~~CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES~~

~~Notes to Consolidated Financial Statements~~



CITIZENS, INC.	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
		(Unaudited)

~~September 30, 2018~~

~~(Unaudited)~~

(1) ~~Financial Statements~~FINANCIAL STATEMENTS

~~Basis of Presentation and Consolidation~~BASIS OF PRESENTATION AND CONSOLIDATION

The consolidated financial statements include the accounts and operations of Citizens, Inc. ("Citizens"), a Colorado corporation, and its wholly-owned subsidiaries, CICA Life Insurance Company of America ("CICA"), Citizens National Life Insurance Company ("CNLIC"), CICA Life Ltd. ("CICA Ltd."), Security Plan Life Insurance Company ("SPLIC"), Security Plan Fire Insurance Company ("SPFIC"), ~~Citizens National Life Insurance Company ("CNLIC"),~~ Magnolia Guaranty Life Insurance Company ("MGLIC"), and Computing Technology,, Inc. ("CTI"),. All significant inter-company accounts and ~~Insurance Investors, Inc. ("III").~~interactions have been eliminated. Citizens and its wholly-owned subsidiaries are collectively referred to as ~~"the Company," "we,"~~the "Company", "we", "us" or ~~"our."~~"our".

The consolidated statements of financial position as of September 30, ~~2018~~,2019, the consolidated statements of comprehensive income and stockholders' equity for the three and ~~nine-months~~nine months ended September 30, ~~2018~~2019 and September 30, ~~2017~~2018 and the consolidated statements of ~~stockholders' equity and~~ cash flows for the nine~~-month periods~~ months ended September 30, ~~2018~~2019 and September 30, ~~2017,~~2018 have been prepared by the Company without audit. In the opinion of management, all normal and recurring adjustments to present fairly the financial position, results of operations, and changes in cash flows at September 30, ~~2018~~2019 and for comparative periods have been made. The consolidated financial statements have been prepared in accordance with United States Generally Accepted Accounting Principles ("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q adopted by the Securities and Exchange Commission ~~(“SEC”~~("SEC"). Accordingly, the consolidated financial statements do not include all the information and footnotes required for complete financial statements and should be read in conjunction with the Company’s consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, ~~2017~~.2018. Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period.

We provide primarily life insurance and a small amount of health insurance policies through our insurance ~~subsidiaries:~~subsidiaries - CICA, CNLIC, CICA Ltd., SPLIC ~~MGLIC~~ and ~~CNLIC. Until the end of 2016,~~MGLIC. CICA and CNLIC issued ordinary whole-life policies, credit life and disability, ~~burial insurance, pre-need policies,~~ and accident and health related policies, throughout the Midwest and southern ~~United States. Beginning~~U.S. until they ceased most domestic sales beginning January 1, ~~2017,~~2017. CICA ~~and CNLIC ceased selling life products domestically. Prior to July 1, 2018, CICA~~Ltd. primarily ~~issued~~issues endowment and ordinary whole-life ~~and endowment~~ policies to non-U.S. residents. From and after July 1, 2018, CICA Ltd. will issue such policies. Effective on July 1, 2018, the Company effected a novation of all of the international policies issued by CICA to CICA Ltd., a newly established Bermuda entity that began operations in July 2018. While this novation transaction has been eliminated in consolidation of affiliated entities, there are tax effects reflected in the consolidated financial statements as a result of the transaction being executed between our subsidiaries that reside in different tax jurisdictions. The tax accounting implications of the novation transaction are further described in Note 9 - Income Taxes in these notes to the consolidated financial statements. SPLIC offers final expense and home service life insurance in Louisiana, Arkansas and ~~Mississippi, and~~Mississippi. SPFIC, a wholly-owned subsidiary of SPLIC, writes a limited amount of property insurance in Louisiana. MGLIC provides industrial life policies through independent funeral homes in Mississippi.

CTI provides data processing systems and services ~~as well as furniture and equipment,~~ to the Company. ~~III is currently not active. We plan to dissolve III and merge it into Citizens.~~

September 30, 2019 Form | 10-Q 10

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~~CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES~~

~~Notes to Consolidated Financial Statements, Continued~~



CITIZENS, INC.	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
		(Unaudited)

~~September 30, 2018~~

~~(Unaudited)~~

~~As of July 1, 2018, we implemented~~We converted to a new actuarial valuation software solution impacting both the ~~life segment that provides~~Home Service Insurance and Life Insurance segments, providing enhanced modeling capabilities for the ordinary whole life policies of SPLIC as of July 1, 2019 and the ordinary whole life and endowment policies of CICA and CICA Ltd.~~, which are included in the life insurance segment. The impact~~ as of ~~this system conversion resulted in changes in estimates due to refinements reflected as a decrease in reserves of $10.2 million and a decrease in DAC of $4.3 million, before tax.~~July 1, 2018. The total impact of ~~this~~these system ~~conversion~~conversions reflected in the accompanying consolidated financial statements as of and for the three and nine months ended September 30, 2019 and 2018 isare summarized in the table below.


Impact on financial balances:	Increase (Decrease)
(In thousands)				September 30, 2019			September 30, 2018
Increase (Decrease)
Consolidated Statements of Financial Position	(In thousands)
Deferred policy acquisition costs	$	(4,339	)	$	(1,396	)	(4,339	)
Future policy benefit reserves:
Life insurance	(10,197		)	(2,299		)	(10,197	)

Consolidated Statements of Comprehensive Income
Consolidated Statement of Comprehensive Income
Decrease in future policy benefit reserves	(10,197		)	(2,299		)	(10,197	)
Amortization of deferred policy acquisition costs	4,339			1,396			4,339
Income (loss) before federal income tax	5,858
Income before federal income tax				903			5,858
Federal income tax expense	1,230			190			1,230
Net income (loss)	$	4,628
Net income				$	713		4,628

We are continuing to convert other information to the new valuation system and will report those items as information becomes available and in accordance with applicable accounting guidance. It is our expectation that we will convert SPLIC's insurance products to the new valuation system during 2019.

~~Use of Estimates~~USE OF ESTIMATES

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

~~The most significant~~Significant estimates include those used in the evaluation of other-than-temporary impairments on debt and equity securities, actuarially determined assets and liabilities and assumptions, tests of goodwill impairment, valuation allowance on deferred tax assets, valuation of uncertain tax positions and contingencies relating to litigation and regulatory matters. Certain of these estimates are particularly sensitive to market conditions, and deterioration and/or volatility in the worldwide debt or equity markets could have a material impact on the consolidated financial statements.

~~Significant Accounting Policies~~RESTATEMENT

~~For a description of significant accounting policies, see~~As disclosed in Note ~~1 of~~14. Quarterly Financial Information (Unaudited) in the notes to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, ~~2017,~~2018, the Company has restated its unaudited consolidated financial information as of and for the three and nine month periods ended September 30, 2018 to correct an immaterial error related to the accounting for the income tax effects of the novation of international insurance policies to our Bermuda-based subsidiary on July 1, 2018.

September 30, 2019 Form | 10-Q 11

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CITIZENS, INC.	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
		(Unaudited)

Federal income tax expense and net income (loss) have been restated herein to properly reflect the reduction in federal income tax expense as compared to originally reported amounts. Basic & diluted earnings (losses) per share of Class A common stock and Class B common stock were also restated. The table below reflects the line items adjusted as a result of the restatement as of September 30, 2018 and for the three and nine months ended September 30, 2018.



