What changed in this filing

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Item 1. Financial Statements

2021-05-05 compared with 2020-11-04 · 237 added, 413 removed, 553 unchanged (54% of the section changed)

3 unchanged sentences

Consolidated Balance Sheets

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

(In thousands) March 31, 2021 December 31, 2020

Assets (Unaudited)

Fixed maturities available-for-sale, at fair value (amortized cost:

Fixed maturity securities available-for-sale, at fair value (amortized cost:

$ 1,332,632 and $ 1,321,487 in 2021 and 2020, respectively)

3 unchanged sentences

Real estate held-for-sale 2,571 2,571

Other long-term investments (portion measured at fair value $ 10,503 in 2020;

less allowance for losses of $ 11 in 2020)

Short-term investments — 1,301

Other long-term investments (portion measured at fair value $ 16,982 and $ 11,923 in 2021 and 2020, respectively;

less allowance for losses of $ 11 in 2021 and 2020)

17,347 27,294

Total investments 1,545,545 1,624,668

1 unchanged sentence

Accrued investment income 15,862 16,137

Receivable for securities 2,808 —

Reinsurance recoverable 4,343 5,753

4 unchanged sentences

Due premiums 9,538 11,309

Other assets (less allowance for losses of $ 257 in 2020)

Other assets (less allowance for losses of $ 304 and $ 297 in 2021 and 2020, respectively)

Total assets $ 1,781,653 1,843,420

See accompanying Notes to Consolidated Financial Statements.

September 30, 2020 | 10-Q 2

March 31, 2021 | 10-Q 2

CITIZENS, INC.

1 unchanged sentence

Consolidated Balance Sheets, Continued

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

(In thousands, except share amounts) March 31, 2021 December 31, 2020

Liabilities and Stockholders' Equity (Unaudited)

23 unchanged sentences

Accumulated other comprehensive income:

Net unrealized gains on fixed maturity securities, net of tax 125,804 77,117

Net unrealized gains (losses) on fixed maturity securities, net of tax 71,737 128,255

Treasury stock, at cost ( 11,011 ) ( 11,011 )

2 unchanged sentences

See accompanying Notes to Consolidated Financial Statements.

September 30, 2020 | 10-Q 3

March 31, 2021 | 10-Q 3

CITIZENS, INC.

1 unchanged sentence

Consolidated Statements of Operations and Comprehensive Income (Loss)

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

Three Months Ended March 31,

(In thousands, except per share amounts)

2020 2019 2020 2019

Life insurance $ 37,642 39,946

23 unchanged sentences

Basic and diluted earnings (losses) per share of Class B common stock ( 0.04 ) ( 0.04 )

Other Comprehensive Income:

Unrealized gains on fixed maturity securities:

Unrealized holding gains arising during period 15,128 24,201 52,707 84,222

Other Comprehensive Income (Loss):

Unrealized losses on fixed maturity securities:

Unrealized holding losses arising during period ( 55,898 ) ( 42,929 )

Reclassification adjustment for losses (gains) included in net income (loss) ( 35 ) 132

Unrealized gains on fixed maturity securities, net 15,130 24,148 52,753 84,192

Income tax expense on unrealized gains on fixed maturity securities 1,020 1,627 4,067 5,815

Other comprehensive income 14,110 22,521 48,686 78,377

Total comprehensive income $ 6,195 24,567 36,160 72,056

Unrealized losses on fixed maturity securities, net ( 55,933 ) ( 42,797 )

Income tax expense (benefit) on unrealized losses on fixed maturity securities 585 ( 2,727 )

Other comprehensive loss ( 56,518 ) ( 40,070 )

Total comprehensive loss $ ( 60,091 ) ( 43,654 )

See accompanying Notes to Consolidated Financial Statements.

September 30, 2020 | 10-Q 4

March 31, 2021 | 10-Q 4

CITIZENS, INC.

8 unchanged sentences

Balance at December 31, 2020 $ 262,869 3,184 ( 82,352 ) 128,255 ( 11,011 ) 300,945

Accounting standards adopted January 1, 2020 — — ( 395 ) — — ( 395 )

Comprehensive income (loss):

4 unchanged sentences

Balance at March 31, 2021 $ 262,855 3,184 ( 85,925 ) 71,737 ( 11,011 ) 240,840

Comprehensive income (loss):

Net income (loss) — — ( 1,027 ) — — ( 1,027 )

Unrealized investment gains (losses), net — — — 74,647 — 74,647

Total comprehensive income (loss) — — ( 1,027 ) 74,647 — 73,620

Stock-based compensation 439 — — — — 439

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, 2019 $ 261,515 3,184 ( 70,969 ) 77,117 ( 11,011 ) 259,836

Accounting standards adopted January 1, 2020 — — ( 395 ) — — ( 395 )

Comprehensive income (loss):

4 unchanged sentences

Balance at March 31, 2020 $ 261,462 3,184 ( 74,948 ) 37,047 ( 11,011 ) 215,734

Comprehensive income (loss):

Net income (loss) — — ( 4,565 ) — — ( 4,565 )

Unrealized investment gains (losses), net — — — 28,976 — 28,976

Total comprehensive income (loss) — — ( 4,565 ) 28,976 — 24,411

Stock-based compensation 127 — — — — 127

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.

September 30, 2020 | 10-Q 6

March 31, 2021 | 10-Q 5

CITIZENS, INC.

