What changed in this filing

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Item 1A. Risk Factors

2020-08-05 compared with 2020-05-07 · 75 added, 43 removed, 14 unchanged (89% of the section changed)

Part I, Item 1A.

Risk Factors of our Form 10-K includes a discussion of our risk factors.

There have been no material changes from the risk factors included in our Form 10-K , except as discussed below.

Major public health issues, and specifically the pandemic caused by the spread of COVID-19, could have an adverse impact on our financial condition and results of operations and other aspects of our business .

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

however, due to the evolving and highly uncertain nature of this event, the extent to which the COVID-19 pandemic impacts our business, results of operations, financial condition or liquidity or prospects will depend on future developments which are highly uncertain and cannot be predicted.

Some of the ways in which COVID-19, or other major public health issues, could affect our business are addressed below.

The COVID-19 pandemic is negatively impacting certain aspects of our business and, depending on severity and duration, could have a material adverse effect on our financial condition, results of operations and overall business operations.

The COVID-19 pandemic has caused significant disruption to the global economy and has resulted in unfavorable impacts to our company as well as the overall insurance industry.

Due to the unprecedented nature of these events and the current pace of change in this environment, while we describe several areas where the COVID-19 pandemic impacted our business during the first six months of 2020, we cannot fully estimate the duration or full impact of the COVID-19 pandemic at this time.

Further events that we are unable to control, such as the further spread or spikes in the number of cases of COVID-19 or the emergence of new strains of coronavirus, and the related responses by government authorities and businesses, may heighten the impacts of the COVID-19 pandemic and present additional risks.

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

As discussed in Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources , our liquidity requirements are met primarily by funds provided by our insurance operations.

Increased economic uncertainty and increased unemployment resulting from the economic impacts of the spread of COVID-19 may affect our premium deposits as policyholders may not be able to pay premiums on existing policies and potential customers may not take out new policies in order to conserve cash.

We may offer relief to policyholders (e.g.

We have experienced declines in premium income resulting from lower sales.

Increased economic uncertainty and increased unemployment resulting from the economic impacts of the spread of COVID-19 virus could continue to affect our premium deposits as policyholders may not be able to pay premiums on existing policies and potential customers may not take out new policies in order to conserve cash.

We have offered relief to policyholders (e.g.

extending grace periods), which may also impact our operating cash flow.

Many of our policies are sold via in-person meetings.

Due to shelter-in-place orders and limitations on interpersonal interactions, the lack of face-to-face meetings could negatively impact sales.

Additionally, due to these limitations as well as disruptions to international mail delivery to and from the United States, customers that pay premiums in cash may not be able to deliver premium payments.

Additional liquidity risks may include increased costs associated with claims under our life insurance products if there are an unusually large number of illnesses or deaths.

Due to shelter-in-place orders and limitations on interpersonal interactions, the lack of face-to-face meetings has negatively impacted sales and may continue to do so if the measures that we have put in place to encourage virtual selling prove to be ineffective.

Additionally, due to these limitations as well as disruptions to international mail delivery to and from the United States, customers that pay premiums in cash may continue to have difficulty in delivering premium payments.

Unfavorable developments in any of these factors may adversely affect our liquidity and capital position.

The COVID-19 pandemic has increased death claims in our Home Service Insurance segment.

We may experience increased claims and our resulting costs if there continues to be an unusually large number of illnesses or deaths.

The economic impacts of the spread of COVID-19 may also result in policyholders seeking sources of liquidity and they may withdraw funds at rates greater than we previously expected.

Our investment portfolio may be adversely affected by market volatility, changes in interest rates, reduced liquidity, or by a slowdown in U.S or global economic conditions caused by the COVID-19 pandemic or the uncertainty of its outcome.

Extreme market volatility may leave us unable to react to market events in a prudent manner consistent with our historical practices in dealing with more orderly markets.

While governmental and non-governmental organizations are engaging in efforts to combat the spread and severity of the COVID-19 pandemic and related public health issues, these measures may not be effective.

The COVID-19 pandemic, and its effect on financial markets, have adversely affected our investment portfolio (and, specifically, increased the risk of defaults, downgrades and volatility in the value of the investments we hold and lowered investment income) and may continue to do so.