(In thousands, except per share amounts)	As Previously Reported			Adjustments		As Restated
For the Three Months Ended September 30, 2018
Consolidated Statement of Comprehensive Income
Federal income expense (benefit)	$	20,316		(7,645	)	12,671
Net income (loss)	(14,754		)	7,645		(7,109	)
Basic and diluted earnings (losses) per share of Class A common stock	(0.30		)	0.16		(0.14	)
Basic and diluted earnings (losses) per share of Class B common stock	(0.14		)	0.07		(0.07	)
Total comprehensive income (loss)	(16,788		)	7,645		(9,143	)



For the Nine Months Ended September 30, 2018
Consolidated Statement of Comprehensive Income
Federal income expense (benefit)	$	21,305		(7,645	)	13,660
Net income (loss)	(17,275		)	7,645		(9,630	)
Basic and diluted earnings (losses) per share of Class A common stock	(0.35		)	0.16		(0.19	)
Basic and diluted earnings (losses) per share of Class B common stock	(0.17		)	0.07		(0.10	)
Total comprehensive income (loss)	(43,084		)	7,645		(35,439	)



As of September 30, 2018
Consolidated Statements of Stockholders' Equity
Balance at June 30, 2018	$	197,430		—	197,430
Net income (loss)	(14,754		)	7,645	(7,109	)
Total comprehensive income (loss)	(16,788		)	7,645	(9,143	)
Accumulated deficit	(75,812		)	7,645	(68,167	)
Balance at September 30, 2018	180,739			7,645	188,384



For the Nine Months Ended September 30, 2018
Consolidated Statements of Cash Flows
Net income (loss)	$	(17,275	)	7,645		(9,630	)
Deferred federal income tax (expense) benefit	67,040			(7,711	)	59,329
Federal income tax payable	(45,744		)	66		(45,678	)
Net cash provided by operating activities	65,235			—		65,235

SIGNIFICANT ACCOUNTING POLICIES

For a description of our significant accounting policies, see Note 1. Summary of Significant Accounting Policies in the notes to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018, which should be read in conjunction with these accompanying consolidated financial statements.

September 30, 2019 Form | 10-Q 12

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~~CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES~~

~~Notes to Consolidated Financial Statements, Continued~~



CITIZENS, INC.	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
		(Unaudited)

~~September 30, 2018~~

~~(Unaudited)~~

(2) ~~Accounting Pronouncements~~ACCOUNTING PRONOUNCEMENTS

~~Accounting Standards Recently Adopted~~ACCOUNTING STANDARDS RECENTLY ADOPTED

OnIn February ~~14, 2018,~~2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") ~~No. 2018-02,~~ ~~Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income~~. It allows a reclassification from accumulated other comprehensive income ("AOCI") to retained earnings of the stranded tax effects that occurred due to the enactment of the Tax Cuts and Jobs Act of 2017 (the "New Tax Act"). The updated guidance is effective for reporting periods beginning after December 15, 2018 and is to be applied retrospectively to each period in which there are items impacted by the New Tax Act remaining in AOCI or at the beginning of the period of adoption. Early adoption is permitted. The Company adopted the updated guidance effective January 1, 2018 and elected to reclassify the income tax effects of the New Tax Act from AOCI to accumulated deficit as of January 1, 2018. This reclassification resulted in an increase in accumulated deficit of $4.7 million as of January 1, 2018 and an increase in AOCI by the same amount.

~~In January 2016, the FASB released ASU 2016-01,~~ ~~Recognition and Measurement of Financial Assets and Financial Liabilities~~. The updated guidance requires equity investments, except those accounted for under the equity method of accounting, that have readily determinable fair values to be measured at fair value with any changes in fair value recognized in net income. Equity securities that do not have readily determinable fair values may be measured at estimated fair value or cost less impairment, if any, adjusted for subsequent observable price changes, with changes in the carrying value recognized in net income. A qualitative assessment for impairment is required for equity investments without readily determinable fair values. The updated guidance also eliminates the requirement to disclose the method and significant assumptions used to estimate the fair value of financial instruments measured at amortized cost on the balance sheet. The updated guidance was effective for the first quarter ended March 31, 2018. The adoption of this guidance resulted in the recognition of $560,000 of net after-tax unrealized gains on equity investments as a cumulative effect adjustment that decreased retained deficit as of January 1, 2018 and decreased AOCI by the same amount. The Company elected to report changes in the fair value of equity investments in realized investment gains (losses), net. At December 31, 2017, equity investments were classified as available-for-sale on the Company's balance sheet. However, upon adoption, the updated guidance eliminated the available-for-sale balance sheet classification for equity investments.

~~Accounting Standards Not Yet Adopted~~

~~The FASB’s new lease accounting standard, ASU~~ 2016-02, Leases (Topic 842)~~, was issued on February 25, 2016.~~. The ASU ~~will require~~requires organizations that lease assets, referred to as ~~“lessees”,~~"lessees," to recognize on the consolidated statement of financial position the rights and obligations created by those ~~leases on the balance sheet.~~leases. The ASU also ~~will require additional~~requires disclosures soto help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative requirements, providing additional information about the amounts recorded in the consolidated financial statements. The accounting by organizations that own the assets leased by the lessee, also known as lessor accounting, will remain largely unchanged from current GAAP. However, the ASU contains some targeted improvements that are intended to align, where necessary, lessor accounting with the lessee accounting model and with the updated revenue recognition guidance issued in 2014. The ASU on leases ~~will take effect~~became effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.

The Company has several lease agreements, such as district office locations related to our Home Service ~~segment, which are currently considered operating leases, and therefore, not recognized on the Company’s balance sheet.~~Insurance segment. The Company ~~intends to adopt~~adopted this standard effective January 1, 2019 and ~~expects the new guidance will require~~recognizes these lease agreements ~~to be recognized~~ on the ~~balance sheet~~consolidated statements of financial position as a right-of-use asset and a corresponding lease liability. See Note 9. Leases for further discussion.

In March 2017, the FASB issued ASU No. 2017-08, Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20). The amendments in this ASU shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The Company ~~is nearing completion~~has a large portfolio of ~~its effort~~callable debt securities purchased at a premium. As such, the Company had already been amortizing the premium to ~~compile a complete inventory~~the earliest call date (yield to worst), thus adoption of ~~arrangements containing a lease and accumulating the lease data necessary to apply the amended guidance. The Company is evaluating the impact~~ this guidance ~~will~~as of January 1, 2019 did not have a material impact on our consolidated financial statements. For public business entities, the amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.

In June 2018, the FASB issued ASU No. 2018-07, Compensation-Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting. This ASU is intended to simplify aspects of share-based compensation issued to non-employees by making the guidance consistent with the accounting for employee share-based compensation. This ASU is effective for annual periods beginning after December 15, 2018 and interim periods within those annual periods, with early adoption permitted. We adopted the provisions of this ASU as of January 1, 2019. This guidance did not have a material impact on our consolidated financial statements.

ACCOUNTING STANDARDS NOT YET ADOPTED

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326), with the main objective to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The ASU requires a financial asset (or a group of

~~Table of Contents~~

~~CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES~~

~~Notes to Consolidated Financial Statements, Continued~~

~~September 30, 2018~~

~~(Unaudited)~~

financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. The income statement reflects the measurement of credit losses for newly recognized financial assets, as well as the ~~expected~~ increases or decreases of expected credit losses that have taken place during the period. Credit losses on available-for-sale debt securities should be measured in a manner similar to current U.S. GAAP; however, the credit losses are recorded through an allowance for credit losses rather than as a write-down. This approach is an improvement to current U.S. GAAP because an entity will be able to record reversals of credit losses (in situations in which the estimate of credit losses declines) in current period net income, which in turn should align the income statement recognition of credit losses with the reporting period in which changes occur. Current U.S. GAAP prohibits reflecting those improvements in current-period earnings. For public business entities, the amendments in this ASU ~~are~~will be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.

September 30, 2019 Form | 10-Q 13

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CITIZENS, INC.	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
		(Unaudited)

The Company ~~is evaluating~~has evaluated the impact this guidance will have on our consolidated financial statements ~~but it is not expected to have a material~~and expects the impact ~~on the Company's consolidated financial statements.~~

~~In March 2017, the FASB issued ASU No. 2017-08,~~ ~~Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20).~~ ~~The amendments in this ASU shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium~~ to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The Company has a large portfolio of callable debt securities purchased at a premium. As such, the Company had already been amortizing the premium to the earliest call date to reduce volatility in earnings by eliminating reporting large realized losses when debt securities are called. For public business entities, the amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.

~~In June 2018, the FASB issued ASU No. 2018-07,~~ ~~Compensation - Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting.~~ This ASU is intended to simplify aspects of share-based compensation issued to non-employees by making the guidance consistent with the accounting for employee share-based compensation. ASU 2018-07 is effective for annual periods beginning after December 15, 2018 and interim periods within those annual periods, with early adoption permitted but no earlier than an entity’s adoption date of Topic 606. We will adopt the provisions of this ASU in the first quarter of 2019. The Company is evaluating the impact this guidance will have on our consolidated financial statements.