1 unchanged sentence

Consolidated Statements of Cash Flows

Nine Months Ended September 30,

Three Months Ended March 31,

(In thousands)

24 unchanged sentences

Principal payments on mortgage loans 4 4

Increase in policy loans, net ( 1,957 ) ( 1,141 )

(Increase) decrease in policy loans, net 644 676

Sales of other long-term investments and real estate 15,089 —

Purchases of other long-term investments ( 4,619 ) ( 2,810 )

Sales of property and equipment — 15

Purchases of property and equipment ( 15 ) ( 5 )

3 unchanged sentences

See accompanying Notes to Consolidated Financial Statements.

September 30, 2020 | 10-Q 7

March 31, 2021 | 10-Q 6

CITIZENS, INC.

1 unchanged sentence

Consolidated Statements of Cash Flows, Continued

Nine Months Ended September 30,

Three Months Ended March 31,

(In thousands)

2 unchanged sentences

Annuity withdrawals ( 2,329 ) ( 561 )

Purchase of treasury stock ( 9,090 ) —

Other ( 89 ) ( 246 )

4 unchanged sentences

SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:

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.

During the three months ended March 31, 2021 and 2020, various fixed maturity issuers exchanged securities with book values of $ 2.0 million and $ 3.1 million, respectively, for securities of equal value.

The Company accrued purchases of property and equipment of $ 0.8 million as of March 31, 2021, which is reflected in other liabilities on the consolidated Balance Sheets and recorded none as of March 31, 2020.

The Company had $ 0.7 million net unsettled security trades at March 31, 2021 and $ 3.4 million at March 31, 2020.

See accompanying Notes to Consolidated Financial Statements.

September 30, 2020 | 10-Q 8

March 31, 2021 | 10-Q 7

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 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 balance sheets as of March 31, 2021 and the consolidated statements of operations and comprehensive income (loss), stockholders' equity and cash flows for the three months ended March 31, 2021 and March 31, 2020 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 March 31, 2021 and for comparative periods have been made.

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

1 unchanged sentence

GAAP") for interim financial information and with the instructions to Form 10-Q adopted by the Securities and Exchange Commission ("SEC").

Accordingly, the consolidated financial statements do not include all the information and footnotes required for complete financial statements and should be read in conjunction with the Company’s consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2019.

Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period.

We provide primarily life insurance and a small amount of health insurance policies through our insurance subsidiaries - CICA, CICA Ltd., CNLIC, SPLIC and MGLIC.

CICA and CNLIC issued ordinary whole-life policies, credit life and disability, and accident and health related policies, throughout the Midwest and southern U.S.

Our Life Insurance segment operates through CICA Ltd., CICA and CNLIC.

Our international life insurance business, which operates through CICA Ltd., issues U.S.

dollar-denominated endowment contracts internationally, which are principally accumulation contracts that incorporate an element of life insurance protection and ordinary whole life insurance in U.S.

dollar-denominated amounts sold to non-U.S.

These contracts are designed to provide a fixed amount of insurance coverage over the life of the insured and may utilize rider benefits to provide additional increasing or decreasing coverage and annuity benefits to enhance accumulations.

Our domestic life insurance business, which operates through CICA and CNLIC, primarily focused on living needs and provided benefits toward accumulating financial benefits for the policyowners throughout the Midwest and southern U.S.

until they ceased most domestic sales beginning January 1, 2017.

primarily issues endowment and ordinary whole-life policies to non-U.S.

SPLIC offers final expense and home service life insurance in Louisiana, Arkansas and Mississippi.

SPFIC writes a limited amount of property insurance in Louisiana and Arkansas.

MGLIC provides industrial life policies through independent funeral homes in Mississippi.

We have recently developed a whole life insurance product and have begun selling this product in Florida in 2021.

Our Home Service Insurance segment operates through our subsidiaries SPLIC, MGLIC and SPFIC, and focuses on the life insurance needs of the middle- and lower-income markets, primarily in Louisiana, Mississippi and Arkansas.

Our products in this segment consist primarily of small face amount ordinary whole life, industrial life and pre-need policies, which are designed to fund final expenses for the insured, primarily consisting of funeral and burial costs as well as limited liability, named peril property policies covering dwelling and contents.

CTI provides data processing systems and services to the Company.

3 unchanged sentences

Actual results could differ from those estimates.

Significant estimates include those used in the evaluation of credit allowances on fixed maturity securities, actuarially determined assets and liabilities and assumptions, tests of goodwill impairment, valuation allowance on deferred tax assets, valuation of uncertain tax positions and contingencies relating to litigation and regulatory matters.

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.

September 30, 2020 | 10-Q 9

March 31, 2021 | 10-Q 8

CITIZENS, INC .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SIGNIFICANT ACCOUNTING POLICIES

For a description of our significant accounting policies, see Note 1.

Summary of Significant Accounting Policies in the notes to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2019, which should be read in conjunction with these accompanying consolidated financial statements.

Investment securities.

We assess all available-for-sale ("AFS") fixed maturity securities in an unrealized loss position for expected credit losses.

First, we assess whether we intend to sell, or it is more likely than not that we will be required to sell, the security before recovery of its amortized cost.

If either of the criteria is met, the security's amortized cost is written down to its fair value.

For AFS fixed maturity securities that do not meet either criteria, we evaluate whether the decline in fair value has resulted from credit losses or other factors.

In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors.

