution of the credit ratings of our portfolio of fixed maturity securities by carrying value as of March 31, 2020 and December 31, 2019.

Carrying Value March 31, 2020 December 31, 2019

The following table shows the distribution of the credit ratings of our portfolio of fixed maturity securities by carrying value as of June 30, 2020 and December 31, 2019.

Carrying Value June 30, 2020 December 31, 2019

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

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We are closely monitoring credit ratings for potential downgrades due to the COVID-19 pandemic.

The Company has no direct sovereign European debt exposure as of March 31, 2020.

March 31, 2020 | 10-Q 44

The Company has no direct sovereign European debt exposure as of June 30, 2020.

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MANAGEMENT'S DISCUSSION & ANALYSIS

As of March 31, 2020, the Company held municipal fixed maturity securities that include third-party guarantees.

Detailed below is a presentation by NRSRO rating of our municipal holdings by funding type as of March 31, 2020.

As of June 30, 2020, the Company held municipal fixed maturity securities that include third-party guarantees.

Detailed below is a presentation by NRSRO rating of our municipal holdings by funding type as of June 30, 2020.

General Obligation Special Revenue Other Total % Based on Amortized

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Total $ 147,669 140,987 286,656 267,258 21,494 19,284 455,819 427,529 100.0 %

The table below shows the categories in which the Company held investments in special revenue bonds that were greater than 10% of fair value based upon the Company's portfolio of fixed maturity securities at March 31, 2020.

The table below shows the categories in which the Company held investments in special revenue bonds that were greater than 10% of fair value based upon the Company's portfolio of municipal fixed maturity securities at June 30, 2020.

(In thousands) Fair

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Education 68,861 63,619 15.1 %

The Company's municipal holdings are spread across many states, however, municipal fixed maturity securities from Texas comprise the most significant concentration of the total municipal holdings portfolio as of March 31, 2020.

The Company holds 15.8% of its municipal holdings in Texas issuers as of March 31, 2020.

There were no other states or individual issuer holdings that represented or exceeded 10% of the total municipal portfolio as of March 31, 2020.

March 31, 2020 | 10-Q 45

The Company holds 17.1% of its municipal holdings in Texas issuers as of June 30, 2020.

There were no other states or individual issuer holdings that represented or exceeded 10% of the total municipal portfolio as of June 30, 2020.

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MANAGEMENT'S DISCUSSION & ANALYSIS

The table below represents the Company's detailed exposure to municipal holdings in Texas at March 31, 2020.

March 31, 2020 General Obligation Special Revenue Other Total

The table below represents the Company's detailed exposure to municipal holdings in Texas at June 30, 2020.

June 30, 2020 General Obligation Special Revenue Other Total

(In thousands) Fair

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IMPAIRMENT CONSIDERATIONS RELATED TO INVESTMENTS IN FIXED MATURITY AND EQUITY SECURITIES

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.

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.

Information on both unrealized and realized gains and losses by category is set forth in Note 5.

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Liquidity refers to a company's ability to generate sufficient cash flows to meet the needs of its operations.

We expect to meet our cash needs for the next 12 months with cash flows from our insurance operations.

We manage our insurance operations as described herein in order to ensure that we have stable and reliable sources of cash flows to meet our obligations.

We are closely monitoring the impact that the COVID-19 pandemic may have on our liquidity and capital resources.

We expect to meet our cash needs for the next 12 months with cash generated by our insurance operations and from our invested assets.

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 maturity securities, mutual funds and real estate held-for-sale.

Thus, our liquidity requirements are met primarily by funds provided from insurance operations.

Premium deposits and revenues, investment income and investment maturities are the primary sources of our funds, while investment purchases, payments of policy benefits to policyholders, and operating expenses are the primary uses of our funds.

Historically, we have not had to liquidate investments to provide cash flow, and there were no liquidity issues during the three months ended March 31, 2020.

Cash flows from operating activities were $14.1 million and $17.9 million for the three months ended March 31, 2020 and 2019, respectively.

We have traditionally also had significant cash flows from both scheduled and unscheduled investment security maturities, redemptions, and prepayments.

These cash flows, for the most part, are reinvested in fixed income

March 31, 2020 | 10-Q 46

Our assets consist of the capital stock of our subsidiaries, cash and investments.

Our liquidity requirements are met primarily from two sources:

cash generated from our operating subsidiaries and our invested assets.

Our ability to obtain cash from our insurance subsidiaries depends primarily upon the availability of statutorily permissible payments, including payments Citizens receives from service agreements with our life insurance subsidiaries and dividends from the subsidiaries.

The ability to make payments to the holding company is limited by applicable laws and regulations of Bermuda and U.S.

states of domicile which subject insurance operations to significant regulatory restrictions.

These laws and regulations require, among other things, that our insurance subsidiaries maintain minimum solvency requirements,

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Net cash outflows from investing activities totaled $26.2 million and $28.8 million for the three months ended March 31, 2020 and 2019, respectively.

which limit the amount of dividends that can be paid to the holding company.