~~In September 2018, the FASB issued ASU No. 2018-15,~~ ~~Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.~~ This ASU requires an entity in a cloud computing arrangement (i.e., hosting arrangement) that is a service contract to follow the internal-use software guidance in ASC 350-40 to determine which implementation costs to capitalize as assets or expense as incurred. Capitalized implementation costs should be presented in the same line item on the balance sheet as amounts prepaid for the hosted service, if any (generally as an “other asset”). The capitalized costs will be amortized over the term of the hosting arrangement, with the amortization expense being presented in the same income statement line item as the fees paid for the hosted service. ASU 2018-15 is effective for interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted. We are evaluating the impact of this guidance on our limited cloud computing arrangements and our consolidated financial statements.

~~In July 2018, the FASB issued ASU No. 2018-11,~~ ~~Leases - Targeted Improvements~~ to provide entities with relief from the costs of implementing certain aspects of the new leasing standard, ASU No. 2016-02. Specifically, under the amendments in ASU 2018-11: (1) entities may elect not to recast the comparative periods presented when transitioning to the new leasing standard, and (2) lessors may elect not to separate lease and non-lease components when certain conditions are met. The amendments have the same effective date as ASU 2016-02 (January 1, 2019 for the Company). The Company expects to elect both transition options. ASU 2018-11 is not expected to have a material impact on the Company’s consolidated financial statements.

~~Table of Contents~~

~~CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES~~

~~Notes to Consolidated Financial Statements, Continued~~

~~September 30, 2018~~

~~(Unaudited)~~

immaterial.

In August 2018, the FASB issued ASU No. 2018-12, Financial Services-Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts. This ASU amends four key areas of the accounting and impacts disclosures for long-duration insurance and investment contracts:

Requires updated assumptions for liability measurement. Assumptions used to measure the liability for traditional insurance contracts, which are typically determined at contract inception, will now be reviewed at least annually, and, if there is a change, updated, with the effect recorded in net income;

Standardizes the liability discount rate. The liability discount rate will be a market-observable discount rate (upper-medium grade fixed-income instrument yield), with the effect of rate changes recorded in other comprehensive income;

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

Table of Contents

~~CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES~~

~~Notes to Consolidated Financial Statements, Continued~~



CITIZENS, INC.	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
		(Unaudited)

~~September 30, 2018~~

~~(Unaudited)~~

~~(10)~~ option~~Stock Compensation~~. Leases with an initial term of 12 months or less are immaterial to the consolidated financial statements and are recognized as lease expense on a straight-line basis over the lease term and not recorded on the consolidated balance sheet.

The table below summarizes the number of weighted-average years remaining in our lease liabilities.



Lease Term		September 30, 2019

Weighted-average remaining lease term (years)
Operating leases		1.4

Maturities of our remaining lease liabilities as of September 30, 2019 are as follows.



(In thousands)	Operating Lease Payments ^(a)
Maturity of Lease Liabilities
2019	$	340
2020	968
2021	174
2022	32
2023	—
After 2023	—
Total lease payments	1,514
Interest expense	(50		)
Present value of lease liabilities	$	1,464

^(a)Operating lease payments exclude $13.5 million of legally binding minimum lease payments for leases signed but not yet commenced.

We recorded the lease right-of-use asset in Other Assets and the lease liability in Other Liabilities. Cash payments related to lease liabilities were $0.2 million and $1.3 million for the three and nine months ended September 30, 2019, respectively, and were reported in operating cash flows.

In January ~~2018,~~2019, the ~~Company's Board~~Company entered into a long-term lease agreement with an unrelated party for its new home office in Austin, Texas. The building in which we have leased office space is under construction and is expected to be completed in 2020. The long-term lease will commence after construction of ~~Directors approved awards of restricted stock units~~the building is complete and has a 121-month term, and therefore is not included in the tables above. Payments under the ~~Citizens, Inc. Omnibus Incentive Plan for non-employee directors and the executive management team, with grant date fair values totaling $10,500~~new long-term lease agreement will average approximately $112,340 per director and $976,000 in total to the executive management team. The grant date was February 15, 2018 with a one-year vesting schedule for the directors and a two-year vesting schedule for the executive management team. Vesting of the units is subject to the recipient’s continued employment with the Company through the applicable vesting date. In addition, the Board also approved equity grants for 2018 not to exceed $1.2 million for other employees with a delegation to the CEO to determine the value to be awarded.

Restricted Stock Units
Units
Aggregate Fair Value ⁽¹⁾

Outstanding at January 1, 2018 —
$ —
Granted 148,883
1,070,500
Less:
Vested —
—
Forfeited 22,322
160,495
Outstanding at September 30, 2018 126,561
$ 910,005

⁽¹⁾ ~~Fair value per share of restricted stock units on September 30, 2018 was equal to Grant Date fair value per share.~~month.

~~Restricted stock awards give the participant the right to receive common stock~~The Company does not engage in ~~the future, subject to certain restrictions and a risk of forfeiture. Compensation expense of $310,000 was recognized as of September 30, 2018~~lease agreements among related ~~to these awards.~~parties.

~~(11)~~(10) ~~Related Party Transactions~~RELATED PARTY TRANSACTIONS

The Company has various routine related party transactions in conjunction with our holding company structure, such as a management service agreement related to costs incurred, a tax sharing agreement between entities, and inter-company dividends and capital contributions. A reinsurance assumption and novation transaction was completed effective July 1, 2018 between CICA and CICA Ltd. to transfer the international policies to the Bermuda entity. As part of this transaction, the Company has agreed to infuse capital into CICA as required by the Colorado Department of Insurance to keep CICA's risk-based capital above 350% in any future calendar year-end periods. There were no other changes related to these relationships during the nine months ended September 30, ~~2018~~.2019. See our Annual Report on Form 10-K for the year ended December 31, ~~2017~~2018 for a comprehensive discussion of related party transactions.

In ~~the first nine months of 2018,~~September 2019, CICA ~~made a~~contributed $0.5 million in capital ~~contribution~~ to ~~CNLIC of $450,000 and SPLIC made a capital contribution of $450,000 to MGLIC.~~

CNLIC.

September 30, 2019 Form | 10-Q 31

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~~CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES~~

~~September 30, 2018~~



CITIZENS, INC.	MANAGEMENT'S DISCUSSION & ANALYSIS

Item 22.. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

Certain statements contained in this report are not statements of historical fact and constitute forward-looking statements within the meaning of the federal securities laws, including, without limitation, statements specifically identified as forward-looking statements within this document. Many of these statements contain risk factors as well. In addition, certain statements in future filings by the Company with the Securities and Exchange Commission ("SEC"), in press releases, and in oral and written statements made by us or with the approval of the Company, which are not statements of historical fact, constitute forward-looking statements. Examples of forward-looking statements include, but are not limited to: (i) projections of revenues, income or loss, earnings or loss per share, the payment or non-payment of dividends, capital structure, and other financial items, (ii) statements of our plans and objectives by our management or Board of Directors, including those relating to products or services, (iii) statements of future economic performance and (iv) statements of assumptions underlying such statements. Words such as "believes," "anticipates," "assumes," "estimates," "plans," "projects," "could," "expects," "intends," "targeted," "may," "will" and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements.

Forward-looking statements are subject to known and unknown risks, uncertainties and other factors that may cause actual results to differ materially from those contemplated by the forward-looking statements. Factors that could cause the Company's future results to differ materially from expected results include, but are not limited to:

Changes in the application, interpretation or enforcement of foreign insurance laws that impact our business, which derives the substantial majority of its revenues from residents of foreign countries;

Potential changes in amounts reserved for in connection with the noncompliance of a portion of our insurance policies with Sections 7702 under the Internal Revenue Code, the failure of certain annuity contracts to qualify under Section 72(s) of the Internal Revenue Code and the anticipated timing of finalization of our proposed closing agreementsintended proposals for settlement with the IRS related to ~~address these matters;~~tax withholding and product compliance matters for international policies issued by CICA Ltd.;

The transition of our international business to a new Bermuda-based entity, the ~~adoption~~regulatory oversight of our international business ~~to regulatory oversight~~ by the Bermuda Monetary Authority and potential shifts in policyholder behavior arising from these changes;

Changes in foreign and U.S. general economic, market, and political conditions, including the performance of financial markets and interest rates;

Changes in consumer behavior or regulatory oversight, which may affect our ability to sell our products and retain business;

The timely development of and acceptance of our new products and the perceived overall value of these products and services by existing and potential customers;

Fluctuations in experience regarding current mortality, morbidity, persistency and interest rates relative to expected amounts used in pricing our products;