Any impairment that has not been recorded through an allowance for credit losses is recognized in accumulated other comprehensive income on our consolidated balance sheets.

Changes in the allowance for credit losses are recorded through realized capital losses.

The Company made a policy election to exclude accrued interest from the amortized cost of AFS fixed maturity securities and report accrued interest separately in accrued investment income in the consolidated balance sheets.

AFS fixed maturity securities are placed on non-accrual status when we no longer expect to receive all contractual amounts due.

Accrued interest receivable is reversed against interest income when a security is placed on non-accrual status.

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 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 funds are generally reported on a three-month delay.

These investments are included in other long-term investments.

For a description of our significant accounting policies, see Part IV, Item 15, Note 1.

Summary of Significant Accounting Policies in the notes to our consolidated financial statements included in our Form 10-K , which should be read in conjunction with these accompanying consolidated financial statements.

(2) ACCOUNTING PRONOUNCEMENTS

5 unchanged sentences

The income statement reflects the measurement of credit losses for newly recognized financial assets, as well as the increases or decreases of expected credit losses that have taken place during the period.

Credit losses on AFS fixed maturity securities should be measured in a manner similar to current U.S.

Credit losses on available-for-sale ("AFS") fixed maturity securities should be measured in a manner similar to current U.S.

however, the credit losses are recorded through an allowance for credit losses rather than as a write-down.

4 unchanged sentences

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

September 30, 2020 | 10-Q 10

CITIZENS, INC .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In September 2018, the FASB issued ASU No.

2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract.

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 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").

The capitalized costs will be amortized over the term of the hosting arrangement, with the amortization expense being presented in the same income statement line item as the fees paid for the hosted service.

We adopted this standard effective January 1, 2020.

The adoption had no impact on our consolidated financial statements.

ACCOUNTING STANDARDS NOT YET ADOPTED

9 unchanged sentences

The two previous measurement models have been reduced to one measurement model (fair value), resulting in greater uniformity across similar market-based benefits and better alignment with the fair value measurement of derivatives used to hedge capital market risk;

• Simplifies amortization of deferred acquisition costs.

• Simplifies amortization of deferred acquisition costs ("DAC").

Previous earnings-based amortization methods have been replaced with a more level amortization basis;

March 31, 2021 | 10-Q 9

CITIZENS, INC .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

• Requires enhanced disclosures.

The new disclosures include rollforwards and information about significant assumptions and the effects of changes in those assumptions.

For calendar-year public companies, the changes will be effective on January 1, 2022.

In July 2020, the FASB tentatively agreed to defer the original effective date by one year.

If finalized, the new guidance will be effective for annual and interim reporting periods beginning January 1, 2023, however early adoption is permitted.

The Company is evaluating the impact this guidance will have on our consolidated financial statements.

This new guidance is expected to have a material impact on our consolidated financial statements.

For calendar-year public companies, the changes will be effective on January 1, 2023, however, early adoption is permitted.

The Company is evaluating the impact of this new guidance, and it is expected to have a material impact on our consolidated financial statements.

No other new accounting pronouncement issued or effective during the year had, or is expected to have, a material impact on our consolidated financial statements.

2 unchanged sentences

Life Insurance and Home Service Insurance.

The Life Insurance and Home Service Insurance portions of the Company constitute separate businesses.

CICA, CICA Ltd.

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 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.

Our Life Insurance segment primarily issues endowment contracts, which are principally accumulation contracts that incorporate an element of life insurance protection and ordinary whole life insurance, to non-U.S.

residents through CICA Ltd.

These contracts are designed to provide a fixed amount of insurance coverage over the life of the insured and may utilize rider benefits to provide additional coverage and annuity benefits to enhance accumulations.

CICA and CNLIC issued ordinary whole-life, credit life and disability and accident and health related policies, throughout the Midwest and southern U.S.

until they ceased most domestic sales beginning January 1, 2017.

We restarted domestic sales in Florida in 2021.

Our domestic Home Service Insurance segment operates through our subsidiaries SPLIC, MGLIC and SPFIC, and focuses on the life insurance needs of the middle- and lower-income markets, primarily in Louisiana, Mississippi and Arkansas.

Our policies are sold and serviced through funeral homes and independent agents who sell policies, collect premiums and service policyholders.

To a lesser extent, our Home Service Insurance segment sells limited liability, named peril property policies covering dwelling and contents.

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.

The Company's Other Non-Insurance Enterprises are the only reportable difference between segments and consolidated operations.

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

September 30, 2020 | 10-Q 11

CITIZENS, INC .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

The Company evaluates profit and loss performance based on U.S.

GAAP income before federal income taxes for its two reportable segments.

The Company's Other Non-Insurance Enterprises are the only reportable difference between segments and consolidated operations.

Life Insurance Home Service Insurance Other Non-Insurance Enterprises Consolidated

Three Months Ended September 30, 2020

(In thousands)

Premiums $ 32,265 11,843 — 44,108

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

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

Other income 189 1 3 193

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

Benefits and expenses:

Insurance benefits paid or provided:

Claims and surrenders 25,023 7,935 — 32,958

Increase in future policy benefit reserves 3,274 884 — 4,158

Policyholders' dividends 1,443 7 — 1,450

Total insurance benefits paid or provided 29,740 8,826 — 38,566

Commissions 4,140 3,572 — 7,712

Other general expenses 1,915 4,524 12,952 19,391

Capitalization of deferred policy acquisition costs ( 3,512 ) ( 1,380 ) — ( 4,892 )

Amortization of deferred policy acquisition costs 6,190 570 — 6,760

Amortization of cost of insurance acquired 113 346 — 459

Total benefits and expenses 38,586 16,458 12,952 67,996

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

September 30, 2020 | 10-Q 12

March 31, 2021 | 10-Q 10

CITIZENS, INC .

