What changed in this filing

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Item 1. Financial Statements

2020-11-04 compared with 2020-08-05 · 225 added, 253 removed, 741 unchanged (39% of the section changed)

3 unchanged sentences

Consolidated Balance Sheets

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

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

Assets (Unaudited)

11 unchanged sentences

Accrued investment income 16,320 17,453

Receivable for securities 3,320 —

Reinsurance recoverable 11,970 3,696

7 unchanged sentences

See accompanying Notes to Consolidated Financial Statements.

June 30, 2020 | 10-Q 2

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September 30, 2020 | 10-Q 2

CITIZENS, INC.

1 unchanged sentence

Consolidated Balance Sheets, Continued

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

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

Liabilities and Stockholders' Equity (Unaudited)

28 unchanged sentences

See accompanying Notes to Consolidated Financial Statements.

June 30, 2020 | 10-Q 3

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September 30, 2020 | 10-Q 3

CITIZENS, INC.

1 unchanged sentence

Consolidated Statements of Operations and Comprehensive Income (Loss)

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

Three Months Ended September 30, Nine Months Ended September 30,

(In thousands, except per share amounts)

20 unchanged sentences

Income (loss) before federal income tax ( 8,171 ) 2,132 ( 9,968 ) 817

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

Federal income tax expense (benefit) ( 256 ) 86 2,558 7,138

Net income (loss) ( 7,915 ) 2,046 ( 12,526 ) ( 6,321 )

Per Share Amounts:

Basic and diluted losses per share of Class A common stock ( 0.02 ) ( 0.09 ) ( 0.09 ) ( 0.17 )

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

Basic and diluted earnings (losses) per share of Class A common stock ( 0.16 ) 0.04 ( 0.25 ) ( 0.13 )

Basic and diluted earnings (losses) per share of Class B common stock ( 0.07 ) 0.02 ( 0.12 ) ( 0.06 )

Other Comprehensive Income:

7 unchanged sentences

See accompanying Notes to Consolidated Financial Statements.

June 30, 2020 | 10-Q 4

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September 30, 2020 | 10-Q 4

CITIZENS, INC.

2 unchanged sentences

Common Stock Accumulated

deficit Accumulated other comprehensive income (loss) Treasury

deficit Accumulated other

comprehensive

income (loss) Treasury

Stock-holders'

14 unchanged sentences

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

Comprehensive income (loss):

Net income (loss) — — ( 7,915 ) — — ( 7,915 )

Unrealized investment gains (losses), net — — — 14,110 — 14,110

Total comprehensive income (loss) — — ( 7,915 ) 14,110 — 6,195

Stock-based compensation 766 — — — — 766

Balance at September 30, 2020 $ 262,667 3,184 ( 83,890 ) 125,804 ( 11,011 ) 296,754

See accompanying Notes to Consolidated Financial Statements.

September 30, 2020 | 10-Q 5

CITIZENS, INC.

AND CONSOLIDATED SUBSIDIARIES

Consolidated Statements of Stockholders' Equity, Continued

Common Stock Accumulated

deficit Accumulated other

comprehensive

income (loss) Treasury

Stock-holders'

(In thousands) Class A Class B

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

11 unchanged sentences

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

Comprehensive income (loss):

Net income (as restated) — — 2,046 — — 2,046

Unrealized investment gains (losses), net — — — 22,521 — 22,521

Total comprehensive income (loss) — — 2,046 22,521 — 24,567

Stock-based compensation 343 — — — — 343

Balance at September 30, 2019 $ 261,346 3,184 ( 75,920 ) 83,743 ( 11,011 ) 261,342

See accompanying Notes to Consolidated Financial Statements.

June 30, 2020 | 10-Q 5

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September 30, 2020 | 10-Q 6

CITIZENS, INC.

1 unchanged sentence

Consolidated Statements of Cash Flows

Six Months Ended June 30,

Nine Months Ended September 30,

(In thousands)

8 unchanged sentences

Stock-based compensation 2,020 1,930

Deferred federal income tax benefit ( 76 ) ( 94 )

Deferred federal income tax expense (benefit) ( 386 ) 560

Accrued investment income 1,133 819

16 unchanged sentences

Purchases of other long-term investments ( 19,115 ) —

Sales of property and equipment — 15

Purchases of property and equipment ( 124 ) ( 509 )

3 unchanged sentences

See accompanying Notes to Consolidated Financial Statements.

June 30, 2020 | 10-Q 6

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September 30, 2020 | 10-Q 7

CITIZENS, INC.

