What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-05-05 compared with 2020-11-04 · 326 added, 467 removed, 282 unchanged (74% of the section changed)

5 unchanged sentences

Forward-looking statements are not guarantees of future performance and the Company’s actual results may differ significantly from the results discussed in the forward-looking statements.

Factors that might cause such differences include, but are not limited to, those discussed in Part II, Item 1A .

of this Form 10-Q as well as in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019 under the heading “Risk Factors,” which are incorporated herein by reference.

Additionally, the effects of the COVID-19 pandemic could cause our actual results to differ significantly for reasons such as:

• Securities market disruption or volatility and related effects such as decreased economic activity that affect our investment portfolio;

Factors that might cause such differences include, but are not limited to, those discussed in Part II, Item 1A of this Form 10-Q as well as in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020 under the heading “Risk Factors,” which are incorporated herein by reference.

The Company assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law.

The impacts of COVID-19 and related economic conditions on the Company's financial results, which began to affect the Company late in the first quarter of 2020, continue to be highly uncertain and outside the Company’s control.

The scope, duration and magnitude of the direct and indirect effects of COVID-19 are difficult or impossible to anticipate.

As a result, it is not possible to predict its impact on the Company's results for the remainder of 2021.

Currently, some of the most significant factors that could cause our actual results to differ significantly from our forward-looking statements are those relating to the adverse effects of the COVID-19 pandemic, including:

• Decreased premium revenue and cash flow from disruption to our distribution channel of independent agents, customer self-isolation, travel limitations, business restrictions and decreased economic activity;

• An unusually high level of claims, lapses or surrenders in our insurance operations, which could affect our liquidity and cash flow.

• Inability of our workforce to perform necessary business functions.

The following discussion should be read in conjunction with the consolidated financial statements and accompanying notes included in Part I, Item 1 of this Form 10-Q.

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("Citizens" or the "Company") is an insurance holding company incorporated in Colorado serving the life insurance needs of individuals in the United States since 1969 and internationally since 1975.

Through our insurance subsidiaries, we pursue a strategy of offering traditional insurance products in niche markets where we believe we are able to achieve competitive advantages.

We had approximately $1.8 billion of assets at September 30, 2020 and approximately $4.6 billion of direct insurance in force.

Our core insurance operations include:

Through our insurance subsidiaries, we provide insurance benefits to residents in 31 U.S.

states and more than 75 different countries.

We pursue a strategy of offering traditional insurance products in niche markets where we believe we are able to achieve competitive advantages.

We operate in two business segments:

• Life Insurance segment - U.S.

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residents, located principally in Latin America and the Pacific Rim, through independent marketing consultants;

• Home Service Insurance segment - final expense life insurance and limited liability property insurance policies sold to middle and lower income households in Louisiana, Mississippi and

September 30, 2020 | 10-Q 33

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

Arkansas, through independent agents in our home service distribution channel and through funeral homes.

STRATEGIC INITIATIVES

The Company remains committed to cultivating enduring value for its key stakeholders through the execution of a customer-centric growth strategy.

As we have previously stated, we entered 2020 with clearly defined priorities in order to set a course for long-term profitable growth.

• We are focused on continuing to build operational excellence, as our high impact and values-based culture takes root.

• We are focused on growth initiatives within the markets in which we operate, as we set targets for growing premium revenues and implementing growth strategies.

• We are focused on building new capabilities that will create business opportunities aligned with our essential purpose.

We are focused on growth primarily through expanding and/or refining our products to tailor them to our markets, creating sales promotions and campaigns to incentivize the agents in our distribution channels, developing training and guidelines that promote safe, yet effective sales practices, and implementing process and technology improvements to remove friction in the sales cycles.

During the third quarter of 2020, we continued to execute on our strategic initiatives and focus on growth initiatives that build on our expertise, all while navigating through significant internal and external disruptions, uncertainties and challenges including a change in control, the resignation of our chief executive officer and appointment of an interim chief executive officer, litigation involving our Board of Directors and controlling shareholder arising from the change in control, and a global pandemic.

These topics are discussed in more detail under Part II, Item 1 – Legal Proceedings and Part II, Item 1A – Risk Factors of this Form 10-Q.

Despite these challenges, we made progress on many of our strategic initiatives during the third quarter of 2020, including the following:

Planned for Expansion of Life Insurance Segment into Hispanic US Market in 2021.

Because we have developed the ability to complete insurance transactions end-to-end in Spanish and Portuguese and understand the needs of the Hispanic market due to over 50 years of doing business in Latin America, we plan to expand our Life Insurance segment to the Hispanic market in the U.S and expect to begin selling in this market during 2021.

Reorganized our Home Service Insurance Distribution System.

In our Home Service Insurance segment, as part of the continued strategic review of our operations, effective August 2020, we began to operate our distribution system through independent agents, rather than employee agents, which involved converting employee agents to independent agents.

For an additional discussion of the potential impacts on the business from the conversion, see Part II, Item 1A – Risk Factor s .

Launched New Marketing Campaigns in our Life Insurance and our Home Service Insurance segments.

In our Life Insurance segment, we created an enticing sales campaign that helped lead to 39% higher premiums in the third quarter as compared to the second quarter of 2020.

In the Home Service Insurance segment, we launched a sales campaign that resulted in an increase in the amount of in-force insurance for our current customer base.

See below in "Our Operating Segments" for more detail on these campaigns and their impact on our business during the third quarter.

Implemented Operational Improvements.

We updated our underwriting processes to remove barriers to sales with a more frictionless process for agents and applicants and to reduce underwriting expense.

We also focused on

September 30, 2020 | 10-Q 34

March 31, 2021 | 10-Q 27

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

continued training for virtual sales and collections in both our Life Insurance and our Home Service Insurance segments and expanded our alternative payment methods for our Home Service Insurance segment to accept credit cards and debit card payments.

As we seek to optimize value for the Company, its customers and its collaborators, we believe our efforts will continue to put the Company on a stronger financial footing and drive sustainable growth.

• Home Service Insurance segment - final expense life insurance and limited liability property insurance policies marketed to middle- and lower-income households in Louisiana, Mississippi and Arkansas, sold through independent agents and through funeral homes.

CURRENT FINANCIAL HIGHLIGHTS

In the three months ended September 30, 2020, we had a net loss of $7.9 million compared to net income of $2.0 million in the prior year period.

In the nine months ended September 30, 2020, we had a net loss of $12.5 million compared to a net loss of $6.3 million in the prior year period.

Accordingly, our earnings (losses) per share declined by $0.20 and $0.12 in the three and nine months ended September 30, 2020, respectively, compared to prior year periods.

The $10.0 million decrease in net income in the three months ended September 30, 2020 compared to the prior year period was primarily driven by a $7.9 million increase in our general expenses related to executive severance costs and professional fees in connection with a change in control of the Company.

As we previously announced on July 29, 2020, a change in control of the Company occurred when the Harold E.

Riley Foundation became the beneficial owner of 100% of the Company’s Class B common stock (the “Change in Control”).

Holders of the Company's Class B common stock have the right to nominate a simple majority of our Board of Directors.

The Change in Control, and its trigger of related payments to our former Chief Executive Officer upon his resignation under his employment agreement, materially impacted our general expenses for the three and nine months ended September 30, 2020.

Expenses related to the Change in Control for the third quarter include (i) payment of $8.8 million to a Rabbi Trust for the benefit of our former Chief Executive Officer, Geoffrey Kolander, following his resignation pursuant to the terms of his employment agreement and the Chief Executive Officer Separation of Service and Consulting Agreement dated July 29, 2020 (the “Separation and Consulting Agreement”), (ii) $1.2 million of expense related to the accelerated vesting of Mr.

Kolander’s Restricted Stock Units following his resignation upon a change in control pursuant to his employment agreement, and (iii) legal fees related to Change in Control, including defense costs for the litigation brought by the Foundation against the Company and its Board, as described in Part II, Item 1.

Legal Proceedings of this Quarterly Report on Form 10-Q.

The increase in general expenses due to the Change in Control was partially offset by previous quarter strategic efforts to lower general expenses.

In addition to the higher general expenses, a $1.9 million decrease in premium revenue and a $4.2 million increase in claims and surrenders expense also contributed to the decrease in net income for the third quarter of 2020.

See below in “Revenue Highlights” and in “Benefits and Expenses Highlights” for an explanation of these changes.

The $6.2 million increase in net loss in the nine months ended September 30, 2020 as compared to the same period in 2019 primarily reflects:

• a $5.4 million decrease in premium revenue for the reasons explained in “Revenue Highlights” below;

• a $2.5 million decrease in realized investment gains primarily due to a realized gain of $5.5 million in the first quarter of 2019 related to the sale of our former corporate headquarters in Austin, Texas;

• an $8.4 million increase in claims and surrenders for the reasons discussed in “Benefits and Expenses Highlights” below;

• a $4.4 million increase in general expenses, driven by our former Chief Executive Officer's severance package and the Change in Control, partially offset by previous strategic efforts to lower general expenses.

These decreases to revenues and increases to benefits and expenses in the nine months ended September 30, 2020 as compared to the same period in 2019 were partially offset by:

• a $6.3 million decrease in future policy benefit reserves driven primarily by the release of reserves resulting from the decreases in our in force business;

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MANAGEMENT'S DISCUSSION & ANALYSIS

• a $2.9 million decrease in commissions paid which primarily reflect lower sales of new policies, which have significantly higher commission rates than renewals;

• lower capitalization and amortization of deferred policy acquisition costs, which also reflect lower sales of new policies;

• a $4.6 million lower federal income tax expense.

While it is difficult to quantify the full impact that the COVID-19 pandemic has had on our business in the three and nine months ended September 30, 2020, as we have previously disclosed, our results of operations for the three and nine months ended September 30, 2020 were negatively impacted by the COVID-19 pandemic in the U.S.

and other countries where we do business.

The COVID-19 pandemic primarily negatively impacted our product sales (and thus first year premium revenue), and our claims and surrenders expenses.

We describe below in more detail areas of our results in which we believe our business may have been impacted by the COVID-19 pandemic.

While we have implemented operational changes and sales practices to mitigate the impact of the COVID-19 pandemic on our business, because the COVID-19 pandemic continues to cause quarantines, “stay-at-home” orders and similar mandates for many individuals and businesses requiring them to substantially restrict daily activities and to curtail or cease normal operations globally where we do business, we continue to foresee some adverse impact to near-term sales activity, premiums, claims, policy benefits, invested assets and regulatory capital as a result of the COVID-19 pandemic and we continue to closely monitor developments related to the COVID-19 pandemic to assess its impact on our future results and business.