1 unchanged sentence

Life Insurance Home Service Insurance Other Non-Insurance Enterprises Consolidated

Nine Months Ended September 30, 2020

Three Months Ended March 31, 2021

(In thousands)

16 unchanged sentences

Total benefits and expenses 39,572 16,297 2,362 58,231

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

September 30, 2020 | 10-Q 13

CITIZENS, INC .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Life Insurance Home Service Insurance Other Non-Insurance Enterprises Consolidated

Three Months Ended September 30, 2019

(In thousands)

Premiums $ 34,385 11,624 — 46,009

Net investment income 11,340 3,309 390 15,039

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

Other income (loss) 349 ( 2 ) — 347

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

Benefits and expenses:

Insurance benefits paid or provided:

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

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

Policyholders' dividends 1,551 9 — 1,560

Total insurance benefits paid or provided 31,751 4,969 — 36,720

Commissions 5,386 3,493 — 8,879

Other general expenses 5,358 4,669 1,503 11,530

Capitalization of deferred policy acquisition costs ( 4,743 ) ( 1,241 ) — ( 5,984 )

Amortization of deferred policy acquisition costs 5,960 1,875 — 7,835

Amortization of cost of insurance acquired 113 242 — 355

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

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

September 30, 2020 | 10-Q 14

Loss before federal income tax expense $ ( 106 ) ( 758 ) ( 1,884 ) ( 2,748 )

March 31, 2021 | 10-Q 11

CITIZENS, INC .

1 unchanged sentence

Life Insurance Home Service Insurance Other Non-Insurance Enterprises Consolidated

Nine Months Ended September 30, 2019

Three Months Ended March 31, 2020

(In thousands)

17 unchanged sentences

Income (loss) before federal income tax expense $ 2,086 ( 2,145 ) ( 2,176 ) ( 2,235 )

September 30, 2020 | 10-Q 15

March 31, 2021 | 10-Q 12

CITIZENS, INC .

3 unchanged sentences

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 (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

Weighted average shares of Class A outstanding - diluted 49,832 49,327

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

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

Three Months Ended March 31, 2021 2020

(In thousands, except per share amounts)

13 unchanged sentences

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

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

September 30, 2020 | 10-Q 16

All insurance subsidiaries exceeded the minimum capital requirements at March 31, 2021.

In order to minimize the risk of a shortfall in capital arising from an unexpected adverse deviation or excess risk, the BMA has established a threshold capital level (termed the Target Capital Level ("TCL")), which is set at 120% of a company’s enhanced capital requirement.

The TCL serves as an early warning tool for the BMA.

As of March 31, 2021, CICA Ltd.

was above the TCL threshold.

At the request of the BMA, on April 15, 2021, Citizens and CICA Ltd.

entered into a Keep Well Agreement.

The Keep Well Agreement requires Citizens to contribute up to $ 10 million in capital to CICA Ltd.

as necessary to ensure that CICA Ltd.

has a minimum capital level of 120% (equal to the TCL).

Since CICA Ltd.’s capital level currently exceeds 120 %, Citizens is not currently required to make a capital contribution.

March 31, 2021 | 10-Q 13

CITIZENS, INC .

1 unchanged sentence

(5) INVESTMENTS

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.

The Company invests primarily in fixed maturity securities, which totaled 90.8 % of total cash and invested assets at March 31, 2021, as shown below.

Carrying Value

(In thousands, except for %)

September 30, 2020 December 31, 2019

March 31, 2021 December 31, 2020

Amount % Amount %

4 unchanged sentences

Real estate and other long-term investments 19,918 1.3 % 29,865 1.8 %

Short-term investments — — % 1,301 0.1 %

Cash and cash equivalents 19,493 1.2 % 34,131 2.1 %

Total cash and invested assets $ 1,565,038 100.0 % 1,658,799 100.0 %

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

September 30, 2020

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

March 31, 2021

(In thousands)

8 unchanged sentences

All Other 294,528 21,395 4,261 311,662

Commercial mortgage-backed 225 — 4 221

Residential mortgage-backed 118,186 14,006 46 132,146

2 unchanged sentences

Total fixed maturity securities $ 1,332,632 100,027 12,072 1,420,587

September 30, 2020 | 10-Q 17

March 31, 2021 | 10-Q 14

CITIZENS, INC .

18 unchanged sentences

(In thousands)

September 30, 2020 December 31, 2019

March 31, 2021 December 31, 2020

Equity securities:

8 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 $ 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.

The building was owned by CICA within our Life Insurance segment.

An impairment loss of $ 3.1 million was recorded during the second quarter of 2019 related to our Citizens Academy training facility property located near Austin, Texas.

It was determined during the quarter that the property met the held-for-sale criteria.

As a result, this investment was reclassified from real estate held for investment to real estate held-for-sale.

This resulted in an impairment loss of $ 3.1 million as the carrying amount of the property was written down to the net realizable value.

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.