1 unchanged sentence

Consolidated Statements of Cash Flows, Continued

Six Months Ended June 30,

Nine Months Ended September 30,

(In thousands)

8 unchanged sentences

SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:

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

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

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

During the nine months ended September 30, 2020 and 2019, various fixed maturity issuers exchanged securities with book values of $ 5.3 million and $ 12.2 million, respectively, for securities of equal value.

The Company had net unsettled security trades of $ 6.0 million at September 30, 2020 and 2019.

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

See accompanying Notes to Consolidated Financial Statements.

June 30, 2020 | 10-Q 7

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September 30, 2020 | 10-Q 8

CITIZENS, INC .

7 unchanged sentences

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

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

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

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

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

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

17 unchanged sentences

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

June 30, 2020 | 10-Q 8

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September 30, 2020 | 10-Q 9

CITIZENS, INC .

15 unchanged sentences

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

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

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

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

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

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

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

These investments are included in other long-term investments.

13 unchanged sentences

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

June 30, 2020 | 10-Q 9

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September 30, 2020 | 10-Q 10

CITIZENS, INC .

3 unchanged sentences

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

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

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

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

29 unchanged sentences

and CNLIC constitute the Life Insurance segment, and SPLIC, SPFIC and MGLIC constitute the Home Service Insurance segment.

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

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

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

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

June 30, 2020 | 10-Q 10

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September 30, 2020 | 10-Q 11

CITIZENS, INC .

4 unchanged sentences

Life Insurance Home Service Insurance Other Non-Insurance Enterprises Consolidated

Three Months Ended June 30, 2020

Three Months Ended September 30, 2020

(In thousands)

1 unchanged sentence

Net investment income 11,507 3,200 290 14,997

Realized investment gains, net 391 924 133 1,448

Realized investment gains (losses), net 133 388 6 527

Other income 189 1 3 193

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

Total revenues 44,094 15,432 299 59,825

Benefits and expenses:

11 unchanged sentences

Income (loss) before federal income tax expense $ 5,508 ( 1,026 ) ( 12,653 ) ( 8,171 )

June 30, 2020 | 10-Q 11

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September 30, 2020 | 10-Q 12

CITIZENS, INC .

1 unchanged sentence

Life Insurance Home Service Insurance Other Non-Insurance Enterprises Consolidated

Six Months Ended June 30, 2020

Nine Months Ended September 30, 2020

(In thousands)

3 unchanged sentences

Other income 1,195 19 3 1,217

Total revenue 84,838 28,745 480 114,063

Total revenues 128,932 44,177 779 173,888

Benefits and expenses:

11 unchanged sentences

Income (loss) before federal income tax expense $ 9,713 ( 3,197 ) ( 16,484 ) ( 9,968 )

June 30, 2020 | 10-Q 12

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September 30, 2020 | 10-Q 13

CITIZENS, INC .

1 unchanged sentence

Life Insurance Home Service Insurance Other Non-Insurance Enterprises Consolidated

Three Months Ended June 30, 2019

Three Months Ended September 30, 2019

(In thousands)

2 unchanged sentences

Realized investment gains (losses), net 61 3 8 72

Other income 614 1 1 616

Total revenue 44,434 15,142 ( 2,710 ) 56,866

Other income (loss) 349 ( 2 ) — 347

Total revenues 46,135 14,934 398 61,467

Benefits and expenses:

1 unchanged sentence

Claims and surrenders 22,533 6,218 — 28,751

Increase in future policy benefit reserves 8,519 953 — 9,472

Increase (decrease) in future policy benefit reserves 7,667 ( 1,258 ) — 6,409

Policyholders' dividends 1,551 9 — 1,560

6 unchanged sentences

Total benefits and expenses 43,825 14,007 1,503 59,335

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

June 30, 2020 | 10-Q 13

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Income (loss) before federal income tax expense $ 2,310 927 ( 1,105 ) 2,132

September 30, 2020 | 10-Q 14

CITIZENS, INC .

1 unchanged sentence

Life Insurance Home Service Insurance Other Non-Insurance Enterprises Consolidated

Six Months Ended June 30, 2019

Nine Months Ended September 30, 2019

(In thousands)

3 unchanged sentences

Other income 1,146 — 2 1,148

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

Total revenues 137,292 45,197 ( 1,750 ) 180,739

Benefits and expenses:

11 unchanged sentences

Income (loss) before federal income tax expense $ 6,828 258 ( 6,269 ) 817

June 30, 2020 | 10-Q 14

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September 30, 2020 | 10-Q 15

CITIZENS, INC .