For an additional discussion of the potential impacts on our business from the COVID-19 pandemic, see Part II, Item 1A – Risk Factors , in this Quarterly Report on Form 10-Q.

Financial highlights for the three and nine months ended September 30, 2020 compared to the same periods in 2019 were:

REVENUE HIGHLIGHTS

• For the three months ended September 30, 2020, insurance premiums declined 4.1% to $44.1 million from $46.0 million for the same period in 2019.

The decline was driven primarily by lower first year premiums in our Life Insurance segment, which, while increasing from the previous quarter, declined 34.1% to $2.2 million from $3.4 million in the third quarter of 2019 as our new policy sales continue to be negatively impacted by the COVID-19 pandemic.

Renewal premiums in our Life Insurance segment also contributed to the overall decrease, declining 3.1% to $30.1 million in the third quarter of 2020 from $31.0 million in the same period in 2019.

The decrease in renewal premiums resulted from a decline in our in force business in this segment over the year, which is due in part to changes we made to our products and distribution over the last few years.

• For the nine months ended September 30, 2020, insurance premiums declined 4.0% to $126.9 million from $132.3 million for the same period in 2019.

The decline was driven by our Life Insurance segment as renewal premiums for the nine months ended September 30, 2020 and first year premiums for the second and third quarters of 2020 fell compared to the comparable periods in 2019.

• Net investment income was $15.0 million for both the three months ended September 30, 2020 and 2019, and slightly increased to $45.1 million from $44.2 million in the nine months ended September 30, 2020 from the same period in 2019.

BENEFITS AND EXPENSES HIGHLIGHTS

• Claims and surrenders expense increased 14.6% and 10.6% for the three and nine months ended September 30, 2020, respectively, compared to the same periods in 2019.

The increases were driven primarily by an increase in surrendered policies in the Life Insurance segment during the third quarter primarily as a result of policies nearing their maturities.

The increases were also due to higher claims in the second and third quarters in our Home Service Insurance segment due primarily to COVID-19 deaths.

Additionally, we incurred unusually large property claims in our

September 30, 2020 | 10-Q 36

In both the three months ended March 31, 2021 and 2020, we had a net loss of $3.6 million;

however, our net loss before federal income tax increased by $0.5 million in the three months ended March 31, 2021 compared to prior year period.

The increase in the pre-tax net loss in the 2021 period was driven by a $4.1 million increase in claims and surrender benefits, which was higher in both our Life Insurance and our Home Service Insurance segments.

The higher claim expense was a result of a higher volume of reported claims, including those COVID-19 related, in addition to an increase in the average death claim amount in both segments.

We also continued to experience an increase in surrender benefits and matured endowments in the Life Insurance segment, which we believe is due primarily to the aging block of business and other economic circumstances.

Our realized investment gains improved by $1.6 million in the three months ended March 31, 2021, to $0.3 million, from a $1.3 million loss in the prior year period.

As discussed in Part I, Item 1, Note 5 .

Investments , changes in realized gains reflect the changes in fair values of our equity securities.

In the three months ended March 31, 2020, we recorded realized losses of $1.1 million, which were primarily the result of the sudden stock market decline resulting from the onset of the COVID-19 pandemic.

Our other general expenses continued to be negatively impacted in the three months ended March 31, 2021 by the expenses related to professional fees incurred in connection with the change in control of the Company.

A detailed description of the change in control of the Company and expenses related thereto are included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020 ("Form 10-K").

The settlement of all legal issues related to the change in control occurred in the first quarter of 2021 and thus, we do not expect any additional expenses related to this matter.

See Part I, Item 1, Business – "Change in Control;

Agreement to Purchase the Class B Shares;

Anticipated Divestiture of Control” in our Form 10-K and Part I, Item 1, Note.

11 Subsequent Events in the notes to our consolidated financial statements herein for a further discussion of the change in control.

Despite the change in control costs, our other general expenses decreased slightly for the three months ended March 31, 2021 compared to the same period in 2020.

The change in control costs were offset by lower salary and benefit expenses resulting from converting our Home Service Insurance sales agents to independent agents and lower audit and consulting fees.

Consolidated Revenue Highlights

Insurance premiums and investment income are our primary sources of revenue.

In the three months ended March 31, 2021 as compared to the same period in 2020:

• Insurance premiums declined by $2.3 million, or 5.5%, to $39.0 million from $41.3 million in the same period in 2020.

The decline was driven by our Life Insurance segment as renewal premiums declined 9.3% to $24.6 million in the first quarter of 2021 from $27.1 million in the same period in 2020.

The decrease in renewal premiums resulted primarily from a decline in our in force business in this segment, which is due in part to changes we made to our products and distribution over the last few years.

• Net investment income was $15.2 million in both periods.

Additionally, realized investment gains increased by $1.6 million primarily for the reason discussed above.

Other income increased 68.8% to $0.9 million from $0.5 million for the same period in 2020.

Other income consists primarily of policyholders selecting supplemental contracts upon maturity of their original policies, which has been increasing over the past few quarters.

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MANAGEMENT'S DISCUSSION & ANALYSIS

Home Service Insurance segment in the third quarter of 2020 due to the impacts of Hurricane Laura, a Category 4 hurricane which caused significant damage in Louisiana.

• Future policy benefit reserves decreased 35.1% and 22.4% for the three and nine months ended September 30, 2020, respectively, compared to the same periods in 2019.

The declines were driven primarily by the release of reserves resulting from the decreases in our in force business.

• General expenses increased 68.2% and 11.7% for the three and nine months ended September 30, 2020, respectively, compared to the same periods in 2019.

The increase for both periods was driven primarily by the Change in Control as described above in "Current Financial Highlights".

Excluding the effects of the executive severance charges incurred in connection with the Change in Control, our general expenses decreased for the three and nine month periods in 2020, reflecting reductions in external audit fees and outside consulting expenses as well as a $2.3 million decrease due to a reduction of our tax compliance liability under Sections 7702 and 72(s) of the Internal Revenue Code for our Life Insurance segment, as discussed in Note 8.

Commitments and Contingencies of the notes to our consolidated financial statements.

Consolidated Benefits and Expenses Highlights

The primary use of our funds is payment of insurance benefits.

As discussed above, our claims and surrender benefits increased by $4.1 million in the three months ended March 31, 2021 as compared to the same period in prior year;

however, total insurance benefits paid or provided was essentially flat year-over-year, as the increase in claims and surrender benefits was offset by a decrease in future policy benefit reserves.

Future policy benefit reserves decreased due to the lower in force block of business.

The other primary use of funds are the costs of selling our insurance products (e.g., commissions, underwriting, marketing expenses) and general expenses.

Costs incurred related to selling our insurance products remained flat in the three months ended March 31, 2021 as compared to the same period in prior year and as discussed above, general expenses slightly decreased for the period.

2021 First Quarter Financial Condition

• Total investments of $1.5 billion;

fixed maturity securities comprised 91.9% of total investments.

• Total assets of $1.8 billion.

• $4.6 billion of direct insurance in force.

OUR OPERATING SEGMENTS

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The amount of insurance, number of policies, and average face amounts of ordinary life policies issued during the periods indicated are shown below.

Nine Months Ended September 30, 2020 2019

Three Months Ended March 31, 2021 2020

Issued Number of

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Home Service Insurance 44,658,259 6,361 7,021 36,117,767 5,174 6,981

The number of policies issued in the nine months ended September 30, 2020 decreased 12.1% in the Life Insurance segment.

We believe that the decrease in new business applications in our Life Insurance segment was driven primarily by disruptions in our sales practices that began in the second quarter of 2020 due to the COVID-19 pandemic.

While the number of new business applications for our Life Insurance segment decreased during the nine months ended September 30, 2020 compared to the same period in 2019, third quarter new business applications increased 23% and 56% from the first and second quarters of 2020, respectively, despite the continuation of strict quarantine protocols in many of the markets in which we operate.

The increase in applications in the third quarter was primarily due to enhancements to our business operations and sales practices to account for the impact of the COVID-19 pandemic, including sales promotions and campaigns, focused training on virtual selling and strategically prioritizing selling lower face amount policies, which typically have less stringent underwriting requirements and, in some cases, may not require the completion of medical tests, as many of our markets remain in lockdown due to COVID-19 pandemic.

Although applications increased in the third quarter from the second quarter, due to these enhancements, average policy face amount declined by 2.7% and the amount of insurance issued declined by 14.5% during the nine months ended September 30, 2020 compared to the same period in 2019 for the Life Insurance segment.

September 30, 2020 | 10-Q 37

Total $ 94,988,799 7,224 $ 85,728,867 5,902

We issued $95.0 million of insurance in the three months ended March 31, 2021 as compared to $85.7 million in 2020, as both our Life Insurance and Home Service Insurance segments experienced growth.

We issued 7,224 new policies in 2021, as compared to 5,902 new policies in 2020.

The number of policies issued in the three months ended March 31, 2021 increased 18.5% in the Life Insurance segment.

The increase in applications in the first quarter was primarily due to enhancements to our business operations and sales practices to account for the impact of the COVID-19 pandemic, including sales promotions and campaigns, focused training on virtual selling and strategically prioritizing selling lower face amount policies, which typically have less stringent underwriting requirements and, in some cases, may not require the completion of medical tests, as many of our top international markets remain in quarantine due to the COVID-19 pandemic.

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MANAGEMENT'S DISCUSSION & ANALYSIS

The number of policies issued in the nine months ended September 30, 2020 increased 17.2% in the Home Service Insurance segment compared to the same period in 2019.

The increase in new business applications in our Home Service segment was driven primarily by the introduction of a new sales campaign targeted at existing policyholders in the third quarter that emphasized higher volume selling at lower average face amounts.

In doing so, we focused on sales of additional benefits for our existing policyholders, which have lower face values, thus leading to a 29.1% decline in average policy face values and a 16.9% decline in amount of insurance issued as compared to the same period in 2020.

Despite the increase in policies issued in the third quarter of 2020 compared to the second quarter, our Home Service Insurance segment has continued to be negatively impacted by the COVID-19 pandemic.

We continued to have temporary office closures in Louisiana during the third quarter due to the COVID-19 pandemic and Hurricane Laura, and we have also had to curtail the sales of certain product offerings that require extensive person-to-person sales interaction due to the COVID-19 pandemic.

We continue to monitor the impact of the COVID-19 pandemic on our business and may have to implement additional operational changes.

addition, in order to address the decreasing first year premiums we have seen in recent years in this segment, we prioritized recruiting new independent contractors in the first quarter of 2021, and we began to see the impact of these efforts in March.