Extreme market volatility may continue to leave us unable to react to market events in a prudent manner consistent with our historical practices in dealing with more orderly

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To the extent that we need to sell our investments to fund liquidity needs in the current financial markets, we may not receive the prices we seek, and may sell at a price lower than our carrying value.

Our risk management, contingency, and business continuity plans may not adequately protect our operations.

Extended periods of remote work arrangements and other unusual business conditions and circumstances as a result of the COVID-19 pandemic could strain our business continuity plans, introduce operational risk, increase our cybersecurity risks, and impair our ability to manage our business.

The frequency and sophistication of attempts at unauthorized access to our technology systems and fraud may increase, and COVID-19 conditions may impair our cybersecurity efforts and risk management.

Our efforts to prevent money-laundering or other fraud, whether due to limited abilities to "know our customers" or otherwise, may increase our compliance costs and risk of violations.

While governmental and non-governmental organizations are continuing to engage in efforts to combat the spread and severity of the COVID-19 pandemic and related public health issues, these measures may not be effective.

We also cannot predict how legal and regulatory responses to concerns about the COVID-19 pandemic and related public health issues will impact our business.

Such events or conditions could result in additional regulation or restrictions affecting the conduct of our business in the future.

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We believe that regulatory approval will soon be granted allowing a transfer of ownership of our Class B common stock, which elects a simple majority of our Board of Directors, from our founder's trust to a 501(c)(3) charitable foundation established by our founder, effectively transferring control of our company to the foundation.

This approval could affect the Company’s liquidity and results of operations if our Chief Executive Officer and President were to resign or be terminated without cause, in which case, the Company would have to pay severance.

Additionally, we cannot determine if this transfer of control will cause any changes to our Board of Directors, management, operations, or strategies will occur.

Riley, our founder, was the beneficial owner of 100% of our Class B common stock, which was held in the name of the Harold E.

Riley Trust ("Trust"), of which he had served as Trustee until his death in September 2017.

Our Class A and Class B common stock are identical in all respects, except the Class B common stock elects a simple majority of the Board and receives one-half of any cash dividends paid, on a per share basis, to the Class A common stock.

The Class A common stock elects the remainder of the Board.

The Trust documents provided that upon Mr.

Riley's death, 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").

As discussed above in Part I, Item 1 “Financial Information” – Note 10, “Subsequent Events”, in April 2020, we were 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 our subsidiaries are domiciled, will also approve the transfer.

Upon receiving all such approvals, the Company will record the transfer of the controlling Class B common stock from the Trust to the Foundation in the Company's shareholder records.

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.

The Foundation is organized as a public support charity for the benefit of its charitable beneficiaries, Baylor University and Southwestern Baptist Theological Seminary, and is governed by a board of trustees.

It is unclear what, if any, change may occur to our Board, management, operations, or strategies as a result of ownership of our Class B common stock by the Foundation.

Our insurance subsidiaries are subject to regulatory capital requirements that could cause the Company to have to infuse additional cash in our wholly-owned subsidiaries, which could negatively impact our liquidity.

Each of our regulated insurance subsidiaries is required to meet stipulated regulatory capital requirements.

These include capital requirements imposed by the NAIC and the BMA.

An inability to meet applicable regulatory capital requirements may lead to intervention by a relevant regulator, which, in the interests of our policyholders, may require us to take steps to restore regulatory capital to acceptable levels.

This could result in us having to move cash from Citizens, or take other measures to increase capital to such impacted subsidiary, resulting in less available liquidity to utilize at the holding company level.

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We have undergone a change in control of the Company and are currently undergoing a leadership change.

We cannot determine if the change in control will result in any additional changes to our Board of Directors, management, operations, or strategies.

Additionally, our business may be adversely impacted if we are not able to successfully manage our leadership change.

As previously announced and discussed in Part I, Item 1.

Financial Information – Note 11 .

Subsequent Events , a change in control of the Company occurred on July 29, 2020, 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 our Class B common stock.

Because our Class B common stock elects a simple majority of our Board of Directors, the Foundation controls the Company.