The performance of our investment portfolio, which may be adversely affected by changes in interest rates, adverse developments and ratings of issuers whose debt securities we may hold, and other adverse macroeconomic events;

Results of litigation we may be involved in;

Changes in assumptions related to deferred acquisition costs and the value of any businesses we may acquire;

Regulatory, accounting or tax changes that may affect the cost of, or the demand for, our products or services;

Our concentration of business from persons residing in Latin America and the Pacific Rim;

Changes in tax laws;

~~Effects~~Our ability to maintain effective information systems;

September 30, 2019 Form | 10-Q 32

Table of ~~acquisitions and restructuring, including possible difficulties in integrating and realizing the projected results of acquisitions;~~Contents



CITIZENS, INC.	MANAGEMENT'S DISCUSSION & ANALYSIS

Changes in statutory, ~~or U.S.~~United States Generally Accepted Accounting Principles ("U.S. GAAP") or Bermuda Monetary Authority ("BMA"), policies or practices;

Changes in leadership among our board and senior management team;

Our success at managing risks involved in the foregoing; and

~~The risk factors discussed in "Part II-Item 1A-Risk Factors" of this report.~~

~~Table of Contents~~

~~CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES~~

~~September 30, 2018~~


•	The risk factors disclosed in Part II, Item 1A. of this Form 10-Q and our Quarterly Reports on Form 10-Q for the quarter ended March 31, 2019 and June 30, 2019, and in Part I. Item 1A. of our Annual Report on Form 10-K for the year ended December 31, 2018.

Such forward-looking statements speak only as of the date on which such statements are made, and ~~we undertake~~the Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made.

The SEC maintains a website that contains reports, proxy and information statements, and other information regarding issuers, including the Company, that file electronically with the SEC. The public can obtain any documents that the Company files with the SEC at http://www.sec.gov. We also make available, free of charge, through our Internet website ~~(www.citizensinc.com)~~(http://www.citizensinc.com), our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Section 16 Reports filed by officers and directors, news releases, and, if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable after we electronically file such reports with, or furnish such reports to, the Securities and Exchange Commission. We are not including any of the information contained on our website as part of, or incorporating it by reference into, this report.

~~Overview~~OVERVIEW

Citizens, Inc. ~~(“Citizens”~~("Citizens" or the "Company") is an insurance holding company incorporated in Colorado serving the life insurance needs of individuals in the ~~United States~~U.S. 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 can achieve competitive advantages. As of September 30, ~~2018,~~2019, we had approximately ~~$1.6~~$1.7 billion of total assets and approximately ~~$4.4~~$4.7 billion of insurance inforce. Our core insurance operations include issuing and servicing:

U.S. ~~Dollar-denominated~~dollar-denominated ordinary whole life insurance and endowment policies predominantly ~~sold~~ to foreign residents, located principally in Latin America and the Pacific Rim through independent marketing consultants;

~~Ordinary~~ordinary whole life insurance policies to middle income households concentrated in the Midwest, Mountain West and southern ~~United States~~U.S. through independent marketing consultants; and

~~Final~~final expense and limited liability property policies to middle and lower income households in Louisiana, Arkansas and Mississippi through employee and independent agents in our home service distribution channel and funeral homes.

We were formed in 1969 and historically, our Company has experienced growth through acquisitions in the domestic market and ~~through~~ organic market expansion in the international market. We strive to generate bottom line returns using knowledge of our niche markets and our well-established distribution channels.

~~Strategic Initiatives~~STRATEGIC INITIATIVES

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

In 2017, the Company's executive management team, in cooperation with its Board of Directors, and new executive management team are continuing their assessment of the Company's domestic and international business models and business strategies with the assistance and support of external consultants and advisors. Ourbegan a strategic realignment of ~~the Company's international business model is ongoing under the leadership of our CEO, Chief Legal Officer~~its Life and ~~Chief Marketing Officer.~~Home Service Insurance segments. Specifically, we ~~are~~ focused on (1) ~~new products~~product enhancements and increasing our ~~profitability in both the domestic and international markets~~product profitability; (2) modernization of our Life Segment as well as our Homes Service Segment; (2) a potential restructuring of our international business and operations which may include withdrawals from certain markets; (3) a strategic modernization and upgrade from our legacy technology systems and IT operations with ~~a focus~~an emphasis on digitization, our future business needs and cyber risk; ~~(4)~~(3) effectively operating our international life insurance business ~~offshore~~ in Bermuda through CICA Ltd.; and ~~(5)~~(4) assessing and optimizing our investment ~~portfolio strategy.~~

As a result of the Company’s strategic review of its international business model, the Company announced in April 2018 that it had decided to discontinue accepting life insurance applications from Brazilian residents or citizens. Although the financial impact of this change is uncertain, the Company does not currently anticipate the impact of withdrawal in this single market to be material since less than 6% of premiums and less than 1% of the Company’s inforce policies stem from applications underwritten on Brazilian residents or citizens as of December 31, 2017. The Company is continuing to assess the financial impacts of this change and has no further update as of September 30, 2018. The Company intends to continue fulfilling commitments under existing policies and to refocus its resources on other more attractive potential markets, products and opportunities.

~~In another step forward to execute~~portfolio. To date, our strategic initiatives, the Company recently completed a novation of all of the international policies issued by CICA to CICA Ltd., effective July 1, 2018. As previously disclosed, Bermuda was chosen for its strong regulatory environment and suitability with the Company's priorities to protect our customers. We expect to operate our international businessrealignment within

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~~September 30, 2018~~



CITIZENS, INC.	MANAGEMENT'S DISCUSSION & ANALYSIS

~~exclusively from this entity going forward. As~~ the ~~Company continues its~~Company's Life Insurance segment is largely complete, and a leadership transition within the Company’s Home Service Insurance segment is underway.

Carrying that momentum forward, in 2019, we identified three areas of strategic ~~review, it may make further changes to its business model in the future.~~focus for cultivating value:


1.	We are focused on building a foundation of operational excellence, as our high impact and values-based culture takes root.


2.	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.


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

As ~~expected,~~we seek to optimize value for the ~~implementation of these international business model changes, while necessary for compliance~~Company, its customers and ~~strategic reasons, is disrupting~~its collaborators, we believe our international markets, resulting in declining initial policy applications and corresponding premiums in certain countries. The pace, extent and ultimate impact of these disruptions are not yet clear. The markets may stabilize over the long term after a period of transition, or the Company’s legacy business model may be undergoing a fundamental shift. We are actively monitoring quantitative changes in sales patterns as well as qualitative feedback from our independent sales consultants and policyholders to identify and analyze longer term business trends, while simultaneously exploring opportunities to mitigate negative impacts andefforts will put the Company on a ~~path to profitable~~stronger financial footing and drive sustainable growth.

As a result of the Company’s strategic review of its technology systems, the Company has implemented technology improvements to support its ongoing operations and initiatives. During the third quarter of 2018, the Company completed the implementation of a new Oracle Enterprise Resource Planning ("ERP") application, which replaced several of the Company's back office legacy systems, such as the general ledger, accounts payable, cash management, and fixed asset systems. The introduction of this new ERP application and the related workflow changes resulted in certain changes to the Company’s financial reporting controls and procedures. These system changes were undertaken to standardize accounting systems, improve management reporting and consolidate accounting functions for the Company and its subsidiaries. In addition, the Company also implemented a new actuarial valuation and modeling system, GGY AXIS, as of July 1, 2018 for CICA and CICA Ltd. actuarial reporting to provide enhanced modeling capabilities. This implementation also resulted in changes to our financial reporting controls and procedures during the current period.CURRENT FINANCIAL HIGHLIGHTS

The following pages describe the operations of our two business segments: Life Insurance and Home Service. Revenues derived from any single customer did not exceed 10% of consolidated revenues in any of the last three years.

~~Current Financial Highlights~~

Financial highlights for the ~~three~~third quarter and nine ~~month periods~~ months ended September 30, ~~2018,~~2019 compared to the same periods in ~~2017~~2018 were:

Insurance premiums declined 3.0% for the third quarter of 2019 compared to the same period in 2018, totaling $46.0 million and $47.4 million, ~~and $137.6 million for the~~ ~~three and nine~~ ~~month periods ended September 30, 2018, respectively, were down from $50.2 million and $143.4 million for the corresponding periods in~~ ~~2017, a decrease of 5.6% and 4.0%, respectively,~~respectively. The decline was driven by ~~declines in first year and~~fewer renewal premiums in our Life Insurance segment.