Although applications increased during the first quarter of 2021 compared to the same period last year due to these enhancements, average policy face amount declined by almost $10,000 per policy, as we continued to emphasize the selling of lower face amount policies, as noted above.

The number of policies issued in the three months ended March 31, 2021 increased 22.9% in the Home Service Insurance segment compared to the same period in 2020.

The increase in new business applications in our Home Service Insurance segment was driven by the broadening of a sales campaign introduced during the third quarter of last year targeted at existing policyholders that emphasizes increased coverage as well as lower applications received in the prior year period as the onset of the COVID-19 pandemic and stay-at-home orders negatively impacted our business.

During the first quarter of 2021, as part of the campaign, we increased the target face amount of insurance.

As a result, the overall average face amount of policies issued for the Home Service Insurance segment increased slightly compared to the first quarter of 2020.

CONSOLIDATED RESULTS OF OPERATIONS

A discussion of consolidated results is presented below, followed by a discussion of segment operations and financial results by segment.

Revenues are generated primarily by insurance renewal premiums and investment income on invested assets.

Three Months Ended Nine Months Ended

September 30, September 30,

Our revenues are generated primarily by insurance renewal premiums and investment income on invested assets.

Three Months Ended

(In thousands) 2021 2020

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Net investment income 15,244 15,169

Realized investment gains, net 527 72 669 3,164

Realized investment gains (losses), net 292 (1,306)

Other income 915 542

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Premium Income.

Premium income derived from life, accident and health, and property insurance sales decreased 4.1% and 4.0% for the three and nine months ended September 30, 2020, respectively, compared to the same periods in 2019.

The overall decrease in premium income was driven primarily by a decline throughout the first nine months of 2020 in renewal premiums for the reasons described above in “Revenue Highlights” and a decline in first year premiums during the second and third quarters, in our Life Insurance segment, which is attributable in large part to the COVID-19 pandemic.

See the detail distribution of premiums within Segment Operations discussed below.

September 30, 2020 | 10-Q 38

Premium income derived from life, accident and health, and property insurance sales decreased $2.3 million, or 5.5% for the three months ended March 31, 2021 compared to the same period in 2020.

The overall decrease in premium income was driven primarily by a $2.5 million decline throughout the first three months of 2021 in renewal premiums in our Life Insurance segment.

The decrease in renewal premiums in the Life Insurance segment continues to result from a decline in our in force business in this segment over the past few years, which is due in part to changes we made to our products and distribution and surrenders outpacing new sales.

Premium revenues continue to be negatively impacted by high levels of surrenders, which we believe are due not only to an aging block of business (i.e., maturities and surrenders of products where the surrender charges are close to expiring or have expired) and our decision to cease issuing new policies in Brazil in 2017 (where we see many policies lapsing), but also due to economic circumstances in Latin America.

See the detailed distribution of premiums within Segment Operations discussed below.

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CITIZENS, INC.

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Net Investment Income.

Net investment income performance is summarized as follows.

September 30, December 31, September 30,

Our annualized net investment income performance is summarized as follows.

March 31, December 31, March 31,

(In thousands, except for %) 2021 2020 2020

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Annualized yield on average invested assets 4.21 % 4.24 % 4.31 %

The annualized yield decreased during the first nine months of 2020 compared to the same period in 2019, due in part to a decline in overall market yields for fixed maturity securities this year.

As a substantial proportion of our fixed maturity investments continue to be called or mature, we have faced challenges in finding investments with comparable yields in the continued low interest rate environment.

In addition, concerns about potential negative COVID-19-related impacts on our liquidity, while not ultimately realized, resulted in us holding more cash than usual during the first nine months of 2020, which also negatively impacted yields.

As part of the ongoing process of managing our portfolio and optimizing performance, we are continuing to identify, consider, and invest in new asset classes.

Investment income from fixed maturity securities accounted for approximately 87.4% and 87.8% of total investment income for the three and nine months ended September 30, 2020, respectively.

Three Months Ended Nine Months Ended

September 30, September 30,

Annualized net investment income increased slightly in the three months ended March 31, 2021 as compared to the same annualized performance in the 2020 period as an increase in average invested assets derived from cash flows from our insurance operations and a one-time benefit described below offset a lower portfolio yield.

The annualized yield decreased by ten basis points during the first quarter of 2021 compared to the same period in 2020, as we continue to face a challenging investment environment for fixed maturity assets, which account for the majority of our investment portfolio.

As part of the ongoing process of managing our portfolio and optimizing performance, we are continuing to identify and invest in new asset classes, including private equities.

Investment income from fixed maturity securities accounted for approximately 87.9% of total investment income for the three months ended March 31, 2021.

Three Months Ended

(In thousands) 2021 2020

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Net investment income $ 15,244 15,169

Fixed maturity securities income decreased 0.3% for the third quarter of 2020 and increased 2.7% for the nine months ended September 30, 2020, compared to the same periods in 2019.

Equity securities income increased for the nine month period as we were able to take advantage of market dislocations and identify and execute on attractive equities purchases during the first quarter of 2020.

In addition, the increase in policy loans, which represents policyholders utilizing their accumulated policy cash value to pay for premiums, contributed to the increase in investment income in both the three and nine months ended September 30, 2020.

Income from fixed maturity securities income increased 1.7% for the three months ended March 31, 2021, compared to the same period in 2020 and our total investment income increased by 1.9% in the same period due to the recognition of accelerated interest payments resulting from a “make-whole” call redemption, whereby the borrower was required to pay a lump sum based on the net present value of interest payments foregone due to the call.

Investment expenses were slightly higher due to our increased investments in private equity, which often include start-up fees.

Realized Investment Gains (Losses), Net.

We recorded realized gains of $0.5 million during the third quarter of 2020 related to fair value changes in our equity securities owned at September 30, 2020.

An impairment loss of $3.1 million was recorded for the first nine months of 2019 in connection with classifying the Citizens Academy training facility near Austin, Texas as real estate held-for-sale.

In addition, we recorded a realized gain of $5.5 million in the first quarter of 2019 relating to the sale of our former corporate headquarters.

September 30, 2020 | 10-Q 39

We recorded realized gains of $0.3 million during the first quarter of 2021 related to fair value changes in our equity securities owned at March 31, 2021.

The fair value of our equity securities owned at March 31, 2020 was negatively impacted by the onset of the COVID-19 pandemic as discussed above.

March 31, 2021 | 10-Q 31

CITIZENS, INC.

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BENEFITS AND EXPENSES

Three Months Ended Nine Months Ended

September 30, September 30,

Three Months Ended

(In thousands) 2021 2020

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Claims and Surrenders.

A detail of claims and surrender benefits is provided below.

Three Months Ended Nine Months Ended

September 30, September 30,

Death claim and surrender benefits are our primary use of cash.

As reflected in the table below, claims and surrender benefits increased 16.6%, from $18.6 million in the three months ended March 31, 2020, to $21.7 million in the three months ended March 31, 2021.

Three Months Ended

(In thousands) 2021 2020

Claims and Surrenders:

Death claims $ 7,724 5,797 21,359 18,227

Death claim benefits $ 8,940 6,589

Surrender benefits 12,807 12,055

Endowments 2,706 3,012 8,064 9,079

Matured endowments 4,475 4,232 14,376 10,597

Endowment benefits 2,401 2,739

Matured endowment benefits 5,122 3,753

Property claims 321 487

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Total claims and surrenders $ 30,589 26,449

• Death claims increased 33.2% and 17.2% for the three and nine months ended September 30, 2020, respectively, compared to the same periods in 2019.

The increase was concentrated in our Home Service Insurance segment and reflected increased mortality due to COVID-19 in our customer base in this segment.

Mortality experience and COVID-19 impacts will continue to be closely monitored by the Company.

• Surrenders increased 15.6% and 4.7% for the three and nine months ended September 30, 2020, respectively, compared to the same periods in 2019.

Surrenders represented 0.8% of total direct ordinary whole life insurance in force of $4.6 billion as of September 30, 2020.

The increase in surrender benefit expense is primarily related to our international business, and partly reflects policies nearing their maturities.

Surrender activity will continue to be closely monitored by the Company.

September 30, 2020 | 10-Q 40

• Death claim benefits increased 35.7% for the three months ended March 31, 2021, compared to the same period in 2020 - Life Insurance segment claims increased 55.6% and Home Service Insurance segment claims increased 28.6%.

As discussed above in "Current Financial Highlights", the increase was due to increases in reported claims, including COVID-19 related deaths, and the average dollar amount of claims incurred.

• Surrender benefits increased 6.2% for the three months ended March 31, 2021, compared to the same period in 2020.

Surrender benefits represented less than 0.3% of total direct ordinary whole life insurance in force of $4.6 billion as of March 31, 2021.

A significant portion of surrender benefits relates to international policies that have been in force and have little or no associated surrender charges.

March 31, 2021 | 10-Q 32

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

• Matured endowments increased 5.7% and 35.7% for the three and nine months ended September 30, 2020, respectively, compared to the same periods in 2019.

We anticipated this increase based upon the dates when our endowment contracts were sold and the maturity dates in the contracts.

• Matured endowment benefits increased 36.5% for the three months ended March 31, 2021, compared to the same period in 2020.

We anticipated this increase based upon the dates when our endowment contracts were sold and the maturity dates set forth in the contracts.

Increase in Future Policy Benefit Reserves.

The change in future policy benefit reserves decreased 35.1% and 22.4% for the three and nine months ended September 30, 2020, respectively, compared to the same periods in 2019 driven primarily by the release of reserves resulting from the decrease in our in force business.

Commission expense for the three and nine months ended September 30, 2020 decreased 13.1% and 11.4%, respectively, compared to the same periods in 2019, which reflects lower new product sales in the 2020 periods.

Commission expense fluctuates directly with changes in premiums and is more heavily weighted towards first year premiums, which pay higher commission levels than renewal premiums.

The change in future policy benefit reserves decreased 44.8% for the three months ended March 31, 2021, compared to the same period in 2020.

Future policy benefit reserves decreased as our block of in force business decreased.

Commission expenses are a cost of acquiring business, as commissions are the primary compensation paid to our independent consultants and independent agents for selling our products.

First year commission rates are higher than renewal commission rates.

Commissions fluctuate directly in relation to sales and were higher in the three months ended March 31, 2021 due to the increase in first year sales in our Home Service Insurance segment.

Other General Expenses.

Expenses for the three and nine months ended September 30, 2020 increased 68.2% and 11.7%, respectively, compared to the same periods in 2019, driven primarily by expenses related to the Change in Control of the Company as described in "Current Financial Highlights" above.