The Company evaluates whether a credit impairment exists for fixed maturity securities by considering primarily the following factors:

(a) changes in the financial condition of the security's underlying collateral;

(b) whether the issuer is current on contractually obligated interest and principal payments;

and (d) the payment structure of the security.

The Company's best estimate of expected future cash flows used to determine the credit loss amount is a quantitative and qualitative process.

Quantitative review includes information received from third-party sources such as financial statements, pricing and rating changes, liquidity and other statistical information.

Qualitative factors include judgments related to business strategies, economic impacts on the issuer, overall judgment related to estimates and industry factors as well as the Company's intent to sell the security, or if it is more likely than not that the Company would be required to sell a security before recovery of its amortized cost.

The Company's best estimate of future cash flows involves assumptions including, but not limited to, various performance indicators, such as historical and projected default and recovery rates, credit ratings, and current delinquency rates.

These assumptions require the use of significant management judgment and include the probability of issuer default and estimates regarding timing and amount of expected recoveries, which may include estimating the underlying collateral value.

In addition, projections of expected future fixed maturity security cash flows may change based upon new information regarding the performance of the issuer.

Any credit losses are presented as an allowance rather than as a write-down on AFS fixed maturity securities management does not intend to sell or believes that it is more likely than not we will be required to sell.

We adopted ASU 2016-13 using the prospective transition approach for fixed maturity securities for which other-than-temporary impairment had been recognized prior to January 1, 2020.

As a result, the amortized cost remains the same before and after adoption.

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

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 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

The Company recognized net realized gains of $ 0.3 million on equity securities held for the three months ended March 31, 2021 and losses of $ 1.1 million for the same period ended March 31, 2020.

The Company considers several factors in its review and evaluation of individual investments, using the process described in Part IV, Item 15, Note 2.

Investments in the notes to the consolidated financial statements of our Form 10-K to determine whether a credit loss impairment exists.

For the three months ended March 31, 2021 and 2020, the Company recorded no credit valuation losses on fixed maturity securities.

March 31, 2021 | 10-Q 15

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 credit losses, aggregated by investment category and length of time that individual securities have been in a continuous loss position at September 30, 2020.

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

The following tables present 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 March 31, 2021 and December 31, 2020.

March 31, 2021 Less than 12 months Greater than 12 months Total

(In thousands, except for # of securities) Fair

11 unchanged sentences

All Other 74,922 4,261 96 — — — 74,922 4,261 96

Commercial mortgage-backed 221 4 1 — — — 221 4 1

Residential mortgage-backed 1,595 46 9 — — — 1,595 46 9

1 unchanged sentence

Total fixed maturity securities $ 233,713 11,558 267 $ 11,810 514 14 $ 245,523 12,072 281

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.

While the losses are currently unrealized, we continue to monitor all fixed maturity securities on an on-going basis as future information may become available which could result in an allowance being recorded.

States and political subdivisions.

The Company's investments in states and political subdivisions were purchased at a premium, relative to their face amount, and the contractual cash flows are guaranteed by the respective state or political subdivision.

Accordingly, it is expected that the securities will not be settled at a price less than the amortized cost bases of the Company's investments.

We did not recognize credit losses on corporate securities with unrealized losses that were due to interest rate sensitivity and changes in credit spreads.

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 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 which has increased the liquidity of the component companies in the sector significantly.

The automobile sector is included in the Consumer subtotal above.

Asset-backed.

Our asset-backed securities are primarily senior tranches of pools of aircraft leases to airlines around the world.

If an airline was to go bankrupt and default on its lease, the trust would repossess the plane and relet or sell it.

There have been no defaults on leases to date, however the leases contain a feature that allows lessors to defer their lease payments for three months, with the funds recaptured with interest when payments resume.

Several of the lessors have requested this deferral.

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

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.

December 31, 2020 Less than 12 months Greater than 12 months Total

16 unchanged sentences

Total fixed maturity securities $ 86,960 1,894 80 $ 2,661 16 2 $ 89,621 1,910 82

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 cost bases which may be maturity.

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

In each category of our fixed maturity securities described above, 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.

We did not recognize credit losses on securities with unrealized losses that were due to interest rate sensitivity and changes in credit spreads.

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

The fair value is expected to recover as the securities approach maturity.

March 31, 2021 | 10-Q 16

CITIZENS, INC .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The amortized cost and fair value of fixed maturity securities at March 31, 2021 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.

September 30, 2020 Amortized

March 31, 2021 Amortized

(In thousands)

5 unchanged sentences

Total fixed maturity securities $ 1,332,632 1,420,587

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 Nine Months Ended

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

Three Months Ended

Fixed Maturity Securities, Available-for-Sale March 31,

(In thousands) 2021 2020

2 unchanged sentences

Gross realized losses $ 1 38

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.

The Company sold 18 and 1 AFS fixed maturity securities during the three months ended March 31, 2021 and 2020, respectively.

No equity securities were sold during the three months ended March 31, 2021 and 2020.

(6) FAIR VALUE MEASUREMENTS

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

We hold available-for-sale fixed maturity securities, which are carried at fair value.

We hold AFS fixed maturity securities, which are carried at fair value.

We also report our equity securities at fair value with changes in fair value reported through the consolidated statements of operations and comprehensive income (loss).

10 unchanged sentences

Treasury securities and actively traded mutual fund and stock investments.

March 31, 2021 | 10-Q 17

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.

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.