2 unchanged sentences

EARNINGS PER SHARE

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

Three Months Ended June 30, 2020 2019

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

Three Months Ended September 30, 2020 2019

(In thousands, except per share amounts)

Basic and diluted earnings per share:

Net loss $ ( 1,027 ) ( 4,565 )

Net loss allocated to Class A common stock $ ( 1,017 ) ( 4,519 )

Net loss allocated to Class B common stock ( 10 ) ( 46 )

Net loss $ ( 1,027 ) ( 4,565 )

Basic and diluted earnings (loss) per share:

Net income (loss) $ ( 7,915 ) 2,046

Net income (loss) allocated to Class A common stock $ ( 7,836 ) 2,026

Net income (loss) allocated to Class B common stock ( 79 ) 20

Net income (loss) $ ( 7,915 ) 2,046

Weighted average shares of Class A outstanding - basic 49,437 49,229

1 unchanged sentence

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

Basic and diluted loss per share of Class A common stock $ ( 0.02 ) ( 0.09 )

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

Six Months Ended June 30, 2020 2019

Basic and diluted earnings (loss) per share of Class A common stock $ ( 0.16 ) 0.04

Basic and diluted earnings (loss) per share of Class B common stock ( 0.07 ) 0.02

Nine Months Ended September 30, 2020 2019

(In thousands, except per share amounts)

Basic and diluted earnings per share:

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

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

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

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

Basic and diluted earnings (loss) per share:

Net income (loss) $ ( 12,526 ) ( 6,321 )

Net income (loss) allocated to Class A common stock $ ( 12,401 ) ( 6,257 )

Net income (loss) allocated to Class B common stock ( 125 ) ( 64 )

Net income (loss) $ ( 12,526 ) ( 6,321 )

Weighted average shares of Class A outstanding - basic 49,365 49,229

1 unchanged sentence

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

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

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

Basic and diluted earnings (loss) per share of Class A common stock $ ( 0.25 ) ( 0.13 )

Basic and diluted earnings (loss) per share of Class B common stock ( 0.12 ) ( 0.06 )

CAPITAL AND SURPLUS

2 unchanged sentences

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

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

June 30, 2020 | 10-Q 15

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

September 30, 2020 | 10-Q 16

CITIZENS, INC .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

The BMA requires insurers domiciled in Bermuda to maintain available statutory economic capital and surplus at a level equal to or in excess of its enhanced capital requirement (“ECR”), which the Company calculates by using the Bermuda Solvency Capital Requirement (“BSCR”).

The BMA has established a target capital level (“TCL”) that requires insurers to maintain available statutory economic capital and surplus equal to 120 % of its ECR.

We normally experience fluctuations in the fair values of our assets and liabilities, which impact our ECR ratio.

As of March 31, 2020, CICA Ltd.’s available statutory economic capital and surplus was below the TCL by $ 8.9 million.

Two key components of available statutory economic capital and surplus were adversely affected at March 31, 2020 due to the disruption that the COVID-19 pandemic has had on the worldwide economy:

1) the fair value of our assets decreased, and 2) interest rates prescribed by the BMA decreased resulting in an increase of our statutory economic insurance liabilities.

Since CICA Ltd.

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

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

At June 30, 2020, CICA Ltd.

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

(5) INVESTMENTS

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

The Company invests primarily in fixed maturity securities, which totaled 89.5 % of total cash and invested assets at September 30, 2020, as shown below.

Carrying Value

(In thousands, except for %)

June 30, 2020 December 31, 2019

September 30, 2020 December 31, 2019

Amount % Amount %

7 unchanged sentences

Total cash and invested assets $ 1,614,192 100.0 % $ 1,526,459 100.0 %

June 30, 2020 | 10-Q 16

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CITIZENS, INC .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

June 30, 2020

September 30, 2020

(In thousands)

13 unchanged sentences

Total fixed maturity securities $ 1,308,056 143,028 6,505 1,444,579

September 30, 2020 | 10-Q 17

CITIZENS, INC .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019

14 unchanged sentences

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

June 30, 2020 | 10-Q 17

Table of Contents DRAFT 6

CITIZENS, INC .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(In thousands)

June 30, 2020 December 31, 2019

September 30, 2020 December 31, 2019

Equity securities:

3 unchanged sentences

Non-redeemable preferred stock 267 314

Non-redeemable preferred stock fund 4,971 —

Total equity securities $ 21,151 16,033

2 unchanged sentences

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

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

The Company recognized net realized gains of $ 0.4 million and $ 0.6 million on equity securities held for the three and nine months ended September 30, 2020, respectively, and gains of $ 18.0 thousand and $ 0.8 million for the same periods ended September 30, 2019.