If the Foundation were to exercise its rights to elect a simple majority of the Board of Citizens, the Foundation would then be able to make subsequent changes to our management, operations or strategies, any of which could have an adverse impact on our business.

Additionally, on July 29, 2020, following the change in control, Geoffrey M.

Kolander, our Chief Executive Officer and President, announced his intention to resign as our Chief Executive Officer and President effective no later than August 10, 2020.

Shields, Vice Chairman of the Board of Directors, will assume the role of Interim Chief Executive Officer following Mr.

Kolander’s resignation and separation from employment.

Kolander has agreed to stay on to provide consulting services through the end of 2020, any significant change in leadership involves inherent risks.

We may be unable to manage this change smoothly, which could adversely impact our business, financial condition and results of operations.

Sales of our insurance products could decline if we are unable to establish and maintain commercial relationships with independent marketing firms, independent consultants and independent agents and maintain our distribution sources.

We distribute our insurance products through several distribution channels.

In our Life Insurance segment, we depend almost exclusively on the services of independent marketing firms and independent consultants.

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.

In our Home Service Insurance segment, we depend on such independent agents whose role in our distribution process is integral to developing and maintaining relationships with policyholders.

Significant competition exists among insurers in attracting and maintaining marketers of demonstrated ability.

Some of our competitors may offer better compensation packages for marketing firms, independent consultants and agents and broader arrays of products and have a greater diversity of distribution resources, better brand recognition, more competitive pricing, lower cost structures and greater financial strength or claims paying ratings than we do.

We compete with other insurers for marketing firms, independent consultants and agents primarily on

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AND CONSOLIDATED SUBSIDIARIES

the basis of our compensation, products and support services.

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

Modifications in our international business model could include withdrawal from certain markets that may have an adverse impact on our ability to attract and retain effective sales representatives.

Additionally, the conversion from employee agents to independent agents in our Home Service Insurance segment may have an adverse impact on our ability to attract and retain effective sales agents in such segment, which could adversely affect our revenues, results of operations and financial condition.

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

Our international sales representatives and, beginning in August 2020, our Home Service Insurance sales representatives are classified as independent contractors who operate their own businesses.

Although we believe that we have properly classified our sales representatives as independent contractors, there is nevertheless a risk that the IRS, a governmental agency, a court or other authority will take the different view that our sales representatives should be classified as employees.

The tests governing the determination of whether an individual is considered to be an independent contractor or an employee are typically fact-sensitive and vary from jurisdiction to jurisdiction.

Laws and regulations that govern the status and misclassification of independent sales representatives are subject to change or interpretation.

If there is a change in the manner in which our independent contractors are classified or an adverse determination with respect to some or all of our independent contractors by a court or governmental agency, we could incur significant costs in complying with such laws and regulations, including in respect of tax withholding, social security payments, government and private pension plan contributions and recordkeeping and workers' compensation insurance, or we may be required to modify our business model, any of which could have a material adverse effect on our business, financial condition and results of operations.

In addition, there is the risk that we may be subject to significant monetary liabilities arising from fines or judgments as a result of any such actual or alleged non-compliance with applicable federal, state, local or foreign laws.

We may suffer losses as a result of foreign currency fluctuations

All of our international policies are U.S.

Dollar denominated and prior to the second quarter of 2020, we required all premiums on these policies to be paid to us directly in U.S.

As part of our strategic initiatives to improve our sales processes and allow more avenues for our international clients to pay their premiums, beginning in May 2020, we allow our international policyholders to pay in their local currencies through an online payment portal.

Because the premiums received by us must still be in U.S.

dollars, in order to minimize currency fluctuations and exchange rate risks to us, we charge a transaction fee on foreign currency payments.

The currency exchange is carried out through a third party processor.

While we currently do not have many policyholders paying premiums in their local currencies, since most of our Life Insurance business is international, if a large number of policyholders were to elect to pay in local currencies and we are unable to charge sufficient fees, any increase in the value of U.S.

dollar in relation to the value of applicable foreign currencies before the date that we receive the U.S.

dollar premiums could adversely affect our operating results.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

1 unchanged sentence

Not applicable.

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MINE SAFETY DISCLOSURES

1 unchanged sentence

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 1A. Risk Factors