As mentioned above, general expenses decreased slightly in the three months ended March 31, 2021 compared to the same period in 2020, driven primarily by lower incentive compensation costs, and lower audit and consulting costs.

Capitalization and Amortization of Deferred Policy Acquisition Costs.

Costs capitalized include certain commissions, policy issuance costs, and underwriting and agency expenses that relate to successful sales efforts for insurance contracts.

Capitalized costs decreased during the three and nine months ended September 30, 2020 compared to the same periods in 2019 as we experienced a decrease in first year premium production as previously discussed.

Amortization of deferred policy acquisition costs was lower during the three and the nine months ended September 30, 2020 compared to the same periods in the prior year.

Capitalized costs decreased slightly during the three months ended March 31, 2021 compared to the same period in 2020 as we experienced a decrease in first year premium production in our Life Insurance segment as previously discussed.

Amortization of deferred policy acquisition costs was slightly higher during the three months ended March 31, 2021 compared to the same period in the prior year.

Amortization is impacted by persistency, surrenders, and new sales production and thus it may fluctuate from quarter to quarter.

Federal Income Tax.

Tax expense decreased for the nine months ended September 30, 2020 compared to the same period in 2019 resulting in effective tax rates of (25.8)% and 873.7%, respectively.

For the nine months ended September 30, 2019, the Company's federal income tax expense was impacted by the gain realized on the sale of our former corporate headquarters.

Tax expense decreased for the three months ended March 31, 2021 compared to the same period in 2020 resulting in effective tax rates of (30.0)% and (60.3)%, respectively.

For the three months ended March 31, 2020, the Company's federal income tax expense was impacted by the gain realized on the sale of our former corporate headquarters.

The Company's tax rate was impacted by differences between our effective tax rate and the statutory tax rate resulting from income and expense items that are treated differently for financial reporting and tax purposes.

1 unchanged sentence

as Subpart F Income, which is treated as a permanent tax difference and therefore included in the Company's effective tax rate calculation.

Income Taxes in the notes to our consolidated financial statements.

See Part I, Item 1, Note 8.

Income Taxes in the notes to our consolidated financial statements herein.

SEGMENT OPERATIONS

The Company has two reportable segments:

Life Insurance and Home Service Insurance.

Our business is comprised of two operating business segments, as detailed below.

• Life Insurance

• Home Service Insurance

These segments are reported in accordance with U.S.

The Company's Other Non-Insurance enterprises include non-insurance operations such as IT and corporate-support functions, which are included in the table presented below to properly reconcile the segment information with the consolidated financial statements of the Company.

September 30, 2020 | 10-Q 41

March 31, 2021 | 10-Q 33

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

evaluates profit and loss performance of its segments based on income (loss) before federal income taxes.

The following table shows income (loss) before federal income taxes by segments during the periods indicated.

Three Months Ended Nine Months Ended

September 30, September 30,

Three Months Ended

(In thousands) 2021 2020

Income (loss) before federal income tax expense:

Life Insurance $ (106) 2,086

2 unchanged sentences

Other Non-Insurance enterprises (1,884) (2,176)

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

Total loss before federal income tax expense $ (2,748) (2,235)

LIFE INSURANCE

Our Life Insurance segment issues ordinary whole life insurance in U.S.

Our Life Insurance segment primarily operates through CICA Ltd.

(a Bermuda company), which issues ordinary whole life insurance and endowment policies in U.S.

Dollar-denominated amounts to non-U.S.

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

Additionally, the Company issues endowment contracts, which are principally accumulation contracts that incorporate an element of life insurance protection.

For the majority of our business, we retain the first $0.1 million of risk on any one life and reinsure the remainder of the risk.

We operate this segment internationally through CICA Ltd.

(a Bermuda company) and domestically through our CICA and CNLIC insurance subsidiaries.

INTERNATIONAL SALES

We focus our sales of U.S.

Dollar-denominated ordinary whole life insurance and endowment policies to residents in Latin America and the Pacific Rim.

We have participated in the foreign marketplace since 1975.

We believe positive attributes of our international insurance business typically include:

• larger face amount policies issued when compared to our U.S.

operations, which results in lower underwriting and administrative costs per dollar of coverage;

• premiums paid annually at the beginning of each policy year rather than monthly or quarterly, which reduces our administrative expenses, accelerates cash flow and results in lower policy lapse rates than premium payment options with more frequently scheduled payments;

• persistency experience and mortality rates that are comparable to U.S.

INTERNATIONAL PRODUCTS

We offer several ordinary whole life insurance and endowment products designed to meet the needs of our non-U.S.

policyowners.

These policies have been structured to provide the policyowners with:

Dollar-denominated cash values that accumulate, beginning in the first policy year, to a policyholder during his or her lifetime;

• premium rates that are competitive with most foreign local companies;

• a hedge against policyowners' local currency inflation;

• protection against devaluation of the policyowners' local currency;

• capital investment in a more secure economic environment (i.e., the U.S.);

• lifetime income guarantees for an insured or for surviving beneficiaries.

September 30, 2020 | 10-Q 42

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

Our international products have both living and death benefit features.

Most policies contain guaranteed cash values and are participating (i.e., provide for cash dividends as apportioned by the Board).

Once a policyowner pays the annual premium and the policy is issued, the owner becomes entitled to policy cash dividends as well as annual premium benefits if the annual premium benefit was elected.

The policyowner has several options with regard to the policy dividends and annual premium benefits, which include, among other things, electing to receive cash crediting such amounts towards the payment of premiums on the policy, leaving such amounts on deposit with the Company to accumulate at a defined interest rate or assigning them to a third-party.

Under the "assigned to a third-party" provision, the Company has historically allowed policyowners, after receiving a copy of the Citizens, Inc.

Stock Investment Plan (the "CISIP") prospectus and acknowledging their understanding of the risks of investing in Citizens Class A common stock, the right to assign policy values outside of the policy to the CISIP, which is administered in the United States by Computershare Trust Company, N.A., our plan administrator and an affiliate of Computershare, Inc., our transfer agent.

The CISIP is a direct stock purchase plan available to policyowners, shareholders, our employees and directors, independent consultants, and other potential investors through the Computershare website.

The Company has registered the shares of Class A common stock issuable to participants under the CISIP on a registration statement under the Securities Act of 1933, as amended (the "Securities Act") that is on file with the SEC.

Computershare administers the CISIP in accordance with the terms and conditions of the CISIP, which is available on the Computershare website and as part of the Company’s registration statement on file with the SEC.

The following table sets forth, by country, our direct premiums from the top five premium producing countries in our international life insurance business for the nine months ended September 30, 2020 and 2019 as indicated below.

Three Months Ended Nine Months Ended

September 30, September 30,

(In thousands) 2020 2019 2020 2019

Colombia $ 5,858 6,465 17,727 18,567

Venezuela 5,000 5,740 14,890 16,471

Taiwan 4,157 4,393 13,013 13,504

Ecuador 3,443 3,641 9,781 10,454

Argentina 2,466 2,539 6,722 7,199

Other Non-U.S.

10,346 10,485 27,894 28,660

Total $ 31,270 33,263 90,027 94,855

September 30, 2020 | 10-Q 43

residents in more than 75 countries through independent marketing consultants.

The whole life products are designed to provide a fixed amount of insurance coverage over the life of the insured and can include rider benefits to provide additional coverage and annuity benefits to enhance accumulations.

The endowment contracts are principally accumulation contracts that incorporate an element of life insurance protection.

For the majority of our business, we retain the first $0.1 million on any one life and reinsure the remainder of the risk.

We operate the Life Insurance segment internationally through CICA Ltd.

and domestically through our CICA and CNLIC insurance subsidiaries.

March 31, 2021 | 10-Q 34

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

We reported declines in premiums during the three and nine months ended September 30, 2020 compared to the same periods in 2019 due primarily to decreases in first year premiums in the second and third quarters as previously discussed, and lower renewal premiums throughout the year.

We continue to monitor key indicators in these markets including the COVID-19 pandemic and other economic impacts.

All of our top five countries listed above experienced a decline in premium levels during the three and nine months ended September 30, 2020 compared to the same periods in 2019.

Renewal premiums declined for the reasons described above in "Revenue Highlights".

DOMESTIC SALES

Our domestic in force business results from blocks of business of insurance companies we have acquired over the years.

We discontinued new sales of domestic ordinary whole life and endowment life insurance products within our Life Insurance segment in 2017 while we evaluated our domestic life strategy;

therefore, the majority of the premium recorded is related to renewal business.

As discussed above in "Strategic Initiatives", we intend to begin selling again in the U.S.

The results of operations for the Life Insurance segment for the periods indicated are as follows:

Three Months Ended Nine Months Ended

September 30, September 30,

Three Months Ended

(In thousands) 2021 2020

1 unchanged sentence

Net investment income 11,598 11,480

Realized investment gains, net 133 61 1,259 5,586

Realized investment gains (losses), net (108) 735

Other income 913 524

12 unchanged sentences

Total benefits and expenses 39,572 40,472

Income before federal income tax expense $ 5,508 2,310 9,713 6,828

We derive most of our premium revenue in the Life Insurance segment from renewal premiums.

Premium revenues declined 6.2% and 5.4% for the three and nine months ended September 30, 2020, respectively, compared to the same periods in 2019.

These declines were due in large part to decreases in renewal premiums throughout the year.

We experienced decreases in renewal premium as a result of a decline in our in force business.

Our in force business, in terms of policy counts and amount of in force insurance, has been declining for several years due to changes we made to our products and distribution over the last few years, which resulted in

September 30, 2020 | 10-Q 44

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

the pace of new policies issued lagging the number of policies terminated from death, surrender or lapse.

A decline in first year premiums during the second and third quarters also contributed to the overall decrease.

The declines in first year premiums were primarily related to the impact of the COVID-19 pandemic.

We have taken and will continue to take countermeasures to reduce the impact of the COVID-19 pandemic on our premiums, including holding sales promotions and campaigns, emphasizing virtual selling and tailoring our sales efforts to products whose sales processes are less impacted by the pandemic.

Income (loss) before federal income tax expense $ (106) 2,086

Life Insurance segment premium breakout is detailed below.

Three Months Ended Nine Months Ended

September 30, September 30,

Three Months Ended

(In thousands) 2021 2020

2 unchanged sentences

Total premiums $ 27,063 29,819

We derive most of our premium revenue in the Life Insurance segment from renewal premiums.

Total premium revenues declined 9.2% for the three months ended March 31, 2021 compared to the same period in 2020 and renewal premiums declined by 9.3%.