The regulations also require approval of our service agreements with the applicable regulatory authority in order to prevent insurance subsidiaries from moving large amounts of cash to the unregulated holding company.

As we discussed in Note 11.

Subsequent Events , upon the regulatory approval of the transfer of the Citizens, Inc.

Class B common stock from the Harold E.

Riley Trust to the Harold E.

Riley Foundation, the "Change in Control" clause in the Employment Agreement by and between the Company and Geoffrey M.

Kolander, our Chief Executive Officer and President, was triggered.

Following the change in control, Mr.

Kolander announced his intention to resign as Chief Executive Officer and President and a member of the Board of Directors, effective no later than August 10, 2020.

Pursuant to the terms of the Employment Agreement, Mr.

Kolander is entitled to the cash severance amount totaling $8.8 million.

Additionally, Citizens entered into a new lease for its headquarters space in Austin, Texas, and expects to spend cash for build-out costs primarily during the third quarter of 2020.

We believe we have the appropriate liquidity to meet such cash commitments.

We are closely monitoring the impact that the COVID-19 pandemic may have on our liquidity and capital resources.

To the extent that we continue to experience significant decreases in sales and collections of premiums, decreases in our investment income and/or increases in claim payments as a result of the COVID-19 pandemic, our liquidity would be negatively impacted and would likely result in the sale of our investments to meet operational cash flow requirements.

INSURANCE COMPANY SUBSIDIARY LIQUIDITY AND CAPITAL RESOURCES

The liquidity requirements of our insurance operations are primarily met by premium deposits and revenues, investment income and investment maturities.

Primary uses of these funds are investment purchases, payments of policy benefits to policyholders, and operating expenses.

Historically, we have not had to liquidate investments to provide cash flow, and there were no liquidity issues during the six months ended June 30, 2020.

Cash flows from operating activities were $28.6 million and $31.4 million for the six months ended June 30, 2020 and 2019, respectively.

We have traditionally also had significant cash flows from both scheduled and unscheduled investment security maturities, redemptions, and prepayments.

These cash flows, for the most part, are reinvested in fixed income securities.

Net cash outflows from investing activities totaled $22.8 million and $41.4 million for the six months ended June 30, 2020 and 2019, respectively.

The investing activities fluctuate from period to period due to timing of securities activities such as calls and maturities and reinvestment of those funds.

The Company's cash outflows from financing activities were $0.8 million and $0.5 million for the three months ended March 31, 2020 and 2019, respectively.

The Company's net cash inflow and outflow from financing activities were $0.4 million and $1.0 million for the six months ended June 30, 2020 and 2019, respectively.

Our investments consist of 92.4% of marketable fixed maturity securities classified as available-for-sale and 1.3% of equity securities that could be readily converted to cash for liquidity needs.

A large portion of our fixed maturity security investment portfolio will mature in the next several years and could be called sooner.

We were subject to significant call activity beginning in 2009 due to the declining interest rate environment, which required us to reinvest in fixed maturity securities with shorter durations that are now approaching maturity.

Over the years, we have been subject to significant call activity due to the declining interest rate environment, which required us to reinvest in fixed maturity securities with shorter durations that are now approaching maturity.

We will need to reinvest these maturing funds in the current low interest rate environment.

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We include provisions in 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 historically have not had an adverse impact on our overall liquidity.

We have not experienced increased surrenders due to the COVID-19 pandemic, however we continue to monitor surrenders and early withdrawals.

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MANAGEMENT'S DISCUSSION & ANALYSIS

had an adverse impact on our overall liquidity.

We have not experienced any measurable increases in surrenders due to the COVID-19 pandemic, however we continue to monitor surrenders and early withdrawals.

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.

An extraordinary level of payment of death benefits can also be a liquidity risk.

However, some of our policies include pandemic exclusions and we carry reinsurance to offset some of these risks.

While mortality experience is closely monitored by the Company and the activity has historically been within expected levels, we cannot predict whether we will see increased death benefit payouts as a result of the COVID-19 pandemic.

For reasons described above, we have experienced increased claims in our Home Service Insurance segment in the second quarter of 2020.

Additionally, we are closely monitoring claim volumes to evaluate whether there is a delay in reporting or filing for benefits as a result of the COVID-19 pandemic in our Home Service Insurance segment and Life Insurance segment.

To the extent we continue to experience increased claims and the associated death benefit payouts in our Home Service Insurance segment and, possibly our Life Insurance segment, as a result of the COVID-19 pandemic, our liquidity could be negatively impacted.

Some of our policies include pandemic exclusions and we carry reinsurance to offset some of these risks.

While our mortality experience is closely monitored by the Company and the activity has historically been within expected levels, we cannot predict whether we will see increased death benefit payouts above expected levels due to the COVID-19 pandemic.

We have had to place a moratorium on policy cancellations or non-renewals for nonpayments of premium and forbearance on premium collections in our Home Service Insurance segment due to state mandates which could negatively affect our liquidity due to lower premium collections and increased death claims due to policies being kept in force that would have otherwise lapsed.