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

5 unchanged sentences

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

September 30, 2020 | 10-Q 18

CITIZENS, INC .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company monitors all fixed maturity securities on an on-going basis relative to changes in credit ratings, market prices, earnings trends and financial performance, in addition to specific region or industry reviews.

14 unchanged sentences

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

June 30, 2020 | 10-Q 18

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CITIZENS, INC .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

For the three 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.

The following table presents the fair values and gross unrealized losses of fixed maturity securities that are not deemed to have credit losses, aggregated by investment category and length of time that individual securities have been in a continuous loss position at June 30, 2020.

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

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

September 30, 2020 | 10-Q 19

CITIZENS, INC .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(In thousands, except for # of securities) Fair

4 unchanged sentences

Value Unrealized

Fixed maturities:

Fixed maturity securities:

Available-for-sale securities:

7 unchanged sentences

Asset-backed 38,680 741 38 — — — 38,680 741 38

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

Total fixed maturity securities $ 160,374 6,221 156 $ 2,990 284 2 $ 163,364 6,505 158

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

5 unchanged sentences

We believe that fluctuations caused by movements in interest rates and credit spreads have little bearing on the recoverability of our investments.

While we are experiencing unrealized losses across several corporate sectors, the energy and automobile sectors have been impacted the most and some issuers within these sectors have been downgraded to below investment grade.

While we are experiencing unrealized losses across several corporate sectors, the energy and automobile sectors have been impacted the most by recent economic pressures and some issuers within these sectors have been downgraded to below investment grade.

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

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

The auto industry has been able to issue debt which has increased the liquidity of the component companies in the sector significantly.

The automobile sector is included in the Consumer subtotal above.

June 30, 2020 | 10-Q 19

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CITIZENS, INC .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Asset-backed.

4 unchanged sentences

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

Currently all of these securities are rated investment grade.

All of the active lease securities are rated investment grade.

September 30, 2020 | 10-Q 20

CITIZENS, INC .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

6 unchanged sentences

Value Unrealized

Fixed maturities:

Fixed maturity securities:

Available-for-sale securities:

7 unchanged sentences

Asset-backed 36,039 110 27 — — — 36,039 110 27

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

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

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

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

June 30, 2020 | 10-Q 20

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CITIZENS, INC .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

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

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

June 30, 2020 Amortized

September 30, 2020 Amortized

(In thousands)

5 unchanged sentences

Total fixed maturity securities $ 1,308,056 1,444,579

September 30, 2020 | 10-Q 21

CITIZENS, INC .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Three Months Ended Six Months Ended

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

Three Months Ended Nine Months Ended

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

(In thousands) 2020 2019 2020 2019

2 unchanged sentences

Gross realized losses $ 77 22 134 387

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

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

The Company sold eighteen and twenty-four available-for-sale fixed maturity securities during the three and nine months ended September 30, 2020 and sold twenty-one and forty-one available-for-sale fixed maturity securities during the three and nine months ended September 30, 2019.

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

(6) FAIR VALUE MEASUREMENTS

13 unchanged sentences

Treasury securities and actively traded mutual fund and stock investments.

June 30, 2020 | 10-Q 21

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CITIZENS, INC .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

5 unchanged sentences

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

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

September 30, 2020 | 10-Q 22

CITIZENS, INC .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

June 30, 2020 Level 1 Level 2 Level 3 Total

September 30, 2020 Level 1 Level 2 Level 3 Total

(In thousands)

15 unchanged sentences

Non-redeemable preferred stock 267 — — 267

Non-redeemable preferred stock fund 4,971 — — 4,971

Total equity securities 21,151 — — 21,151

3 unchanged sentences

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

June 30, 2020 | 10-Q 22

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September 30, 2020 | 10-Q 23

CITIZENS, INC .

23 unchanged sentences

Fixed maturity securities, available-for-sale.

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

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

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

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

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

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

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

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

Equity securities.

1 unchanged sentence

Other long-term investments.

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

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

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

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

Our unfunded commitment as of September 30, 2020 is $ 34.8 million.

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

3 unchanged sentences

company market participants for levered asset purchases with a

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September 30, 2020 | 10-Q 24

CITIZENS, INC .

