CITIZENS, INC. 10-Q

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK GENERAL The nature of our business exposes us to market risk relative to our invested assets and policy liabilities. Market risk is the risk of loss that may occur when changes in interest rates and public equity prices adversely affect the value of our invested assets. Interest rate risk is our primary market risk exposure. Substantial and sustained increases and decreases in market interest rates can affect the fair value of our investments. The fair value of our fixed maturity securities portfolio generally increases when interest rates decrease and decreases when interest rates increase. For additional information regarding market risks to which we are subject, see Item 1. Financial Statements - Note 5. Investments - Valuation of Investments in the notes to our consolidated financial statements for further discussion. September 30, 2020 | 10-Q 57 Table of Contents CITIZENS, INC. The following table summarizes net unrealized gains and losses as of the dates indicated. September 30, 2020 December 31, 2019 (In thousands) Amortized Cost Fair Value Net Unrealized Gains Amortized Cost Fair Value Net Unrealized Gains Total fixed maturity securities $ 1,308,056 1,444,579 136,523 1,293,853 1,377,959 84,106 Total equity securities $ 19,529 21,151 1,622 15,055 16,033 978 MARKET RISK RELATED TO INTEREST RATES Our exposure to interest rate changes results from our significant holdings of fixed maturity investments, which comprised 91.9% of our investment portfolio based on carrying value as of September 30, 2020. These investments are mainly exposed to changes in U.S. Treasury rates. Our fixed maturity investments include U.S. Government-sponsored enterprises, U.S. Government bonds, securities issued by government agencies and state and political subdivisions, and corporate bonds. To manage interest rate risk, we perform periodic projections of asset and liability cash flows to evaluate the potential sensitivity of our investments and liabilities. We assess interest rate sensitivity annually with respect to our available-for-sale fixed maturities investments using hypothetical test scenarios that assume either upward or downward shifts in the prevailing interest rates. The changes in fair values of our fixed maturity and equity securities as of September 30, 2020 were within the expected range of this analysis. Changes in interest rates typically have a sizable effect on the fair values of our fixed maturity and equity securities. The interest rate of the ten-year U.S. Treasury bond decreased to 0.68% at September 30, 2020 from 1.92% at December 31, 2019. Generally, fair values of our securities increase in a declining interest rate environment, however, economic and other credit events can have a significant impact on the fair values of our securities. The fixed maturity security portfolio is exposed to call risk, as a significant portion of the current bond holdings are callable. A decreasing interest rate environment can result in increased call activity, and an increasing rate environment will likely result in securities being paid at their stated maturity. There are no fixed maturities or other investments classified as trading instruments. All of the Company's fixed maturity securities were classified as available-for-sale at September 30, 2020. At September 30, 2020 and December 31, 2019, we had no investments in derivative instruments, nor did we have any subprime or collateralized debt obligation risk. MARKET RISK RELATED TO EQUITY PRICES Changes in the level or volatility of equity prices affect the value of equity securities we hold as investments. Our equity investments portfolio represented 1.3% of our total investments based upon carrying value at September 30, 2020, with 93.3% invested in diversified equity and bond mutual funds. See further discussion in Note 5. Investments in the notes to our consolidated financial statements. September 30, 2020 | 10-Q 58 Table of Contents CITIZENS, INC.