September 30, 2020 Level 1 Level 2 Level 3 Total

March 31, 2021 Level 1 Level 2 Level 3 Total

(In thousands)

Financial Assets

Fixed maturities available-for-sale

Fixed maturity securities available-for-sale

Treasury and U.S.

2 unchanged sentences

Corporate 52 834,738 — 834,790

Commercial mortgage-backed — 221 — 221

Residential mortgage-backed — 132,146 — 132,146

1 unchanged sentence

Foreign governments — 116 — 116

Total fixed maturities available-for-sale 11,560 1,433,019 — 1,444,579

Total fixed maturity securities available-for-sale 11,073 1,409,514 — 1,420,587

Equity securities

9 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.

September 30, 2020 | 10-Q 23

March 31, 2021 | 10-Q 18

CITIZENS, INC .

3 unchanged sentences

Financial Assets

Fixed maturities available-for-sale

Fixed maturity securities available-for-sale

Treasury and U.S.

6 unchanged sentences

Foreign governments — 118 — 118

Total fixed maturities available-for-sale 11,400 1,366,559 — 1,377,959

Total fixed maturity securities available-for-sale 11,378 1,478,005 — 1,489,383

Equity securities

3 unchanged sentences

Non-redeemable preferred stock 281 — — 281

Non-redeemable preferred stock fund 5,150 — — 5,150

Total equity securities 22,102 — — 22,102

Other long-term investments (1)

Total financial assets $ 33,480 1,478,005 — 1,523,408

(1) In accordance with Subtopic 820-10, certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy.

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.

FINANCIAL INSTRUMENTS VALUATION

1 unchanged sentence

Fixed maturity securities, available-for-sale.

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.

At March 31, 2021, our fixed maturity securities, valued using a third-party pricing source, totaled $ 1.4 billion for Level 2 assets and comprised 96.5 % 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 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.

There were no Level 3 assets at March 31, 2021.

For the three months ended March 31, 2021, 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.

Our equity securities are classified as Level 1 assets as their fair values are based upon quoted market prices.

Other long-term investments.

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 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.

The fund has a 10 -year term but this life could be extended at the fund manager's discretion in one year increments.

We hold an investment in a term asset-backed securities liquidity facility private equity fund, established by the U.S.

Federal Reserve, that provides financing to U.S.

company market participants for levered asset purchases with a

September 30, 2020 | 10-Q 24

Private equity funds.

The Company considers the net asset value ("NAV") to represent the value of the investment fund and is measured by the total value of assets minus the total value of liabilities.

The following tables include information related to our investments in private equity funds that calculate NAV per share.

For these investments,

March 31, 2021 | 10-Q 19

CITIZENS, INC .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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 shortened depending on available investment opportunities.

which are measured at fair value on a recurring basis, we use the NAV per share to measure fair value.

These investments are included in other long-term investments on the consolidated balance sheets.

March 31, 2021 December 31, 2020

Using NAV Per Share Unfunded Commit-

in years Fair Value

Using NAV Per Share Unfunded Commit-

(In thousands, except years)

Private equity funds

Middle market Investments in privately-originated, performing senior secured debt primarily in North America-based companies $ 8,457 31,777 10 $ 10,542 29,783 10

liquidity facility Investments in a facility established by the U.S.

Federal Reserve that provides financing to U.S.

company market participants for levered asset purchases with a focus on asset-backed, commercial mortgage and collateralized loan obligation markets 36 — 1 1,381 — 3

Late-stage growth Investments in private late-stage, established companies seeking capital to accelerate growth prior to an IPO or sale 6,199 14,198 7 — 16,291 7

Infrastructure Investments in climate infrastructure assets, focusing on renewable power generation in wind and solar energy 2,290 17,485 12 — 17,497 12

Total private equity funds $ 16,982 63,460 $ 11,923 63,571

Our private equity fund investments are not redeemable because distributions from the funds will be received when the underlying investments of the funds are liquidated.

The life spans indicated above may be shortened or extended at the fund manager's discretion, typically in one or two-year increments.

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

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 nine months ended September 30, 2020.

There were no transfers in or out of Level 3 during the three months ended March 31, 2021.

FINANCIAL INSTRUMENTS NOT CARRIED AT FAIR VALUE

1 unchanged sentence

The estimated fair values of financial instruments presented below are not necessarily indicative of the amounts the Company might realize in actual market transactions.

March 31, 2021 | 10-Q 20

CITIZENS, INC .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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:

September 30, 2020 December 31, 2019

March 31, 2021 December 31, 2020

(In thousands) Carrying

1 unchanged sentence

Financial Assets:

Mortgage loans $ 158 196 177 210

Policy loans $ 82,674 82,674 83,318 83,318

Short-term investments — — 1,301 1,301

Mortgage loans 153 190 157 195

Cash and cash equivalents 19,493 19,493 34,131 34,131

1 unchanged sentence

Annuity - investment contracts 61,716 68,360 60,861 71,547

Mortgage loans.

Mortgage loans are secured principally by residential properties.

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 September 30, 2020 and December 31, 2019, and no specified maturity dates.

Policy loans had a weighted average annual interest rate of 7.7 % at March 31, 2021 and December 31, 2020, and no specified maturity dates.

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

1 unchanged sentence

Therefore, the fair value of policy loans approximates the carrying value and policy loans are considered Level 3 assets in the fair value hierarchy.