Cash flow projections and cash flow tests under various market interest rate scenarios are performed annually to assist in evaluating liquidity needs and adequacy.

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The policyholder can choose to take a lump sum payout or leave the money on deposit at interest with the Company.

As of March 31, 2020, the Company has a significant amount of endowment products representing 41% of total insurance in force.

As of June 30, 2020, 41% of the Company's total insurance in force was in endowment products.

Approximately 12% of the endowments in force will mature in the next five years.

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We currently anticipate that available liquidity sources and future cash flows will be adequate to meet our needs for funds, but we will monitor closely our policyholder behavior patterns.

We have established a liability of $10.0 million, net of tax, as of March 31, 2020 for probable liabilities and expenses associated with a tax compliance matter as described in Note 7.

We have established a liability of $ 10.0 million, net of tax, as of June 30, 2020 for probable liabilities and expenses associated with a tax compliance matter as described in Note 7.

Commitments and Contingencies in the notes to our consolidated financial statements, which represents management’s estimate of this contingent liability.

This estimate and range include projected settlement amounts 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

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MANAGEMENT'S DISCUSSION & ANALYSIS

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 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 exceed the high end of our estimated range of liabilities and expenses.

We are subject to regulatory capital requirements that could affect the Company’s ability to access capital from our insurance operations or cause the Company to have to put additional cash in our wholly-owned subsidiaries.

Our cash flows depend primarily upon the availability of statutorily permissible payments, primarily payments under management agreements from our life insurance subsidiaries or dividend payments from the subsidiaries.

As discussed above, we are subject to regulatory capital requirements that could affect the Company’s ability to access capital from our insurance operations or cause the Company to have to put additional cash in our wholly-owned subsidiaries.

Our domestic companies are subject to minimum capital requirements set by the NAIC in the form of risk-based capital ("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".

This level of capital is then compared to an adjusted statutory capital that includes capital and surplus as reported under statutory accounting principles, plus certain investment reserves.

This level of capital is then compared to an adjusted statutory capital that includes capital and surplus as reported under statutory accounting principles, plus certain investment

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MANAGEMENT'S DISCUSSION & ANALYSIS

Should the ratio of adjusted statutory capital to control level RBC fall below 200% for our domestic companies, a series of remedial actions by the affected company would be required.

Additionally, we have a parental guarantee between Citizens and CICA, Citizens' wholly-owned subsidiary domiciled in Colorado, to maintain a RBC level above 350%.

At March 31, 2020, our domestic insurance subsidiaries were above the required minimum RBC levels.

At June 30, 2020, our domestic insurance subsidiaries were above the required minimum RBC levels.

is a Bermuda domiciled company.

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As described in Note 4.

Stockholders' Equity and Restrictions , because of the disruption that the COVID-19 pandemic has had on the worldwide economy, the fair value of our assets has decreased and interest rates also have decreased which increased the fair value of our statutory economic insurance liabilities.

Stockholders' Equity and Restrictions , because of the disruption that the COVID-19 pandemic had on the worldwide economy in March 2020, the fair value of our assets had decreased and interest rates also had decreased which increased the fair value of our statutory economic insurance liabilities.

As a result, CICA Ltd.’s statutory economic capital and surplus at March 31, 2020 was below the Target Capital Level ("TCL") by $8.9 million.

Pursuant to the insurance laws in Bermuda, CICA Ltd.

has notified the BMA of this shortfall and will file a written report containing details of the circumstances leading to the shortfall and a plan detailing the manner, specific actions to be taken and the time within which CICA Ltd.

intends to rectify the failure.

Because the fair value of our assets has increased significantly since March 31, 2020, the Company believes that the failure has been rectified as of 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.

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 real estate held-for-sale.

Our cash flows depend primarily upon the availability of statutorily permissible payments, primarily payments under management agreements from our life insurance subsidiaries.

The ability to make payments is limited by applicable laws and regulations of Bermuda and U.S.

states 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, our subsidiaries have made dividend payments of available funds from time to time in relation to business strategies.

notified the BMA of this shortfall and filed a written report containing details of the circumstances leading to the shortfall.

The fair value of our assets has increased significantly since March 31, 2020 and CICA Ltd.

has rectified the failure as of June 30, 2020.

Although we continue to hold discussions with the BMA, there have been no capital or management actions required.

CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS

There have been no material changes in contractual obligations from those reported in the Company's Annual Report on Form 10-K for the year ended December 31, 2019.

The Company does not have off-balance sheet arrangements at March 31, 2020.

We do not utilize special purpose entities as investment vehicles, nor are there

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AND CONSOLIDATED SUBSIDIARIES

any such entities in which we have an investment that engage in speculative activities of any nature, and we do not use such investments to hedge our investment positions.

The Company does not have off-balance sheet arrangements at June 30, 2020.

We do not utilize special purpose entities as investment vehicles, nor are there any such entities in which we have an investment that engage in speculative activities of any nature, and we do not use such investments to hedge our investment positions.

CRITICAL ACCOUNTING POLICIES

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What changed 10-Q

Item 2. Management’s Discussion and Analysis