CITIZENS, INC. 10-Q

Item 1A. RISK FACTORS Part I, Item 1A. 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 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. 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 generated by our insurance subsidiaries and invested assets. 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 purchase new policies in order to conserve cash. We have September 30, 2020 | 10-Q 62 Table of Contents CITIZENS, INC. offered relief to policyholders (e.g. extending grace periods), which may also impact our operating cash flow. 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. 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. 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 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 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. 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. 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. Although Mr. 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. September 30, 2020 | 10-Q 63 Table of Contents CITIZENS, INC. 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. Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS None. Item 3 . DEFAULTS UPON SENIOR SECURITIES Not applicable. Item 4. MINE SAFETY DISCLOSURES Not applicable. September 30, 2020 | 10-Q 64 Table of Contents CITIZENS, INC.