The fair value of short-term investments and cash and cash equivalents approximate carrying value and are characterized as Level 1 assets in the fair value hierarchy.

Mortgage loans.

Mortgage loans are secured principally by residential properties.

Weighted average interest rates for these loans were approximately 6.4 % at March 31, 2021 and December 31, 2020.

At March 31, 2021, maturities ranged from 7 to 19 years.

Management estimated the fair value using an annual interest rate of 6.25 % at March 31, 2021.

Our mortgage loans are considered Level 3 assets in the fair value hierarchy and are included in other long-term investments on the consolidated balance sheets.

Cash and cash equivalents.

The fair value of cash and cash equivalents approximate carrying value and are characterized as Level 1 assets in the fair value hierarchy.

Annuity liabilities.

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

September 30, 2020 | 10-Q 25

CITIZENS, INC .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

The fair value of the Company's liabilities under annuity contract policies, which are considered Level 3 liabilities, was estimated at March 31, 2021 and December 31, 2020 using discounted cash flows based upon spot rates adjusted for various risk adjustments ranging from 0.20 % to 2.86 % and 0.22 % to 2.34 %, respectively.

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

Other long-term investments.

Financial instruments included in other long-term investments are classified in various levels of the fair value hierarchy.

The following table summarizes the carrying amounts of these investments.

Carrying Value

(In thousands )

September 30, 2020 December 31, 2019

March 31, 2021 December 31, 2020

Other long-term investments:

4 unchanged sentences

Total other long-term investments $ 17,347 27,293

We are a member of the Federal Home Loan Bank ("FHLB") of Dallas and such membership requires members to own stock in the FHLB.

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.

September 30, 2020 | 10-Q 26

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

September 30, 2020 | 10-Q 27

March 31, 2021 | 10-Q 21

CITIZENS, INC .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

We are a member of the Federal Home Loan Bank ("FHLB") of Dallas and such membership requires members to own stock in the FHLB.

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

Included in all other investments in 2020 was a Rabbi Trust holding $ 8.8 million for the benefit of our former Chief Executive Officer, Geoffrey Kolander, which represented his severance payment under the terms of his employment agreement in connection with his resignation following a change in control of the Company, that was paid during the first quarter of 2021.

(7) COMMITMENTS AND CONTINGENCIES

6 unchanged sentences

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.

persons, we expect to settle any past liabilities with the Internal Revenue Service ("IRS") related to tax withholding and information reporting failures.

The Company has continued to refine its estimate of the tax, penalty and interest exposure and expenses related to these tax issues, as described below for the current reporting period.

The products have been and continue to be appropriately reported as life insurance under U.S.

GAAP for financial reporting.

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.

Accruals for loss contingencies are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated.

The process of determining our best estimate and the estimated range is a complex undertaking including insight from external consultants and involved management’s judgment based upon a variety of factors known at the time.

The amount of our liabilities and expenses depends on a number of uncertainties, including the number of prior tax years for which we may be liable to the IRS and the methodology applicable to the calculation of the tax liabilities for policies.

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 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.

To satisfy the Internal Revenue Service ("IRS") tax withholding and information reporting requirements 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, and amended returns in August 2020 and paid the associated withholding tax.

The IRS processed these withholding tax returns in 2021 and the Company considers this matter closed.

LITIGATION AND REGULATORY ACTIONS

2 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.

September 30, 2020 | 10-Q 28

CITIZENS, INC .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CONTRACTUAL OBLIGATIONS

As of September 30, 2020, CICA Ltd.

As of March 31, 2021, CICA Ltd.

is committed to fund investments up to $ 68.5 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.

CREDIT FACILITY

On May 5, 2021, the Company entered into a $ 20 million senior secured revolving credit facility with Regions Bank (the “Credit Facility”).

The Credit Facility has a three-year term and allows the Company to borrow up to $ 20 million for working capital purposes, capital expenditures and other lawful corporate purposes.

The Credit Facility is secured by a first priority lien on most of Citizens’ assets, excluding its ownership interests in all of the regulated insurance subsidiaries and contains standard representations, warranties and covenants.

For a more detailed description of the Credit Facility, see the Company’s Current Report on Form 8-K filed on May 5, 2021.

As of May 5, 2021, the Company had not borrowed any funds against the Credit Facility.

March 31, 2021 | 10-Q 22

CITIZENS, INC .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(8) INCOME TAXES

3 unchanged sentences

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

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.

For the three months ended March 31, 2021, the Subpart F income inclusion generated $ 0.4 million of federal income tax expense.

A reconciliation between the U.S.

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

Three Months Ended September 30, 2020 2019

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

Federal income tax expense:

Expected tax expense (benefit) $ ( 1,716 ) 21.0 % $ 448 21.0 %

Foreign income tax rate differential ( 687 ) 8.4 % ( 521 ) ( 24.4 ) %

Tax-exempt interest and dividends-received deduction ( 35 ) 0.4 % ( 57 ) ( 2.7 ) %

Annualized effective tax rate adjustment ( 646 ) 7.9 % ( 1,796 ) ( 84.2 ) %

Adjustment of prior year taxes 98 ( 1.2 ) % 1,923 90.2 %

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 (benefit) $ ( 256 ) 3.1 % $ 86 4.1 %

September 30, 2020 | 10-Q 29

CITIZENS, INC .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Nine Months Ended September 30, 2020 2019

Three Months Ended March 31, 2021 2020

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

6 unchanged sentences

Effect of uncertain tax position 603 ( 21.9 ) % 1,015 ( 45.4 ) %

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

Subpart F income 392 ( 14.3 ) % 675 ( 30.2 ) %

3 unchanged sentences

Income tax expense consists of:

Nine Months Ended September 30, 2020 2019

Three Months Ended March 31, 2021 2020

(In thousands)

3 unchanged sentences

Total federal income tax expense $ 825 1,349

September 30, 2020 | 10-Q 30

March 31, 2021 | 10-Q 23

CITIZENS, INC .