1 unchanged sentence

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

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

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

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

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

The fund is expected to be liquidated in 3 years but this life could be shortened depending on available investment opportunities.

We review the fair value hierarchy classifications each reporting period.

1 unchanged sentence

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

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

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

FINANCIAL INSTRUMENTS NOT CARRIED AT FAIR VALUE

2 unchanged sentences

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

June 30, 2020 December 31, 2019

September 30, 2020 December 31, 2019

(In thousands) Carrying

9 unchanged sentences

Mortgage loans are secured principally by residential properties.

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

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

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

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

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

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

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

Policy loans.

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

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

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

3 unchanged sentences

Annuity liabilities.

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

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

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The fair value of the Company's liabilities under annuity contract policies, which are considered Level 3 liabilities, was estimated at September 30, 2020 and December 31, 2019 using discounted cash flows based upon spot rates adjusted for various risk adjustments ranging from 0.29 % to 2.44 % and 1.67 % to 3.02 %, respectively.

The fair value of liabilities under all insurance contracts are taken into consideration in the overall

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CITIZENS, INC .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

1 unchanged sentence

(In thousands )

June 30, 2020 December 31, 2019

September 30, 2020 December 31, 2019

Other long-term investments:

Private equity $ 9,079 —

FHLB common stocks 190 187

Private equity funds $ 10,503 —

FHLB common stock 190 187

Mortgage loans 158 177

3 unchanged sentences

Our FHLB stock is carried at amortized cost, which approximates fair value.

Included in All other investments is a Rabbi Trust holding $ 8.8 million for the benefit of our former Chief Executive Officer, Geoffrey Kolander, representing the severance payment due to him under the terms of his employment agreement in connection with his resignation following a change in control of the Company.

Such amount is payable in 2021.

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CITIZENS, INC .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(7) SHORT DURATION CONTRACTS

The Company's short duration contracts consist of credit life and credit disability in the Life Insurance segment and property insurance in the Home Service Insurance segment.

The following table presents information on changes in the liability for credit life, credit disability and property policy and contract claims for the nine months ended September 30, 2020 and 2019.

September 30, 2020 2020 2019

(In thousands)

Policy claims payable, January 1, $ 477 404

reinsurance recoverable — —

Net balance, January 1, 477 404

Add claims incurred, related to:

Current year 1,890 1,082

Prior years ( 15 ) ( 165 )

Deduct claims paid, related to:

Current year 1,822 764

Prior years 315 157

Net balance, September 30, 215 400

reinsurance recoverable 8,755 —

Policy claims payable, September 30, $ 8,970 400

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CITIZENS, INC .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(8) COMMITMENTS AND CONTINGENCIES

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effective July 1, 2018 , may have inadvertently generated U.S.

source income over time, which caused tax withholding and information reporting requirements for the Company under Chapters 3 and 4 of the IRC.

source income over time, which subjected the Company to certain tax withholding and information reporting requirements for the Company under Chapters 3 or 4 of the IRC.

For the novated policies sold to non-U.S.

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GAAP for financial reporting.

In December 2019, the Company submitted corrected withholding tax returns to the IRS in order to establish the tax liability amount for failing to withhold tax and report the U.S.

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

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

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

To remediate the noncompliance matter for the novated policies sold to non-U.S.

persons as described above, the Company submitted withholding tax returns to the IRS in December 2019, followed by some minor amendments in August 2020.

These withholding tax returns establish a total tax liability for calendar years 2014 through 2019 (“the covered period”) of $ 7.3 million for failure to withhold tax and report the U.S.

source income generated by the novated policies, plus interest through August 28, 2020 in the amount of $ 0.7 million.

To date, the Company has paid $ 8.0 million to the IRS for the covered period, including an August 28, 2020 payment of $ 6.0 million and previous deposits totaling $ 2.0 million.

Note that these payments do not represent closure of the matter or IRS acceptance of the tax liability shown on the submitted withholding tax returns.

The IRS is still reviewing our submission of the withholding tax returns relating to the novated policies and the IRS has the right to revise our total tax liability for the covered period.

Thus, the probability weighted range of estimated financial liabilities related to this issue remains at $ 7.3 million to $ 52.5 million, after tax.

This estimated range includes projected taxes and interest and penalties payable to the IRS, as well as estimated increased payout obligations to current holders of non-compliant domestic life insurance policies expected to result from remediation of those policies.

3 unchanged sentences

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

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

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CITIZENS, INC .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

3 unchanged sentences

If we suffer an adverse judgment as a result of litigation claims, it could have a material adverse effect on our business, results of operations and financial condition.