See “Consolidated Results of Operations” above for a discussion regarding the decline in renewal premiums in this segment.

As previously mentioned, first year policies issued increased in the three months ended March 31, 2021, but lower issued face amounts led to the decline in first year premium revenue.

Endowment sales totaled approximately $2.2 million of first year premiums in the three months ended March 31, 2021, as compared to $2.0 million in the prior year period.

March 31, 2021 | 10-Q 35

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

The following table sets forth, for our top five producing countries, our direct premiums from our international life insurance business for the three months ended March 31, 2021 and 2020.

Three Months Ended

(In thousands) 2021 2020

Colombia $ 5,244 5,888

Taiwan 4,484 4,974

Venezuela 4,368 4,953

Ecuador 2,921 3,111

Argentina 1,828 1,823

Other Non-U.S.

Total $ 26,950 28,950

Sales from Colombia, Taiwan and Venezuela continued to represent the majority of the new and renewal business premiums in our international business in the three months ended March 31, 2021.

Overall, four of our top five countries listed above experienced a decline in premium levels in the current year period due primarily to decreases in renewal premiums.

As we discussed above, our in force business, in terms of policy counts and amount of in force insurance, has been declining for several years due to changes we made to our products and distribution over the last few years, which resulted in the pace of new policies issued lagging the number of policies terminated from death, surrender or lapse.

DOMESTIC SALES

Domestic premiums in our Life Insurance segment were $1.2 million in the three months ended March 31, 2021, down from $1.3 million in the prior year period.

Our domestic in force business results from blocks of business of insurance companies we have acquired over the years.

We discontinued new sales of domestic ordinary whole life and endowment life insurance products within our Life Insurance segment in 2017 while we evaluated our domestic life strategy;

therefore, the majority of the premium recorded is related to renewal business.

We began marketing our products again domestically in early 2021, beginning in Florida.

We believe that our experience in developing and selling products in Latin America will help us expand into the large Hispanic market in the U.S.

March 31, 2021 | 10-Q 36

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

Net Investment Income .

Net investment income increased in the nine months ended September 30, 2020 compared to the same period in 2019 and the twelve months ended December 31, 2020.

September 30, December 31, September 30,

Annualized net investment income in our Life Insurance segment was as follows:

March 31, December 31, March 31,

(In thousands, except for %) 2021 2020 2020

2 unchanged sentences

Annualized yield on average invested assets 4.19 % 4.28 % 4.34 %

The annualized yield in the first nine months of 2020 decreased compared to the same period in 2019 and from December 31, 2019.

Annualized net investment income in our Life Insurance segment increased in the three months ended March 31, 2021 compared to the same period annualized in 2020 and the twelve months ended December 31, 2020, due to continued growth in average invested assets.

The annualized yield in the first three months of 2021 decreased compared to the same period in 2020 and from December 31, 2020 as a substantial portion of our fixed maturity investments were called or matured during the past year and we face challenges in finding investments with comparable yields in the continued low interest rate environment.

See the Investments section below for more detailed information on our investments.

Realized Investment Gains (Losses), Net.

The realized gains for the three and nine months ended September 30, 2020 were primarily due to the appreciation in the value of a preferred stock exchange traded fund purchase we made during the first quarter as we were able to take advantage of the market dislocation to identify an attractive risk-adjusted opportunity.

We recorded a realized gain of $5.5 million during the first quarter of 2019 related to the sale of our former corporate headquarters in Austin, Texas.

September 30, 2020 | 10-Q 45

The realized loss for the three months ended March 31, 2021 and the realized gain for the prior year period were primarily due to changes in the market value of a preferred stock exchange traded fund purchased during the first quarter of 2020.

Claims and Surrenders.

The following table shows the claims and surrender benefits paid within the Life Insurance segment for the three months ended March 31, 2021 compared to the same period in 2020.

March 31, 2021 | 10-Q 37

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

The following table shows the claims and surrenders incurred within the Life Insurance segment for the nine months ended September 30, 2020 compared to the same period in 2019.

Three Months Ended Nine Months Ended

September 30, September 30,

Three Months Ended

(In thousands) 2021 2020

Claims and Surrenders:

Death claims $ 1,595 1,249 4,563 4,599

Death claim benefits $ 2,684 1,725

Surrender benefits 12,251 11,303

Endowment benefits 2,399 2,736

Matured endowments 4,324 4,103 13,893 10,190

Matured endowment benefits 4,980 3,600

Accident and health benefits 21 27

1 unchanged sentence

Total claims and surrenders $ 23,270 20,160

• Death claims expense was unfavorable for the three months ended September 30, 2020 increasing 27.7% from the same period in 2019, while remaining flat for the nine months ended September 30, 2020 compared with the same period in 2019.

Mortality experience is closely monitored by the Company as a key performance indicator and these amounts were within expected levels.

We are closely monitoring claim volumes to evaluate whether there is a delay in reporting or filing for benefits as a result of the COVID-19 pandemic.

• Surrenders increased 17.9% and 6.6% for the three and nine months ended September 30, 2020, respectively, compared to the same periods in 2019, primarily as a result of policies nearing their maturities, as noted above, and fell within anticipated range.

Surrender activity will continue to be closely monitored by the Company.

• Matured endowments increased 5.4% and 36.3% for the three and nine months ended September 30, 2020, respectively, compared to the same periods in 2019, as a large number of our endowment contracts reached maturity in the current period.

We anticipate this trend will continue as endowment products sold reach their stated maturities.

September 30, 2020 | 10-Q 46

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

Increase in Future Policy Benefit Reserves.

The lower increase in policy benefit reserves for the three and nine months ended September 30, 2020 compared to the same periods in 2019 was primarily due to premium decreases and benefit increases as discussed above.

Commission expense decreased substantially during the three and nine months ended September 30, 2020 as we experienced lower first year premiums compared to the same periods in 2019.

Commission expense is driven primarily, but not exclusively, by new business as commission rates paid are higher on first year premium sales.

Other General Expenses.

Expenses are allocated by segment based upon an annual expense study performed by the Company.

Expenses decreased for the three and nine months ended September 30, 2020 due to lower audit, consulting and employee-related expenses compared to the same periods in 2019 and the release of the tax compliance liability under Sections 7702 and 72(s) of the Internal Revenue Code as described above.

The majority of our claims and surrender benefits in our Life Insurance segment are related to payment of surrender benefits and matured endowment benefits.

Policy surrenders increased 8.4% in the three months ended March 31, 2021 as compared to the prior year period and matured endowment benefits increased by 38.3% in the current year.

These expenses have been increasing over the last several years, which is expected, due to the aging of this block of business - a significant portion of surrenders relates to policies that have been in force and have little to no associated surrender charges and endowment products reaching their stated maturities.

These expenses are within expected levels.

The other key component of claims and surrender benefits is death claim benefits, which increased 55.6% in the three months ended March 31, 2021 as compared to the prior year period due to the reasons discussed above in “Current Financial Highlights”.

HOME SERVICE INSURANCE

We operate in the Home Service Insurance market through our subsidiaries SPLIC, MGLIC and SPFIC, and focus on the life insurance needs of the middle- and lower-income markets, primarily in Louisiana, Mississippi and Arkansas.

Premium revenue of 89.4% and 89.7% in the three months ended March 31, 2021 and March 31, 2020, respectively, were from policyholders in Louisiana.

Our policies are sold and serviced through a home service insurance marketing distribution system of independent agents who work on a debit route system and through funeral homes that sell policies, collect premiums and service policyholders.

The following table sets forth our direct premiums by state for the periods indicated.

Three Months Ended Nine Months Ended

September 30, September 30,

(In thousands) 2020 2019 2020 2019

Louisiana $ 10,967 10,688 31,955 31,997

Mississippi 488 508 1,497 1,546

Arkansas 424 398 1,290 1,222

Other States 260 235 744 694

Total $ 12,139 11,829 35,486 35,459

HOME SERVICE INSURANCE PRODUCTS

Our Home Service Insurance products consist primarily of small face amount ordinary whole life and pre-need policies, which are designed to fund final expenses for the insured, primarily consisting of funeral and burial costs.

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

We provide $30,000 maximum coverage on any one dwelling and contents, while content only coverage and dwelling only coverage are both limited to $20,000.

We provide final expense ordinary life insurance and annuity products primarily to middle and lower income individuals and families in Louisiana, Mississippi and Arkansas, a demographic that has been disproportionally impacted by the COVID-19 pandemic.

September 30, 2020 | 10-Q 47

March 31, 2021 | 10-Q 38

CITIZENS, INC.

1 unchanged sentence

The results of operations for the Home Service Insurance segment for the periods indicated are as follows:

Three Months Ended Nine Months Ended

September 30, September 30,

Three Months Ended

(In thousands) 2021 2020

2 unchanged sentences

Realized investment gains (losses), net 223 (1,717)

Other income (loss) 1 (2) 19 —

Other income 2 18

Total revenues 15,539 13,131

11 unchanged sentences

Total benefits and expenses 16,297 15,276

Income (loss) before federal income tax expense $ (1,026) 927 (3,197) 258

Premiums increased slightly in the three months and were flat for the nine months ended September 30, 2020 compared to the same periods in 2019, despite the COVID-19 pandemic.

Third quarter premiums increased compared to the prior period due to increases in renewal premiums, which was attributable to changes we made in our Home Service Insurance operations and collection processes, leading to increased use of alternative payment methods, such as debit and credit cards, which assisted with the agents’ collection levels.

While first year premiums increased in the three months and decreased slightly in the nine months ended September 30, 2020, the introduction of a new sales campaign in the third quarter targeted at existing policyholders boosted first year premium revenue.

September 30, 2020 | 10-Q 48

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

Loss before federal income tax expense $ (758) (2,145)

Premiums increased by 4.1% in the three months ended March 31, 2021 compared to the same period in 2020, with increases in both first year premiums and renewal premiums despite the continuing effects of the COVID-19 pandemic in the states in which this segment operates.

First year premiums increased due to an automatic issue product we offered to existing policyholders, which resulted in a higher number of policies issued as well as lower premiums in the prior year period due to the onset of the COVID-19 pandemic and stay-at-home orders, which negatively impacted our business.

Renewal premiums increased based on continued strong collections by our independent agents.

Net Investment Income.

Net investment income for the nine months ended September 30, 2020 increased slightly compared to the same period in 2019 due to an increase in average invested assets.

Net investment income yield for our Home Service Insurance segment is summarized below.