3 unchanged sentences

(In thousands)

September 30, 2020 December 31, 2019

March 31, 2021 December 31, 2020

Deferred tax assets:

1 unchanged sentence

Net operating and capital loss carryforwards 1,774 1,395

Accrued expenses — 85

Accrued policyholder dividends and expenses 134 124

Investments 198 147

2 unchanged sentences

Lease liability 2,446 2,514

Accrued compensation 376 513

Other 166 164

8 unchanged sentences

Net deferred tax liability $ ( 9,717 ) ( 9,564 )

The Company leases home office space in Austin, Texas for Citizens and in Bermuda for CICA Ltd.

as well as several district office locations related to our Home Service Insurance segment across Louisiana, Mississippi and Arkansas, which are classified as operating leases.

Certain operating leases include renewal options that extend the lease terms.

The exercise of lease renewal options is at our sole discretion when it is reasonably certain that we will exercise such option .

Leases with an initial term of 12 months or less are immaterial to the consolidated financial statements and are recognized as lease expense on a straight-line basis over the lease term and not recorded on the consolidated balance sheet.

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

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 September 30, 2020

Weighted-average remaining lease term (in years)

Operating leases 9.8

September 30, 2020 | 10-Q 31

March 31, 2021 | 10-Q 24

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 $ 0.2 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

Maturity of Lease Liabilities

After 2024 8,271

Total lease payments 13,918

Interest expense ( 1,653 )

Present value of lease liabilities $ 12,265

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

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.

(9) OTHER COMPREHENSIVE INCOME

The changes in the components of other comprehensive income (loss) are reported net of the effects of income taxes of 21% as of the three months ended March 31, 2021 and 2020, as indicated below.

(In thousands) Amount Tax Effect Total

Three months ended March 31, 2021

Unrealized gains (losses):

Unrealized holding gains (losses) arising during the period $ ( 79,422 ) 5,373 ( 74,049 )

Reclassification adjustment for (gains) losses included in net income ( 35 ) 7 ( 28 )

Effects on deferred policy acquisition costs 25,198 ( 6,317 ) 18,881

Effects on cost of insurance acquired 269 ( 56 ) 213

Effects on unearned revenue reserves ( 1,943 ) 408 ( 1,535 )

Other comprehensive income (loss) $ ( 55,933 ) ( 585 ) ( 56,518 )

Three months ended March 31, 2020

Unrealized gains (losses):

Unrealized holding gains (losses) arising during the period $ ( 42,906 ) 2,750 ( 40,156 )

Reclassification adjustment for (gains) losses included in net income 132 ( 28 ) 104

Effects on deferred policy acquisition costs 211 ( 44 ) 167

Effects on cost of insurance acquired 115 ( 24 ) 91

Effects on unearned revenue reserves ( 349 ) 73 ( 276 )

Other comprehensive income (loss) $ ( 42,797 ) 2,727 ( 40,070 )

(10) RELATED PARTY TRANSACTIONS

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 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.

There were no changes related to these relationships during the three months ended March 31, 2021.

See our Form 10-K 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.

CHANGE IN CONTROL

As previously disclosed, on February 5, 2021, Citizens, Inc.

(the “Company”) entered into a Purchase and Sale Agreement (the “Purchase Agreement”) with the Harold E.

Riley Foundation (the “Foundation”) to purchase 100% of the Company’s Class B common stock (the “Class B Shares”) from the Foundation at an aggregate purchase price of $ 9.1 million (the “Class B Transaction”).

In accordance with the Purchase Agreement, the purchase price was paid to the Foundation on March 5, 2021 and is reported within other assets rather than treasury stock on the consolidated balance sheets as all regulatory approvals had not been received as of March 31, 2021.

March 31, 2021 | 10-Q 25

CITIZENS, INC .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Because the Class B Shares have the right to elect a simple majority of the Board, the Foundation was able to exercise control over the Company as the holder of 100% of the Class B Shares.

Thus, in order to consummate the Class B Transaction, the Company and the Foundation were required to obtain regulatory approvals by the insurance regulators in Colorado, Louisiana, Mississippi, Texas and Bermuda, the jurisdictions in which the Company and its insurance subsidiaries are domiciled.

On April 12, 2021, the Company and the Foundation received the last of the regulatory approvals required for the Foundation to divest control of the Company and thus all of the Foundation’s Class B Shares were transferred to the Company as of such date.

In accordance with Colorado law, the Class B Shares are now classified as authorized, but unissued shares.

On March 9, 2021, the Board passed a resolution stating that as long as the Class B Shares are being held as unissued shares, the Company will not vote, nor permit any other person or entity to exercise any voting rights or other rights, with respect to the Class B Shares.

Accordingly, there is no party that now controls the Company.

March 31, 2021 | 10-Q 26

CITIZENS, INC.

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