What changed in this filing

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Item 1A. Risk Factors

2020-11-04 compared with 2020-08-05 · 46 added, 63 removed, 26 unchanged (81% 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.

Risk Factors of our Form 10-K includes a discussion of our risk factors, which risk factors were supplemented by those included in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2020.

There have been no material changes from the risk factors included in our Form 10-K , as supplemented by the risk factors included in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2020, except as discussed 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.

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

Due to the unprecedented nature of these events and the uncertainty surrounding the virus and its impacts, we cannot fully estimate the duration or full impact of the COVID-19 pandemic at this time though we have identified several areas where the COVID-19 pandemic impacted our business during the first nine months of 2020.

Events that we are unable to control, such as the further spread or spikes in the number of cases of COVID-19 as we head into the winter months in the Northern Hemisphere 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.

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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.

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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.

Historically, many of our policies have been sold via in-person meetings.

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.

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

In addition, we believe some policyholders have changed their behavior in unexpected ways in response to the COVID-19 pandemic.

For example, policyholders seeking sources of liquidity due to COVID-19 pandemic-related economic uncertainty and increased unemployment have withdrawn or surrendered at greater rates than in prior year.

Some policyholders have changed their premium payment practices, declined to meet in-person with our independent sales consultants or took other actions as a result of the COVID-19 pandemic and governments’ efforts to respond to it.

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.

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

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

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.

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

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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We are currently undergoing a period of significant leadership change following a change in control of the Company, which could be disruptive to, or cause uncertainty in, our business and future strategic direction.

As previously disclosed, the change in control of the Company occurred on July 29, 2020.

Following the change in control, Geoffrey M.

Kolander resigned as our Chief Executive Officer and President effective August 5, 2020.

Also, effective August 5, 2020, Gerald W.

Shields, Vice Chairman of the Board of Directors, assumed the role of Interim Chief Executive Officer and has agreed to serve in such role until a permanent Chief Executive Officer is hired.

Kolander has agreed to provide consulting services through the end of 2020, any significant change in leadership involves inherent risks and may be disruptive to, or cause uncertainty in, our business and future strategic direction.

If we fail to appoint a permanent Chief Executive Officer with the desired level of experience and expertise in a timely manner, and/or if we fail to ensure a smooth transition and effective transfer of knowledge, our strategic planning and execution could be hindered or delayed, and our ability to retain other key members of executive team could be adversely affected.

Any such disruptions or uncertainties could have a material adverse effect on our business, financial condition and results of operations.

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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.

Our business could be negatively impacted by the ongoing dispute with, and the lawsuit filed by, the Harold E.

Riley Foundation.

Following the change in control of the Company, the Harold E.

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

Because our Class B common stock has the right to nominate a simple majority of our Board, the Foundation is deemed our new control party.

On August 13, 2020, the Foundation delivered a written consent to us purporting to remove four directors and appoint five replacements.

The Foundation attempted to unilaterally take such actions without regard to the process mandated in the Corporate Governance Guidelines of the Company, namely that the Board’s Nominating and Corporate Governance Committee is responsible for identifying, recruiting, interviewing, vetting and recommending potential director candidates and evaluating their qualifications.

We do not consider the Foundation’s nominees to be duly appointed current members of our Board;

rather, they have been submitted by the Foundation as potential director candidates under the review of the Nominating and Corporate Governance Committee of the Board.

The Board later took certain actions to facilitate the orderly transition of the Foundation as the new control party and protect the interests of all of the Company’s shareholders, including, among other things, preserving the existing Board composition.

On September 2, 2020, the Company and its Board were named in a lawsuit filed by the Foundation in the District Court of Arapahoe County of Colorado.

The Foundation’s complaint requested, among other things, a declaratory judgment by the court, based on the Company’s governing documents, that the Foundation had a unilateral right to seat the nominees when it sent the written consent on August 13, 2020 and that the Foundation's five nominees were validly appointed.

The Company and the Board dispute the view taken by the Foundation.

Although the Company and the Board are defending the suit and believe that their defenses are meritorious, the outcome of this litigation is uncertain.

The ongoing dispute and litigation with the Foundation have required us and, may continue to require us, to incur significant legal fees, and have required, and may continue to require, significant time and attention by management and the Board.

Further, the litigation has imposed constraints upon the Company’s ability to execute certain strategic initiatives.

Any perceived uncertainties as to the composition of our Board may make it more difficult to attract a permanent Chief Executive Officer and attract and retain our qualified personnel and business partners.

If the court were to rule in the Foundation’s favor and seat the Foundation’s nominees on our Board, the Foundation would have a majority representation on our Board and be able to make subsequent changes to our management, operations or strategies, any of which could have an adverse impact on our business.

Additionally, any prolonged dispute with the Foundation could affect our share price.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

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Not applicable.

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MINE SAFETY DISCLOSURES

Not applicable.

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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