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CITIZENS, INC .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CONTRACTUAL OBLIGATIONS

As of September 30, 2020, CICA Ltd.

is committed to fund investments up to $ 95 million related to private equity funds and other investments.

We are also committed to pay $ 8.8 million to our former Chief Executive Officer, Geoffrey Kolander, in February 2021 representing the severance payments due to him under the terms of his employment agreement in connection with his resignation following a change in control of the Company.

(9) INCOME TAXES

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

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

For the three and nine months ended September 30, 2020, the Subpart F income inclusion generated $ 0.8 million and $ 2.2 million of federal income tax expense, respectively.

A reconciliation between the U.S.

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

Three Months Ended June 30, 2020 2019

Three Months Ended September 30, 2020 2019

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

6 unchanged sentences

Effect of uncertain tax position 630 ( 7.7 ) % ( 2,284 ) ( 107.1 ) %

Nondeductible costs to remediate tax compliance issue ( 620 ) 7.6 % ( 27 ) ( 1.3 ) %

Subpart F income 787 ( 9.6 ) % 2,253 105.7 %

Nondeductible officer compensation 2,041 ( 25.0 ) % — — %

Other ( 108 ) 1.3 % 147 6.9 %

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

Six Months Ended June 30, 2020 2019

Total federal income tax expense (benefit) $ ( 256 ) 3.1 % $ 86 4.1 %

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Nine Months Ended September 30, 2020 2019

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

6 unchanged sentences

Effect of uncertain tax position 2,673 ( 26.8 ) % 132 16.2 %

Nondeductible costs to remediate tax compliance issue ( 620 ) 6.2 % ( 27 ) ( 3.3 ) %

Subpart F income 2,180 ( 21.9 ) % 3,848 471.0 %

Nondeductible officer compensation 2,042 ( 20.5 ) % — — %

Other 5 ( 0.1 ) % 429 52.5 %

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

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CITIZENS, INC .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Total federal income tax expense (benefit) $ 2,558 ( 25.8 ) % $ 7,138 873.7 %

Income tax expense consists of:

Six Months Ended June 30, 2020 2019

Nine Months Ended September 30, 2020 2019

(In thousands)

3 unchanged sentences

Total federal income tax expense $ 2,558 7,138

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CITIZENS, INC .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The components of deferred federal income taxes are as follows:

1 unchanged sentence

(In thousands)

June 30, 2020 December 31, 2019

September 30, 2020 December 31, 2019

Deferred tax assets:

1 unchanged sentence

Net operating and capital loss carryforwards 595 230

Accrued expenses — 85

Investments 286 702

18 unchanged sentences

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

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CITIZENS, INC .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

The Company has $ 12.3 million of undiscounted lease liability remaining as of September 30, 2020.

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

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

Lease Term June 30, 2020

Lease Term September 30, 2020

Weighted-average remaining lease term (in years)

Operating leases 9.8

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CITIZENS, INC .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

Cash payments related to lease liabilities were $ 0.2 million and $ 0.9 million for the three and nine months ended September 30, 2020, respectively, and were reported in operating cash flows.

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

(In thousands) Operating Lease Payments

5 unchanged sentences

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

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

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

Beginning in the second quarter of 2020, the leased area was under construction to our specifications, which required the Company to recognize the related lease right of use asset and liability of $ 12.0 million.

The Company moved into its new home office in the first week of November 2020.

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

1 unchanged sentence

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

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

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

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

(11) SUBSEQUENT EVENTS

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

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CITIZENS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CHANGE IN CONTROL

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

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

Prior to the change in control, the Harold E.

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

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

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

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

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

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

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

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

RESIGNATION OF CHIEF EXECUTIVE OFFICER

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

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

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

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

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

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

In connection with Mr.

Kolander’s resignation and separation from employment, Mr.

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

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

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

Additionally, all outstanding Restricted Stock Units held by Mr.

Kolander will be fully vested on the date that Mr.

Kolander resigns and separates from employment.

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

Kolander resigns and separates from employment.

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

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

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

Under the Separation and Consulting Agreement, Mr.

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

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

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

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

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CITIZENS, INC .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

APPOINTMENT OF INTERIM CHIEF EXECUTIVE OFFICER

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

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

Kolander’s separation from employment.

Following his appointment, Mr.

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

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MANAGEMENT'S DISCUSSION & ANALYSIS

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

What changed 10-Q

Item 1. Financial Statements