Nine Months Ended Year Ended Nine Months Ended

September 30, December 31, September 30,

(In thousands, except for %) 2020 2019 2019

Net investment income, annualized $ 13,051 13,058 13,098

Average invested assets, at amortized cost 298,344 293,497 291,712

Annualized yield on average invested assets 4.37 % 4.45 % 4.49 %

Net investment income for the three months ended March 31, 2021 increased slightly compared to the same period in 2020 due to an increase in average invested assets and a one-time benefit from a “make-whole” call redemption offsetting a decline in portfolio yield.

Realized Investment Gains (Losses), Net.

Changes in realized gains/losses were primarily due to overall market fluctuations and the related fair value adjustments on equity securities.

Changes in realized gains/losses, which reflect changes in fair values of our equity securities, were primarily due to the sudden stock market decline at the quarter ended March 31, 2020 due to the onset of the COVID-19 pandemic.

March 31, 2021 | 10-Q 39

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

Claims and Surrenders.

Claims and surrenders expense is summarized as follows:

Three Months Ended Nine Months Ended

September 30, September 30,

Claims and surrender benefits for the Home Service Insurance segment is summarized as follows:

Three Months Ended

(In thousands) 2021 2020

Claims and Surrenders:

Death claims $ 6,129 4,548 16,796 13,628

Death claim benefits $ 6,256 4,864

Surrender benefits 556 752

Endowment benefits 2 3

Matured endowments 151 129 483 407

Matured endowment benefits 142 153

Property claims 321 487

2 unchanged sentences

Total claims and surrenders $ 7,319 6,289

• Death claims expense fluctuates based upon reported claims.

We experienced an increase in reported claims and the average dollar amount of claims in the three and nine months ended September 30, 2020 compared to the same periods in 2019, due primarily to the COVID-19 pandemic as indicated above.

Mortality experience is closely monitored by the Company as a key performance indicator and amounts were within the range of expected levels.

• Property claims increased in the three and nine months ended September 30, 2020 compared to the same periods in 2019 for the reasons described below.

During the third quarter of 2020, SPFIC was impacted by Hurricane Laura, a Category 4 hurricane that caused significant damage in Louisiana.

The Company has a reinsurance agreement that covers catastrophic events such as Hurricane Laura.

The reinsurance agreement specifies a maximum coverage per event of $11.0 million and a retention level of $0.5 million per event.

We have paid the $0.5 million retention in claim amounts for this storm and do not believe we will exceed the maximum coverage;

however, any claims in excess of $11.0 million would have to be paid by SPFIC.

September 30, 2020 | 10-Q 49

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

After the third quarter of 2020, SPFIC was impacted by Hurricanes Delta and Zeta, both of which were Category 2 storms that also hit Louisiana.

Hurricane Delta is expected to be a less significant event and we are still evaluating the impact of Hurricane Zeta.

At this point, we do not expect the impact of either storm to have a material effect on our consolidated financial statements.

Our catastrophic event reinsurance agreement only allows coverage on a maximum of two catastrophic events per calendar year per reinsurance layer.

If Hurricane Delta turns out to be a more significant event than we anticipate and claims exceed our retention amount so that we need to use our reinsurance to cover for losses arising from Hurricane Delta, our current reinsurance will not cover all of an additional catastrophic event in 2020.

Thus, if any additional catastrophic events occur in the fourth quarter of 2020, SPFIC may have to absorb more of the cost of the claims arising from such events or incur additional catastrophe reinsurance premiums for coverage, either of which could adversely affect the Company’s results of operations.

Increase in Future Policy Benefit Reserves.

The change in future policy benefit reserves for the three and nine months ended September 30, 2019 was lower due primarily to the impact of our actuarial valuation system conversion which resulted in a decrease in reserves of $2.3 million in the prior year.

Other General Expenses.

Expenses are allocated by segment based upon an annual expense study performed by the Company.

Expenses decreased for the three and nine months ended September 30, 2020 compared to the same periods in 2019 due primarily to lower audit and employee-related expenses.

Amortization of DAC.

Amortization decreased for the three and nine months ended September 30, 2020 compared to the same period in 2019 due primarily to the impact of the conversion to a new actuarial valuation system in our Home Service Insurance segment in the third quarter of 2019 which increased amortization by $0.9 million in the prior year.

The vast majority of claims and surrender benefits in our Home Service Insurance segment relate to death claim benefits.

Death claim benefits increased 28.6% in the three months ended March 31, 2021 compared to the 2020 period due to the reasons discussed above in “Current Financial Highlights”.

Mortality experience is closely monitored by the Company as a key performance indicator and can fluctuate based on reported claims.

OTHER NON-INSURANCE ENTERPRISES

As described above in “Segment Operations”, Other Non-Insurance Enterprises consists of the Company's non-insurance operations, which primarily include the Company's IT and Corporate-support functions who provide services to the insurance operations.

In the three and nine months ended September 30, 2020, the Other Non-Insurance Enterprises had revenues of $0.3 million and $0.8 million, respectively, which is primarily intercompany and is eliminated in consolidation under GAAP.

Losses reported for the three and nine months ended September 30, 2020 were $12.7 million and $16.5 million, respectively, and were driven primarily by the expenses related to the Change in Control, as described above in “Current Financial Highlights.”

The administration of our investment portfolios is handled by our management and a third-party investment manager pursuant to board-approved investment guidelines, with all trading activity approved by each board of Citizens and its insurance subsidiaries.

The guidelines used require that fixed maturities, both government and corporate, are investment grade and comprise a majority of the investment portfolio.

State insurance statutes prescribe the quality and percentage of the various types of investments that may be made by insurance companies and generally permit investments in qualified state, municipal, federal and foreign government obligations, high quality corporate bonds, preferred and common stock, mortgage loans and real estate within certain specified percentages.

The invested assets are intended to mature in accordance with the average maturity of our insurance products and provide the cash flow for our insurance company subsidiaries to meet their respective policyholder obligations.

September 30, 2020 | 10-Q 50

Three Months Ended

(In thousands)

Income (loss) before income tax expense $ (1,884) (2,176)

This operating unit represents the administrative support entities to the insurance operations whose revenues are primarily intercompany and have been eliminated in consolidation under U.S.

GAAP, which typically results in a segment loss.

Revenue in this operating unit consists primarily of net investment income and realized investment gains or losses, while expenses consist of other general expenses.

In the three months ended March 31, 2021, the Other Non-Insurance Enterprises had a loss of $1.9 million compared to a loss of $2.2 million for the three months ended 2020 as realized investment gains improved.

Our investments are an integral part of our business success, as we invest the majority of premiums collected to pay for future benefits and rely on net investment income for our ongoing operations.

Our cash and invested assets at March 31, 2021 were $1.6 billion, of which 90.8% was invested in fixed maturity securities, all of which are classified as available-for-sale.

We closely monitor the duration of our fixed maturity investments, and investment purchases and sales are executed with the objective of having adequate funds available to satisfy our insurance obligations.

March 31, 2021 | 10-Q 40

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

The following table shows the carrying value of each invested asset and the percentage to total cash and invested assets.

Carrying Value September 30, 2020 December 31, 2019

The following table shows the carrying value of our investments by investment category and cash and the percentage of each to total cash and invested assets.

Carrying Value March 31, 2021 December 31, 2020

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

3 unchanged sentences

Government-sponsored enterprises $ 15,538 1.0 % $ 16,117 1.0 %

Corporate 834,790 53.4 % 877,208 52.8 %

States and political subdivisions (1)

393,859 25.2 % 409,665 24.7 %

Corporate 807,925 50.1 % 650,088 42.6 %

Mortgage-backed (2)

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Total fixed maturity securities 1,420,587 90.8 % 1,489,383 89.8 %

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

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

4 unchanged sentences

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

(1) Includes $167.8 million and $188.1 million of securities guaranteed by third parties at September 30, 2020 and December 31, 2019, respectively.

(1) Includes $161.8 million and $164.0 million of securities guaranteed by third parties at March 31, 2021 and December 31, 2020, respectively.

(2) Includes $132.0 million and $139.8 million of U.S.

Government-sponsored enterprises at September 30, 2020 and December 31, 2019, respectively.

Cash and cash equivalents decreased as of September 30, 2020 compared to December 31, 2019 due to timing of cash inflows and investments of cash into marketable securities.

Investments in the notes to our consolidated financial statements for a discussion of the increase in real estate and other long-term investments.

At September 30, 2020, investments in fixed maturity and equity securities were 90.8% of our total invested assets.

All of our fixed maturities were classified as available-for-sale securities at September 30, 2020 and December 31, 2019.

We had no fixed maturity or equity securities that were classified as trading securities at September 30, 2020 or December 31, 2019.

September 30, 2020 | 10-Q 51

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

The following table shows the distribution of the credit ratings of our portfolio of fixed maturity securities by carrying value as of September 30, 2020 and December 31, 2019.

Carrying Value September 30, 2020 December 31, 2019

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

AAA $ 36,249 2.5 % $ 56,977 4.1 %

AA 473,027 32.7 % 513,190 37.2 %

A 424,938 29.4 % 385,345 28.0 %

BBB 489,990 33.9 % 406,515 29.5 %

BB and other 20,375 1.5 % 15,932 1.2 %

Totals $ 1,444,579 100.0 % $ 1,377,959 100.0 %

Credit ratings reported for the periods indicated are assigned by a Nationally Recognized Statistical Rating Organization ("NRSRO") such as Moody’s Investors Service, Standard & Poor’s or Fitch Ratings.

A credit rating assigned by an NRSRO is a quality-based rating, with AAA representing the highest quality and D the lowest, with BBB and above being considered investment grade.

In addition, the Company may use credit ratings of the National Association of Insurance Commissioners ("NAIC") Securities Valuation Office ("SVO") as assigned, if there is no NRSRO rating.

Securities rated by the SVO are grouped in the equivalent NRSRO category as stated by the SVO and securities that are not rated by an NRSRO are included in the "other" category.

Non-investment grade securities are the result of downgrades of issuers or securities acquired during acquisitions of companies, as the Company does not purchase below investment grade securities.

We are closely monitoring credit ratings for potential downgrades due to the COVID-19 pandemic.

The Company has no direct sovereign European debt exposure as of September 30, 2020.

September 30, 2020 | 10-Q 52

Government-sponsored enterprises at March 31, 2021 and December 31, 2020, respectively.

The carrying value of the Company’s fixed maturity securities investment portfolio at March 31, 2021 was $1.4 billion.

The distribution of the credit ratings of our portfolio of fixed maturity securities by carrying value as of March 31, 2021 did not materially change from December 31, 2020 – the weighted average was “A” at both dates.

Cash and cash equivalents decreased as of March 31, 2021 compared to December 31, 2020 due primarily to the purchase of 100% of the Company’s Class B common stock from the Foundation for $9.1 million.