~~Net investment income decreased 1.7% and~~ However, first year premiums in our Life Insurance segment increased ~~3.9%~~31.0% for the ~~three and nine~~ ~~month periods ended September 30, 2018, respectively,~~third quarter of 2019 compared to the ~~corresponding periods~~same period in ~~2017. The decrease for the three months ended September 30,~~ 2018 ~~is due to a decline in make-whole calls in the three months ended September 30, 2018 than we experienced in 2017 (which resulted in less net income~~and increased 25.7% from the ~~make-whole premiums~~second quarter of 2019 as we invested heavily in ~~2018) while the increase for~~our sales and marketing activities. For the nine months ended September 30, 2019, insurance premiums declined 3.9%, totaling $132.3 million, compared to $137.6 million for the same period in 2018. The decline was driven by fewer renewal premiums in our Life Insurance segment throughout the nine months and lower first year premiums during the first quarter of 2019.

Net investment income increased 10.7% for the third quarter of 2019 compared to the same period of 2018, ~~is due to~~totaling $15.0 million and $13.6 million, respectively. The increase was driven by a growing asset base derived from cash flows from our insurance ~~operations.~~operations, improvements in cash management, and a strategic focus on achieving greater yields while maintaining a prudent risk profile for our investment portfolio. We were able to achieve strong portfolio returns despite facing a difficult investment environment during the quarter. Net investment income was lower during the third quarter of 2018 due in part to the need to maintain sufficient cash balances to fund our Bermuda novation that occurred in July 2018. As these funds were not available for investment, we experienced lower overall portfolio yields and net investment income. The average yield on the consolidated portfolio as of the nine months ended September 30, ~~2018~~2019 was an annualized rate of ~~4.29%~~4.34% compared to ~~4.31%~~4.29% for the same period in ~~2017.~~

2018.

An impairment loss of $3.1 million was recorded during the second quarter of 2019 in our Other Non-Insurance enterprises related to our Citizens Academy training facility located near Austin, Texas. This investment was reclassified from real estate held for investment to held-for-sale. A realized gain of $5.5 million was recorded in the first quarter of 2019 related to the sale of our former corporate headquarters in Austin, Texas. We also recorded realized gains of ~~$156,000 and~~$0.8 million during the first nine months of 2019 related to fair value changes in our equity securities owned at September 30, 2019. Realized losses of ~~$232,000~~$0.8 million were recorded for the ~~three and~~ nine months ~~periods~~ ended September 30, 2018 related to our fixed maturities portfolio and we recorded equity losses of $0.2 million during the same period.

Claims and surrenders expense increased 14.7% for the third quarter of 2019 and 17.9% for the nine months ended September 30, 2019 compared to the same periods in 2018. The increase was driven primarily by an increase in surrender benefits and matured endowments in the Life Insurance segment, which were within expected levels.

General expenses decreased 7.0% for the third quarter of 2019 and increased 12.7% for the nine months ended September 30, 2019 compared to the same periods in 2018. For both the third quarter

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and the nine months ended in September 30, 2019, we had reduced audit fees, partially offset by increased costs relating to higher executive compensation, compared to the same periods in 2018. In addition, due to a change in our 7702/72(s) tax compliance best estimate liability from the estimate at year end 2017, general expenses increased by $1.8 million for the third quarter of 2018 and decreased by $3.6 million for the nine months ended September 30, 2018.

OUR OPERATING SEGMENTS

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

Life Insurance

Home Service Insurance

Our insurance operations are the primary focus of the Company, as those operations generate most of our income. See the discussion under Segment Operations below for detailed analysis. 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,	2019					2018
	Amount of Insurance Issued		Number of Policies Issued	Average Policy Face Amount Issued		Amount of Insurance Issued		Number of Policies Issued	Average Policy Face Amount Issued
Life Insurance	$	166,580,870	2,519	$	66,130	$	169,392,236	2,797	$	60,562
Home Service Insurance	124,529,689		17,288	7,203		134,494,004		19,054	7,059

The number of policies issued decreased 9.9% and 9.3% for the Life Insurance and Home Service Insurance segments, respectively, for the nine months ended September 30, 2019 compared to the same period in 2018. The decline in new business applications in our Life Insurance segment is driven by ceasing sales in Brazil and terminating agreements with several independent consultants in Latin America who did not align with our vision, values and culture. Excluding these two factors, the number of policies issued by our international business increased during the period as we invested heavily in our sales and marketing activities and achieved better alignment with our sales collaborators on vision, value and strategy. While the number of policies issued has declined in the Life Insurance and Home Service Insurance segments during 2019, the average face amount issued has increased, resulting in overall premium income not declining at the same rate as policy issuances.

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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

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



	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(In thousands)	2019		2018		2019	2018

Revenues:
Premiums:
Life insurance	$	44,502	45,898		127,795	133,058
Accident and health insurance	350		323		1,018	915
Property insurance	1,157		1,208		3,464	3,615
Net investment income	15,039		13,587		44,150	41,169
Realized investment gains (losses), net	72		(498	)	3,164	(1,251	)
Other income	347		643		1,148	930
Total revenues	$	61,467	61,161		180,739	178,436

Premium Income. Premium income derived from life, accident and health, and property insurance sales decreased 3.0% for the third quarter of 2019 and 3.9% for nine months ended September 30, 2019 compared to the same periods in 2018. The decrease is driven primarily by a decline in renewal premiums in our Life Insurance segment and slightly offset by an increase in first year premiums in the third quarter of 2019. See the detail distribution of premiums within Segment Operations discussed below.

Net Investment Income. Net investment income performance is summarized as follows.



	September 30,			December 31,		September 30,
(In thousands, except for %)	2019			2018		2018

Net investment income, annualized	$	58,867		54,205		54,892
Average invested assets, at amortized cost	1,357,720			1,300,755		1,280,592
Annualized yield on average invested assets	4.34		%	4.17	%	4.29	%

The annualized yield increased during the first nine months of 2019 compared to the same period in 2018, despite a decline in overall market yields. We have been successful in achieving higher yields while maintaining a prudent risk profile for our portfolio despite facing an increasingly challenging investment environment. In addition, during the fourth quarter of 2018, we repositioned our portfolio into more diversified holdings and maturities as part of our investment management strategy. We increased our purchases of AA rated mortgage backed securities while reducing our municipal holdings. While these securities generally have a higher rating than our municipal holdings, average yields are lower. As part of the ongoing process of managing our portfolio and optimizing performance, we are continuing to identify and consider new asset classes.

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Investment income from debt securities accounted for approximately 87.7% of total investment income for the nine months ended September 30, 2019.



	Three Months Ended					Nine Months Ended
	September 30,					September 30,
(In thousands)	2019			2018		2019		2018

Gross investment income:
Fixed maturity securities	$	13,637		11,792		39,898		36,773
Equity securities	154			143		479		471
Mortgage loans	2			3		8		9
Policy loans	1,619			1,544		4,820		4,600
Long-term investments	—			3		1		3
Other investment income	96			380		279		470
Total investment income	15,508			13,865		45,485		42,326
Investment expenses	(469		)	(278	)	(1,335	)	(1,157	)
Net investment income	$	15,039		13,587		44,150		41,169

Fixed maturity securities income increased 15.6% for the third quarter of 2019 and 8.5% for nine months ended September 30, 2019, compared to the same periods in 2018. We continue to adjust our investment management strategy to increase our investment yields while maintaining a prudent risk profile. 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.

Realized Investment Gains (Losses), Net. An impairment loss of $3.1 million was recorded for the second quarter of 2019 in connection with classifying the Citizens Academy training facility near Austin, Texas as real estate held-for-sale. We also recorded a realized gain of $5.5 million in the first quarter of 2019 relating to the sale of our former corporate headquarters. Finally, we recorded realized gains of $0.8 million due to fair value changes related to equity securities still owned at September 30, 2018. In addition, we recorded realized losses of $551,000 and $776,000 for the three and nine month periods ended September 30, 2018 related to securities in an unrealized loss position which we do not intend to hold until recovery of value and a write-down on a single issuer. The Company recorded a gain of $1.1 million in the first quarter of 2017 on the sale of an office building in Little Rock, Arkansas.2019.