Real estate and other long-term investments decreased to $19.9 million as of March 31, 2021 as compared to $29.9 million as of December 31, 2020 primarily due a $8.8 million payment from a Rabbi Trust (which was considered a long-term investment) to our former Chief Executive Officer, Geoffrey Kolander, representing the severance payments due to him in connection with his resignation following the change in control.

Obligations of States and Political Subdivisions

The Company’s fixed maturity securities investment portfolio at March 31, 2021 and December 31, 2020 included $393.9 million and $409.7 million, respectively, of securities that are obligations of states and political subdivisions, including municipalities (collectively referred to as the municipal bond portfolio).

March 31, 2021 | 10-Q 41

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

As of September 30, 2020, the Company held municipal fixed maturity securities that include third-party guarantees.

Detailed below is a presentation by NRSRO rating of our municipal holdings by funding type as of September 30, 2020.

As of March 31, 2021, the Company's municipal bond portfolio included third-party guarantees.

Detailed below is a presentation by the Nationally Recognized Statistical Rating Organization ("NRSRO") rating of these holdings by funding type as of March 31, 2021.

General Obligation Special Revenue Other Total % Based on Amortized

4 unchanged sentences

Value Amortized

Municipal fixed maturity securities shown including third-party guarantees

State and political subdivision fixed maturity securities including third-party guarantees

AAA $ 21,343 20,768 3,307 3,091 — — 24,650 23,859 6.4 %

4 unchanged sentences

Total $ 108,028 101,707 267,112 252,583 18,719 16,705 393,859 370,995 100.0 %

Municipal fixed maturity securities shown excluding third-party guarantees

State and political subdivision fixed maturity securities excluding third-party guarantees

AAA $ 3,248 3,156 — — — — 3,248 3,156 0.9 %

4 unchanged sentences

Total $ 108,028 101,707 267,112 252,583 18,719 16,705 393,859 370,995 100.0 %

The table below shows the categories in which the Company held investments in special revenue bonds that were greater than 10% of fair value based upon the Company's portfolio of municipal fixed maturity securities at September 30, 2020.

The table below shows the categories in which the Company held investments in special revenue bonds that were greater than 10% of fair value based upon the Company's municipal bond portfolio at March 31, 2021.

(In thousands) Fair

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Cost % of Total

Utilities $ 90,604 81,956 20.9 %

Education $ 70,289 66,134 17.9 %

The Company's municipal holdings are spread across many states, however, municipal fixed maturity securities from Texas comprise the most significant concentration of the total municipal holdings portfolio as of September 30, 2020.

The Company holds 19.2% of its municipal holdings in Texas issuers as of September 30, 2020.

There were no other states or individual issuer holdings that represented or exceeded 10% of the total municipal portfolio as of September 30, 2020.

September 30, 2020 | 10-Q 53

Utilities 65,579 59,591 16.7 %

Transportation 39,432 38,709 10.0 %

The Company's municipal bond portfolio are spread across many states, however, municipal bonds from Texas and California comprise the most significant concentration of the total municipal bond portfolio as of March 31, 2021.

The Company holds 21.1% and 10.0% of its municipal bond portfolio in Texas and California issuers, respectively, as of March 31, 2021.

There were no other states or individual issuer holdings that represented or exceeded 10% of the total municipal bond portfolio as of March 31, 2021.

March 31, 2021 | 10-Q 42

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

The table below represents the Company's detailed exposure to municipal holdings in Texas at September 30, 2020.

September 30, 2020 General Obligation Special Revenue Other Total

The table below represents the Company's detailed exposure to municipal bond portfolio in Texas at March 31, 2021.

March 31, 2021 General Obligation Special Revenue Other Total

(In thousands) Fair

3 unchanged sentences

Value Amortized

Texas municipal fixed maturity securities shown including third-party guarantees

Texas state and political subdivision fixed maturity securities including third-party guarantees

AAA $ 20,757 20,259 3,307 3,091 — — 24,064 23,350

4 unchanged sentences

Total $ 42,511 41,666 40,577 40,086 56 55 83,144 81,807

Texas municipal fixed maturity securities shown excluding third-party guarantees

Texas state and political subdivision fixed maturity securities excluding third-party guarantees

AAA $ 3,248 3,156 — — — — 3,248 3,156

4 unchanged sentences

Total $ 42,511 41,666 40,577 40,086 56 55 83,144 81,807

The table below represents the Company's detailed exposure to municipal bond portfolio in California at March 31, 2021.

March 31, 2021 General Obligation Special Revenue Other Total

(In thousands) Fair

Value Amortized

California state and political subdivision fixed maturity securities including third-party guarantees

AAA $ — — — — — — — —

AA 1,681 1,650 25,068 24,333 2,898 2,728 29,647 28,711

A — — 4,682 4,726 — — 4,682 4,726

BBB — — 4,888 4,669 — — 4,888 4,669

BB and other — — — — — — — —

Total $ 1,681 1,650 34,638 33,728 2,898 2,728 39,217 38,106

California state and political subdivision fixed maturity securities excluding third-party guarantees

AAA $ — — — — — — — —

AA 1,681 1,650 2,664 2,632 — — 4,345 4,282

A — — 10,496 10,294 2,898 2,728 13,394 13,022

BBB — — 8,521 7,970 — — 8,521 7,970

BB and other — — 12,957 12,832 — — 12,957 12,832

Total $ 1,681 1,650 34,638 33,728 2,898 2,728 39,217 38,106

March 31, 2021 | 10-Q 43

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

IMPAIRMENT CONSIDERATIONS RELATED TO INVESTMENTS IN FIXED MATURITY AND EQUITY SECURITIES

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.

Information on both unrealized and realized gains and losses by category is set forth in Note 5.

Investments of the notes to our consolidated financial statements.

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

Information on both unrealized and realized gains and losses by category is set forth in Part I, Item 1, Note 5.

Investments of the notes to our consolidated financial statements herein.

LIQUIDITY AND CAPITAL RESOURCES

Although the Company experienced increased death claim benefits in the first three months of 2021, we do not believe that the Company's liquidity and capital resources were materially impacted by COVID-19 in the period.

For further discussion regarding the potential future impacts of COVID-19 and related economic conditions on the Company's liquidity and capital resources, see Part I, Item 1A, Risk Factors in the Company's Form 10-K .

Liquidity refers to a company's ability to generate sufficient cash flows to meet the needs of its operations.

1 unchanged sentence

We expect to meet our cash needs for the next 12 months with cash generated by our insurance operations and from our invested assets.

At March 31, 2021, we had $19.5 million in cash and cash equivalents and $1.5 billion in invested assets.

PARENT COMPANY LIQUIDITY AND CAPITAL RESOURCES

Citizens is a holding company and has had minimal operations of its own.

Liquidity is the ability to generate amounts of cash adequate to meet our cash needs.

Citizens is a holding company and has minimal operations of its own.

Our assets consist of the capital stock of our subsidiaries, cash and investments.

4 unchanged sentences

states of domicile which subject insurance operations to significant regulatory restrictions.

These laws and

September 30, 2020 | 10-Q 54

These laws and regulations require, among other things, that our insurance subsidiaries maintain minimum solvency requirements, which limit the amount of dividends that can be paid to the holding company.

The regulations also require approval of our service agreements with the applicable regulatory authority in order to prevent insurance subsidiaries from moving large amounts of cash to the unregulated holding company.

Our cash and cash equivalents decreased from $34.1 million at December 31, 2020 to $19.5 million at March 31, 2021.

In the three months ended March 31, 2021, uses of cash included:

• $8.8 million severance payment to our former Chief Executive Officer, Geoffrey Kolander, following his resignation pursuant to the terms of his employment agreement and the Chief Executive Officer Separation of Service and Consulting Agreement dated July 29, 2020 (See Part I, Item 1, Note 6 .

Fair Value Measurements – "Other Long-Term Investments”, herein, and our Form 10-K for additional discussion about the severance payment to Mr.

• $9.1 million payment to the Harold E.

Riley Foundation ("Foundation") for the purchase of 100% of the outstanding Class B common stock.

See Part I, Item 1, Note 11.

Subsequent Events in the notes to our consolidated financial statements herein.

On May 5, 2021, we entered into a Credit Facility with Regions Bank.

See Part I, Item 1, Note 7 .

Commitments and Contingencies in the notes to our consolidated financial statements, herein, for a description of the Credit Facility.

March 31, 2021 | 10-Q 44

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MANAGEMENT'S DISCUSSION & ANALYSIS

regulations require, among other things, that our insurance subsidiaries maintain minimum solvency requirements, which limit the amount of dividends that can be paid to the holding company.

As we discussed in "Current Financial Highlights", Citizens had significant expenses in the third quarter of 2020 related to executive severance costs due to our former Chief Executive Officer under his employment agreement upon his resignation in August 2020 following the Change in Control.

These expenses included payment of $8.8 million to a Rabbi Trust for the benefit of Mr.

Kolander representing the severance payments due to him under his employment agreement in connection with his resignation following a change in control.

During the third quarter of 2020, Citizens sold approximately $5.7 million of fixed maturity securities held in our investment portfolio in order to fund a portion of the $8.8 million severance payment to the Rabbi Trust for the benefit of Mr.

We are closely monitoring the impact that the COVID-19 pandemic may have on our liquidity and capital resources.

To the extent that we experience decreases in sales or collections of renewal premiums, increases in surrenders, decreases in our investment income and/or increases in claim payments as a result of the COVID-19 pandemic, our liquidity would be negatively impacted and we may have to sell some of our investments to meet operational cash flow requirements.

The Credit Facility provides additional liquidity to the Company for short-term and longer-term needs.

As of May 5, 2021, we had not borrowed any money under the Credit Facility and do not expect to do so immediately.

INSURANCE COMPANY SUBSIDIARY LIQUIDITY AND CAPITAL RESOURCES

The liquidity requirements of our insurance operations are primarily met by premium deposits and revenues, investment income and investment maturities.

Primary uses of these funds are investment purchases, payments of policy benefits to policyholders, and operating expenses.

Historically, we have not had to liquidate investments to provide cash flow for our insurance operations, and there were no liquidity issues during the nine months ended September 30, 2020.

Cash flows from operating activities were $34.0 million and $50.9 million for the nine months ended September 30, 2020 and 2019, respectively.

We have traditionally also had significant cash flows from both scheduled and unscheduled investment security maturities, redemptions, and prepayments.

These cash flows, for the most part, are reinvested in fixed income securities.

However, during the third quarter of 2020, the Company paid $6.0 million to the IRS for the tax compliance matter described in Note 8.