~~Claims and surrenders expense increased 16.9% and 7.6% for the~~ ~~three and nine~~ ~~month periods ended September 30, 2018, respectively, compared to corresponding periods in 2017 due primarily to an increase in matured endowments in the life segment.~~

~~General expenses increased 71.0% and 24.7% for the~~ ~~three and nine~~ month period ended September 30, 2018, respectively, compared to the corresponding periods in 2017, due primarily to increased audit related costs and $1.8 million of additional costs added to the 7702 tax liability in the three months ended September 30, 2018. We reported a decrease of expenses in the nine months ended September 30, 2018 totaling $3.6 million related to our 7702/72(s) tax compliance best estimate

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~~CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES~~

~~September 30, 2018~~



CITIZENS, INC.	MANAGEMENT'S DISCUSSION & ANALYSIS

~~liability from~~BENEFITS AND EXPENSES



	Three Months Ended					Nine Months Ended
	September 30,					September 30,
(In thousands)	2019			2018		2019		2018

Benefits and expenses:
Insurance benefits paid or provided:
Claims and surrenders	$	28,751		25,076		78,808		66,844
Increase in future policy benefit reserves	6,409			1,653		28,180		32,816
Policyholders' dividends	1,560			1,595		4,165		4,516
Total insurance benefits paid or provided	36,720			28,324		111,153		104,176
Commissions	8,879			8,656		25,147		26,284
Other general expenses	11,530			12,402		37,611		33,375
Capitalization of deferred policy acquisition costs	(5,984		)	(5,561	)	(16,224	)	(17,164	)
Amortization of deferred policy acquisition costs	7,835			11,412		21,043		26,218
Amortization of cost of customer relationships acquired	355			366		1,192		1,517
Total benefits and expenses	$	59,335		55,599		179,922		174,406

Claims and Surrenders. A detail of claims and surrender benefits is provided below.



	Three Months Ended			Nine Months Ended
	September 30,			September 30,
(In thousands)	2019		2018	2019	2018

Claims and Surrenders:
Death claims	$	5,797	6,031	18,227	17,742
Surrender benefits	13,959		11,078	37,124	29,612
Endowments	3,012		3,313	9,079	9,819
Matured endowments	4,232		3,251	10,597	5,881
Property claims	625		482	1,115	1,296
Accident and health benefits	92		140	208	254
Other policy benefits	1,034		781	2,458	2,240
Total claims and surrenders	$	28,751	25,076	78,808	66,844

Death claims decreased 3.9% for the ~~estimate at year end 2017 amount as we continue to refine our estimates~~third quarter of 2019 and prepare to submit offers to enter into closing agreements with the IRS related to these matters. We also have additional costs reported in the nine months ended September 30, 2018 from internal and external audit fees and higher permanent salaries related to executive officers hired in 2017. These higher expenses are offset partially by the 7702/72(s) items as noted.

~~Tax expense~~ increased ~~as our effective tax rate was 528.7% and 1.2%~~2.7% for the nine months ended September 30, 2019 compared to the same periods in 2018. Mortality experience is closely monitored by the Company and the activity is within expected levels.

Surrenders increased 26.0% for the third quarter of 2019 and 25.4% for the nine months ended September 30, 2019 compared to the same periods in 2018. Surrenders represented less than 1.0% of total direct ordinary whole life insurance in force of $4.7 billion as of September 30, 2019. The increase in surrender expense is primarily related to our international business and was within expected levels. A significant portion of surrenders relate to policies that have been in force over fifteen years and no longer have associated surrender charges.

Matured endowments increased 30.2% for the third quarter of 2019 and 80.2% for the nine months ended September 30, 2019 compared to the same periods in 2018. We anticipated this increase based

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upon the dates of when our policy endowment contracts were sold and their expected maturities as set forth in the contracts.

Increase in Future Policy Benefit Reserves. The change in future policy benefit reserves increased 287.7% for the third quarter of 2019 and decreased 14.1% for the nine months ended September 30, 2019 compared to the same periods in 2018. The conversion resulted in a decrease in future policy benefit reserves of $11.9 million for the three and nine months ended September 30, 2018 relating to our international business. For the three and nine months ended September 30, 2019, the conversion resulted in a decrease in future policy benefit reserves of $2.4 million in our Home Service Insurance segment when compared to the same periods in 2018. Changes in surrender and maturity activity between periods also impacts this line item.

Commissions. Commission expense for the third quarter and the nine months ended September 30, 2019 fluctuated directly in relation to the decrease in first year and renewal premiums compared to premium levels for the same periods in 2018.

Other General Expenses. Expenses declined 7.0% in the third quarter of 2019 compared to the same period in 2018 due to a decrease in audit fees and our 7702/72(s) tax compliance best estimate liability. We recognized $1.8 million in expense related to our 7702/72(s) liability during the third quarter of 2018. We have continued to refine our estimated liability related to this matter. These declines were partially offset by additional costs relating to higher executive compensation. Expenses for the nine months ended September 30, 2019 increased 12.7% compared to the same period in 2018 as expenses during the 2018 period were reduced by $3.6 million from the reduction in our 7702/72(s) liability estimate. We also had additional costs related to salaries, bonuses and other compensation paid to executive officers, partially offset by lower audit fees, during the nine months ended September 30, 2019 compared to the same period in 2018.

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 increased during the third quarter of 2019 compared to the same period in 2018 as we experienced an increase in first year premium production. For the nine months ended September 30, 2019, capitalized costs decreased compared to the same period last year as first year premium production declined slightly. Commissions paid on renewal premiums are significantly lower than those paid on first year business. The decline in production for the entire period also resulted in lower amortization during the nine months ended September 30, 2019 compared to the same period in 2018. Amortization of deferred policy acquisition costs is also impacted by persistency and may fluctuate from quarter to quarter. In addition, the conversion to a new actuarial valuation system impacted amortization in both periods. The conversion resulted in an increase in amortization of $3.7 million for the three and nine months ended September 30, 2018 and ~~2017, respectively.~~$0.9 million for the three and nine months ended September 30, 2019.

Federal Income Tax. Tax expense decreased for the three and nine months ended September 30, 2019 compared to the same period in 2018. 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 as well as impacts from our uncertain tax position. In addition, CICA Ltd., a wholly owned subsidiary of Citizens, is considered a controlled foreign corporation for federal tax purposes and CICA Ltd.'s activity gives rise to taxable income in the U.S. as ~~Sub Part F Income. As of September 30, 2018, the~~ Subpart F ~~income inclusion generated $18.7 million of federal income~~Income, which is treated as a permanent tax ~~expense, which impacted~~difference and therefore included in the ~~current tax rate. Differences between our~~Company's effective tax rate and the statutory tax rate result from income and expense items that are treated differently for financial reporting and tax purposes, as well as impacts from our tax compliance issues and uncertain tax positions.calculation. See Note ~~9 -~~8. Income Taxes in the notes to our consolidated financial ~~statements for further discussion.~~statements.

~~Our Operating Segments~~

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

~~Life Insurance~~

~~Home Service Insurance~~

Our insurance operations are the primary focus of the Company, as those operations generate the majority of our income. See the discussion under Segment Operations for detailed analysis. 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,
2018 2017
Amount of
Insurance
Issued Number of
Policies
Issued Average Policy
Face Amount
Issued Amount of
Insurance
Issued Number of
Policies
Issued Average Policy
Face Amount
Issued
Life $ 169,392,236
2,797
$ 60,562
$ 219,592,550
3,988
$ 55,063
Home Service 134,494,004
19,054
7,059
141,400,866
20,795
6,800

The number of policies issued has decreased 29.9% and 8.4% for the life and home service segments for the nine months ended September 30, 2018, respectively, compared to the same periods in 2017. We believe that the decline in new business applications in our life segment is driven by several factors but primarily the political instability in Venezuela, uncertainty around the novation to Bermuda, ceasing sales in Brazil, and slower acceptance of the new product set that was repriced and submitted to the market beginning in 2017. While the number of policies issued has declined in the home service segment during 2018, the average face amount issued has increased, which results in overall premium income not declining at the same rate as policy issuances.

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~~CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES~~

~~September 30, 2018~~

~~Note: All discussions below compare or state results for the~~ ~~three and nine~~ ~~month periods ended~~ ~~September 30, 2018~~ ~~compared to the~~ ~~three and nine~~ ~~month periods ended~~ ~~September 30, 2017~~.