Commitments and Contingencies in the notes to our consolidated financial statements.

As noted in Note 8.

Commitments and Contingencies , our payment does not represent closure of the matter or IRS acceptance of the tax liability shown on the submitted withholding tax returns, and the IRS reserves the right to revise our total tax liability for the covered period.

In addition, the Company invested in private equity funds and other alternate investments in 2020 as detailed in Note 5.

Investments of the notes to our consolidated financial statements.

Net cash outflows from investing activities totaled $39.2 million and $48.1 million for the nine months ended September 30, 2020 and 2019, respectively.

The liquidity requirements of our insurance operations are primarily met by premium revenues, investment income and investment maturities.

Primary cash needs relate to payments of policy benefits to policyholders, investment purchases and operating expenses.

Historically, we have not had to liquidate a material amount of investments to provide cash flow for our insurance operations and we did not do so in the three months ended March 31, 2021.

We believe that we have adequate capital resources to support the liquidity requirements of our insurance operations if the cash flow from our insurance operations is insufficient to meet our cash needs.

See Contractual Obligations and Off-balance Sheet Arrangements in our Form 10-K for a discussion of known and estimated cash needs.

In the three months ended March 31, 2021, our operations provided $1.8 million in net cash as compared to $14.1 million provided by operations in the same period in 2020.

As mentioned above, we used $8.8 million in cash in the quarter to pay Mr.

Kolander’s severance.

Cash provided by operations was also lower, as surrenders and lower renewal premiums in our international business are not being replaced by new sales.

We have traditionally also had significant cash flows from investing activities due to both scheduled and unscheduled investment security maturities, redemptions, and prepayments.

These cash flows, for the most part, are reinvested in fixed income securities and to a lesser extent private equity funds and other alternative investments.

Net cash used in investing activities totaled $7.4 million for the three months ended March 31, 2021 as opposed to $26.2 million used in investing activities for the three months ended March 31, 2020.

The investing activities fluctuate from period to period due to timing of securities activities such as calls and maturities and reinvestment of those funds.

The Company's net cash inflows and outflows from financing activities were $1.3 million and $1.1 million for the nine months ended September 30, 2020 and 2019, respectively.

Our investments consist of 91.9% of marketable fixed maturity securities classified as available-for-sale and 1.3% of equity securities that could be readily converted to cash for liquidity needs.

A large portion of our fixed maturity security investment portfolio will mature in the next several years and could be called sooner.

Over the years, we have been subject to significant call activity due to the declining interest rate environment, which required us to reinvest in fixed maturity securities with shorter durations that are now approaching maturity.

We will need to reinvest these maturing funds in the current low interest rate environment.

Our profitability could be negatively impacted depending on the market rates at the time of reinvestment.

This could result in a decrease in our spread between our policy liability crediting rates and our investment earned rates which could also negatively impact our liquidity.

Our investment portfolio (and, specifically, the valuations of investment assets we hold) has also been, and may continue to be, adversely affected as a result of market developments from the COVID-19 pandemic and

September 30, 2020 | 10-Q 55

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MANAGEMENT'S DISCUSSION & ANALYSIS

uncertainty regarding its outcome.

Moreover, changes in interest rates, reduced liquidity or a continued slowdown in the U.S.

or in global economic conditions may also adversely affect the values and cash flows of these assets.

A primary liquidity concern is the risk of an extraordinary level of early policyholder withdrawals.

We include provisions in our insurance policies, such as surrender charges, that help limit and discourage early withdrawals.

Since these contractual withdrawals, as well as the level of surrenders experienced, have been largely consistent with our assumptions in asset liability management, our associated cash outflows historically have not had an adverse impact on our overall liquidity.

Although we experienced an increase in surrenders in the Life Insurance segment during the third quarter of 2020 compared to the same period in 2019, we believe that such surrenders were not materially impacted by the COVID-19 pandemic.

However, policyholders' surrender behavior is unknown and may change in unexpected ways in response to a prolonged COVID-19 pandemic and related economic uncertainty.

To the extent that we continue to experience an increase in surrenders in our Life Insurance segment, whether due to the COVID-19 pandemic or otherwise, our liquidity could be negatively impacted.

We continue to monitor surrenders and early withdrawals.

Individual life insurance policies are less susceptible to withdrawal than annuity reserves and deposit liabilities because policyholders may incur surrender charges and undergo a new underwriting process in order to obtain a new insurance policy.

For reasons previously discussed, we have experienced increased death claims in our Home Service Insurance segment in the third quarter of 2020 compared to the same period in 2019.

Additionally, we are closely monitoring claim volumes to evaluate whether there is a delay in reporting or filing for benefits as a result of the COVID-19 pandemic in our Home Service Insurance segment and Life Insurance segment.

To the extent we continue to experience increased claims and the associated death benefit payouts in our Home Service Insurance segment and, possibly our Life Insurance segment, as a result of the COVID-19 pandemic, our liquidity could be negatively impacted.

Some of our policies include pandemic exclusions, and we carry reinsurance to offset some of these risks.

While our mortality experience is closely monitored by the Company and the activity has historically been within expected levels, we cannot predict whether we will see increased death benefit payouts above expected levels due to the COVID-19 pandemic.

We have had to place a moratorium on policy cancellations or non-renewals for nonpayments of premium and forbearance on premium collections in our Home Service Insurance segment due to state mandates which could negatively affect our liquidity due to lower premium collections and increased death claims due to policies being kept in force that would have otherwise lapsed.

Cash flow projections and cash flow tests under various market interest rate scenarios are performed annually to assist in evaluating liquidity needs and adequacy.

As described above in "Home Service Insurance", in the third quarter of 2020, we experienced substantial increases in property claims due in large part to the impact of Hurricane Laura.

While we do not believe that SPFIC will reach its maximum reinsurance levels for Hurricane Laura under its catastrophe reinsurance policy, any claims in excess of the maximum coverage would have to be paid by SPFIC.

Additionally, higher-than-expected claims from Hurricane Delta or additional catastrophic events that hit in the fourth quarter of 2020 may cause us to pay out-of-pocket on claims arising from such catastrophic events or obtain additional catastrophe reinsurance.

We believe we have the appropriate liquidity to meet such potential cash commitments, although we may need to provide a capital contribution to SPFIC.

Our whole life and endowment products provide the policyholder with alternatives once the policy matures.

The policyholder can choose to take a lump sum payout or leave the money on deposit at interest with the Company.

As of September 30, 2020, 41% of the Company's total insurance in force was in endowment products.

Approximately 13% of the endowments in force will mature in the next five years.

Policyholder election behavior is unknown, but if policyholders elect lump sum distributions, the Company could be exposed to liquidity risk in years of high maturities.

Meeting these distributions could require the Company to sell securities at inopportune times to pay policyholder withdrawals.

Alternatively, if the policyholders were to leave the money on deposit with the Company at interest, our profitability could be impacted if the product guaranteed rate is higher than the market rate we are earning on our investments.

We currently anticipate that available liquidity sources and future cash flows will be adequate to meet our needs for funds, but we will monitor closely our policyholder behavior patterns.

September 30, 2020 | 10-Q 56

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MANAGEMENT'S DISCUSSION & ANALYSIS

Cash used in financing activities was $9.1 million in the three months ended March 31, 2021, due to the purchase of the Class B common stock from the Foundation.

Because claims and surrender benefits are our largest expense, a primary liquidity concern is the risk of an extraordinary level of early policyholder surrenders.

While these expenses increased in the three months ended March 31, 2021 and have been increasing over the last several years, the increases are within expected levels due to the aging of this block of business - a significant portion of surrenders relates to policies that have been in force and have little to no associated surrender charges and endowment products reaching their stated maturities.

For reasons previously discussed, death claim benefits in our Home Service Insurance segment increased in the first quarter of 2021.

We continue to closely monitor claim volumes to evaluate whether there is a delay in reporting or filing for benefits as a result of the COVID-19 pandemic.

As discussed above, we are subject to regulatory capital requirements that could affect the Company’s ability to access capital from our insurance operations or cause the Company to have to put additional cash in our wholly-owned subsidiaries.

4 unchanged sentences

Additionally, we have a parental guarantee between Citizens and CICA, Citizens' wholly-owned subsidiary domiciled in Colorado, to maintain a RBC level above 350%.

At September 30, 2020, our domestic insurance subsidiaries were above the required minimum RBC levels.

At March 31, 2021, our domestic insurance subsidiaries were above the required minimum RBC levels.

is a Bermuda domiciled company.

The Bermuda Monetary Authority ("BMA") requires Bermuda insurers to maintain available statutory economic capital and surplus at a level equal to or in excess of its enhanced capital requirement, which requires a certain Target Capital Level ("TCL").

As of September 30, 2020, CICA Ltd.

The BMA requires Bermuda insurers to maintain available statutory economic capital and surplus at a level equal to or in excess of the BMA's Enhanced Capital Requirement, which

March 31, 2021 | 10-Q 45

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

requires a certain Target Capital Level ("TCL").

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%.

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

Any capital injection that Citizens is required to make under the parental guarantee with CICA or under the Keep Well Agreement with CICA Ltd.

could negatively impact the Company’s capital resources and liquidity.

CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS

As of September 30, 2020, the Company is committed to fund investments up to $95 million related to private equity funds and other investments.

The Company is 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.

There have been no other material changes in contractual obligations from those reported in the Company's Annual Report on Form 10-K for the year ended December 31, 2019.

The Company does not have off-balance sheet arrangements at September 30, 2020.

As of March 31, 2021, the Company is committed to fund investments up to $68.5 million related to private equity funds and other investments.

There have been no other material changes in contractual obligations from those described in Part II, Item 7, Contractual Obligations and Off-Balance Sheet Arrangements in our Form 10-K .

The Company does not have off-balance sheet arrangements at March 31, 2021.

We do not utilize special purpose entities as investment vehicles, nor are there any such entities in which we have an investment that engage in speculative activities of any nature, and we do not use such investments to hedge our investment positions.

CRITICAL ACCOUNTING POLICIES

We believe that the accounting policies set forth Note 1.

Financial Statements of our consolidated financial statements and "Critical Accounting Policies" in the Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2019 continue to describe the significant judgments and estimates used in the preparation of our consolidated financial statements.

We believe that the accounting policies set forth in Part I, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations - "Critical Accounting Policies" and Part IV, Item 15, Note 1.

Summary of Significant Accounting Policies of our consolidated financial statements in our Form 10-K continue to describe the significant judgments and estimates used in the preparation of our consolidated financial statements.

CITIZENS, INC.

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 2. Management’s Discussion and Analysis