~~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~~

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

Three Months Ended Nine Months Ended
September 30, September 30,
2018 2017 2018 2017
(In thousands)
Revenues:
Premiums:
Life insurance $ 45,898
48,644
133,058
138,603
Accident and health insurance 323
360
915
1,033
Property insurance 1,208
1,243
3,615
3,731
Net investment income 13,587
13,828
41,169
39,640
Realized investment gains (losses), net (498 ) (404 ) (1,251 ) 742
Other income 643
660
930
1,015
Total revenues $ 61,161
64,331
178,436
184,764

~~Premium Income. Premium income derived from life, accident and health, and property insurance sales decreased 5.6% and 4.0% for the~~ ~~three and nine~~ ~~month periods ended~~ ~~September 30, 2018~~, respectively. compared to the same periods in 2017. The decrease is driven primarily by a decrease in first year and renewal premiums in our Life Segment. See the detail distribution of premiums within Segment Operations discussion below.

~~Net Investment Income. Net investment income performance is summarized as follows.~~

September 30, December 31, September 30,
2018 2017 2017
(In thousands, except for %)
Net investment income, annualized $ 54,892
53,146
52,853
Average invested assets, at amortized cost 1,280,592
1,233,580
1,225,187
Annualized yield on average invested assets 4.29 % 4.31 % 4.31 %

The annualized yield has decreased during the third quarter of 2018 compared to the same periods in 2017 due to the decrease in investment income as make-whole calls declined compared to prior year. These calls resulted in $427,000 of additional net income in 2017 compared to $141,000 in 2018. A make-whole call provision in the bond instruments allows the borrower to pay off the debt early and this option was elected by borrowers on some of our bond issues as noted.

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~~CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES~~

~~September 30, 2018~~

~~Investment income from debt securities accounted for approximately~~ ~~86.9%~~ ~~of total investment income for the nine months ended~~ ~~September 30, 2018~~.

Three Months Ended Nine Months Ended
September 30, September 30,
2018 2017 2018 2017
(In thousands)
Gross investment income:
Fixed maturity securities $ 11,792
12,466
36,773
35,879
Equity securities 143
154
471
521
Mortgage loans 3
3
9
8
Policy loans 1,544
1,454
4,600
4,242
Long-term investments 3
—
3
66
Other investment income 380
20
470
44
Total investment income 13,865
14,097
42,326
40,760
Investment expenses (278 ) (269 ) (1,157 ) (1,120 )
Net investment income $ 13,587
13,828
41,169
39,640

Fixed maturity securities accounted for the majority of the increase in investment income and the decrease in consolidated investment yield from 4.31% at December 31, 2017 to 4.29% at September 30, 2018. We noted a decrease in income from our fixed maturity securities which was mainly due to the decline in the level of make-whole calls we had experienced in 2017. This decreased investment income by approximately $400,000 and $300,000 for the ~~three and nine~~ months ended September 30, 2018, respectively, compared to the corresponding periods in 2017. During the quarter, we held a higher amount of assets in cash equivalents as part of the novation settlement accounting for approximately $20.0 million which decreased the investment income for the current quarter related to fixed maturity securities. These funds have been reinvested into fixed maturities subsequent to September 30, 2018. In addition, the increase in policy loans, which represents policyholders utilizing their accumulated policy cash value, contributed to the increase in investment income.

~~Realized Investment Gains (Losses), Net. Realized net losses in the~~ ~~three and nine~~ months ended September 30, 2018 were related to realized losses on equity securities adjustments to fair value of $231,000 for the nine months ended September 30, 2018. Losses were recorded totaling $551,000 and $776,000 in the three and nine months ended September 30, 2018 due to recording losses on securities that we do not intend to hold until recovery in value and one bond issuer impairment due to credit concerns. A realized gain was recorded for the nine month period ended September 30, 2017 resulting from a $1.1 million gain on the sale of an office building in Little Rock, Arkansas. One other-than-temporary impairment was recorded on a common stock equity security in 2017 of $17,000.

~~Table of Contents~~

~~CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES~~

~~September 30, 2018~~

~~Benefits and Expenses~~

Three Months Ended Nine Months Ended
September 30, September 30,
2018 2017 2018 2017
(In thousands)
Benefits and expenses:
Insurance benefits paid or provided:
Claims and surrenders $ 25,076
21,454
66,844
62,130
Increase in future policy benefit reserves 1,653
19,597
32,816
51,953
Policyholders' dividends 1,595
1,613
4,516
4,418
Total insurance benefits paid or provided 28,324
42,664
104,176
118,501
Commissions 8,656
10,801
26,284
30,620
Other general expenses 12,402
7,254
33,375
26,765
Capitalization of deferred policy acquisition costs (5,561 ) (7,756 ) (17,164 ) (21,540 )
Amortization of deferred policy acquisition costs 11,412
7,623
26,218
22,640
Amortization of cost of customer relationships acquired 366
635
1,517
1,629
Total benefits and expenses $ 55,599
61,221
174,406
178,615

~~Claims and Surrenders. A detail of claims and surrender benefits is provided below.~~

Three Months Ended Nine Months Ended
September 30, September 30,
2018 2017 2018 2017
(In thousands)
Death claims $ 6,031
6,128
17,742
17,441
Surrender benefits 11,078
9,448
29,612
27,933
Endowments 3,313
3,969
9,819
11,148
Matured endowments 3,251
654
5,881
1,888
Property claims 482
373
1,296
1,373
Accident and health benefits 140
108
254
196
Other policy benefits 781
774
2,240
2,151
Total claims and surrenders $ 25,076
21,454
66,844
62,130

~~Death claims decreased 1.6% and increased 1.7% for the~~ ~~three and nine~~ ~~months ended September 30, 2018, respectively, compared to the same periods in 2017. Mortality experience is closely monitored by the Company and the activity is within expected levels.~~

~~Surrenders increased 17.3% and 6.0% for the~~ ~~three and nine~~ months ended September 30, 2018, respectively, compared to the same periods in 2017 primarily due to activity in the life insurance segment. We noted increased surrender activity in Colombia and Taiwan for the quarter ended September 30, 2018, compared to 2017, and we continue to see high levels of surrenders in policies that have been in force for over fifteen years and no longer have surrender charges associated with them. The Company has historically noted a shock lapse after a policy has been inforce for fifteen years and is at its fifteenth year duration.

~~Table of Contents~~

~~CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES~~

~~September 30, 2018~~

~~Matured endowments increased~~ ~~397.1%~~ ~~and~~ ~~211.5%~~ ~~for the~~ ~~three and nine~~ months ended September 30, 2018, respectively, as a large portion of our endowment contracts reached maturity under those contracts in the current periods. This increase has been anticipated based upon the date of when our policy endowment contracts were sold and their expected endowment maturities as set forth in the contracts.

~~Increase in Future Policy Benefit Reserves. The change in future policy benefit reserves decreased 91.6% and 36.8% for the~~ ~~three and nine~~ months ended September 30, 2018, respectively, compared to the same periods in 2017, primarily due to the conversion to the new actuarial valuation system, AXIS, in the current quarter that resulted in a decrease in reserves of $11.9 million for the three and nine months ended September 30, 2018.

~~Policyholders' Dividends. Policyholders' dividends decreased slightly for the three months ended September 30, 2018 and increased slightly for the nine months ended September 30, 2018, compared to prior periods.~~

~~Commissions~~. Commission expense for the three and nine months ended September 30, 2018 fluctuated directly in relation to the decrease in first year and renewal premiums compared to premium levels for the three and nine months ended September 30, 2017.

~~Other General Expenses~~. Expenses increased for the three and nine months ended September 30, 2018. We had additional costs from internal and external audit fees related to the 2017 audit that were incurred in 2018 and $0.8 million and $2.6 million of higher permanent salaries and bonuses related to executive officers for the three and nine months ended September 30, 2018, respectively, compared to the same periods in 2017. The Company also incurred additional expenses related to the ongoing technology improvements of $0.7 million and $1.3 million for the three and nine months ended September 30, 2018, respectively. We recorded a decrease of $3.6 million related to our 7702/72(s) tax compliance best estimate liability for the nine months ended September 30, 2018, as we continue to refine our calculations and prepare to submit offers to enter into closing agreements with the IRS related to these matters. These higher expenses are offset partially by the 7702/72(s) items as noted.

~~Capitalized and Amortized 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 decrease for the ~~three and nine~~ ~~months ended~~ ~~September 30, 2018, compared to the same period in~~ ~~2017~~ as we experienced a decline in first year premium production in the current period, which decreased capitalized amounts. Commissions paid on renewal premiums are significantly lower than those paid on first year business.

~~The significant increase in amortization resulted from the AXIS actuarial system conversion in the current quarter, which impacted amortization by $3.7 million for the three and nine months ended~~ ~~September 30, 2018, compared to the same period in~~ ~~2017. Amortization of deferred policy acquisition costs is also impacted by persistency and may fluctuate from year to year.~~

~~Federal Income Tax~~. The effective tax rate was 528.7% and 1.2% for the nine months ended September 30, 2018 and 2017, respectively. Subsequent to the novation, the insurance activity of CICA Ltd. is subject to Subpart F of the IRC and is included in Citizens’ taxable income. As of September 30, 2018, the Subpart F income inclusion generated $18.7 million of federal income tax expense and this amount is largely driven by the impact of the novation transaction. Differences between our effective tax rate and the statutory tax rate result from income and expense items that are treated differently for financial reporting and tax purposes, as well as impacts from our tax compliance issues and uncertain tax positions. See Note 9 - Income Taxes in the consolidated financial statements for further discussion.

~~Table of Contents~~

~~CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES~~

~~September 30, 2018~~

~~Segment Operations~~SEGMENT OPERATIONS

The Company has two reportable segments: Life Insurance and Home Service Insurance. These segments are reported in accordance with U.S. GAAP. The Company also operates other non-insurance portions of the Company, which primarily include the Company's 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. The

September 30, 2019 Form | 10-Q 39

Table of Contents



CITIZENS, INC.	MANAGEMENT'S DISCUSSION & ANALYSIS

Company evaluates profit and loss performance of its segments based on ~~net~~ 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				Three Months Ended					Nine Months Ended
	September 30,					September 30,				September 30,					September 30,
	2018			2017		2018		2017
(In thousands)										2019			2018		2019		2018
Segments:	(In thousands)
Life Insurance	$	6,973		3,983		11,594		7,582		$	2,310		6,973		6,828		11,594
Home Service Insurance	(352		)	(365	)	(3,146	)	496		927			(352	)	258		(3,146	)
Total segments	6,621			3,618		8,448		8,078		3,237			6,621		7,086		8,448
Other Non-Insurance enterprises	(1,059		)	(508	)	(4,418	)	(1,929	)	(1,105		)	(1,059	)	(6,269	)	(4,418	)
Income before income tax expense	$	5,562		3,110		4,030		6,149
Income before federal income tax expense										$	2,132		5,562		817		4,030

~~Life Insurance~~

LIFE INSURANCE

Our Life Insurance segment issues ordinary whole life insurance in the U.S. and in U.S. Dollar-denominated amounts to foreign residents. These contracts are designed to provide a fixed amount of insurance coverage over the life of the insured and can utilize rider benefits to provide additional increasing or decreasing coverage and annuity benefits to enhance accumulations. Additionally, endowment contracts are issued by the Company, which are principally accumulation contracts that incorporate an element of life insurance protection. For the majority of our business, we retain the first ~~$100,000~~$0.1 million of risk on any one life, reinsuring the remainder of the risk. Historically, we have operated this segment through our CICA and CNLIC insurance subsidiaries. Since July 1, 2018, we have operated the ~~novated~~ international business in this segment through CICA Ltd.

~~International Sales~~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 include:

larger face amount policies typically issued when compared to our U.S. operations, which results in lower underwriting and administrative costs per unit of coverage;

premiums typically paid annually rather than monthly or quarterly, which reduces our administrative expenses, accelerates cash flow and results in lower policy lapse rates than premiums with more frequently scheduled payments; and

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

September 30, 2019 Form | 10-Q 40

Table of Contents

~~CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES~~

~~September 30, 2018~~



CITIZENS, INC.	MANAGEMENT'S DISCUSSION & ANALYSIS

~~International Products~~INTERNATIONAL PRODUCTS

We offer several ordinary whole life insurance and endowment products designed to meet the needs of our non-U.S. ~~policyowners.~~policyholders. These policies have been structured to provide:

U.S. 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 ~~or better than~~ most foreign local companies;

a hedge against local currency inflation;

protection against devaluation of foreign currency;

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

lifetime income guarantees for an insured or for surviving beneficiaries.

Our international products have living benefit features. Most policies contain guaranteed cash values and are participating (i.e., provides for cash dividends as apportioned by the board of directors). Once a ~~policyowner~~policyholder 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. According to the policy language, the ~~policyowner~~policyholder has several options with regard to the policy dividends and annual premium benefits. Any annual policy cash dividend may, at the option of the ~~policyowner~~policyholder and provided the value of a dividend is not encumbered by a policy loan, be applied under one of the following options: (1) paid in cash to the policy owner; (2) credited toward payment of premiums on the policy; (3) left with the Company to accumulate at a defined interest rate; (4) applied to increase the amount of insurance benefit by purchase of paid-up additions to the policy; or (5) be assigned to a third party. If the policy is encumbered by a loan, only option 3 will apply to secure the outstanding loan. Similarly, all annual premium benefits credited to the policy may, at the option of the ~~policyowner,~~policyholder and provided the policy is not encumbered by a policy loan, be applied under one of the following options: (1) paid in cash to the policy owner; (2) credited toward payment of premiums on the policy; (3) left with the Company to accumulate at an annually company declared interest rate; or (4) be assigned to a third party. Likewise, if the policy is encumbered by a loan, only option (3) will apply to secure the outstanding loan. Under the ~~“assigned~~"assigned to a third ~~party”~~party" provision, the Company has historically allowed ~~policyowners,~~policyholders, after receiving a copy of the Citizens, Inc. Stock Investment Plan (the ~~“CISIP”~~"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~~U.S. 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,~~policyholders, 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 Securities and Exchange Commission. 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 Securities and Exchange Commission.

September 30, 2019 Form | 10-Q 41

Table of Contents

~~CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES~~

~~September 30, 2018~~



CITIZENS, INC.	MANAGEMENT'S DISCUSSION & ANALYSIS

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 ~~periods indicated.~~nine months ended September 30, 2019 and 2018 as indicated below.


	Three Months Ended			Nine Months Ended		Three Months Ended			Nine Months Ended
	September 30,			September 30,		September 30,			September 30,
	2018		2017	2018	2017
	(In thousands)
Country
(In thousands)						2019		2018	2019	2018
Country:
Colombia	$	6,990	7,390	20,016	20,635	$	6,465	6,990	18,567	20,016
Venezuela	6,420		6,744	18,574	20,602	5,740		6,420	16,471	18,574
Taiwan	4,282		4,408	13,161	13,673	4,393		4,282	13,504	13,161
Ecuador	3,770		4,359	11,232	12,104	3,641		3,770	10,454	11,232
Argentina	2,556		3,216	7,135	7,772	2,539		2,556	7,199	7,135
Other Non-U.S.	10,934		11,222	29,954	29,988	10,485		10,934	28,660	29,954
Total	$	34,952	37,339	100,072	104,774	$	33,263	34,952	94,855	100,072



Colorado	84-0755371
(State or other jurisdiction of	~~(I.R.S. Employer~~
incorporation or organization)	(I.R.S. Employer Identification No.)

~~2900 Esperanza Crossing,~~14231 Tandem Blvd, 2nd Floor
Austin, Texas	~~78758~~78728
(Address of principal executive offices)	(Zip Code)

	2900 Esperanza Crossing, 2nd Floor
(512) 837-7100	Austin, Texas 78758
(Registrant's telephone number, including area code:)	(Former name, former address and former fiscal year, if changed since last report:)

Class A Common Stock	CIA	NYSE
(Title of Each Class)
(~~Former name, former address and former fiscal year, if changed since last report:~~Trading Symbol(s)) ~~N/A~~	(Name of Each Exchange on Which Registered)



Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. xYes o No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). xYes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated ~~filer",~~filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act:
	Large accelerated filer ¨o	Accelerated filer x	Non-accelerated filer ¨o	Smaller reporting company ¨o	Emerging growth company ¨o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period forcomplying with anyneworrevisedfinancialaccountingstandardsprovidedpursuanttoSection13(a)oftheExchangeAct. ¨o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨o Yes x No



			Page Number
Part I. FINANCIAL INFORMATION			~~Financial Information~~

	Item 1.	Financial Statements

		Consolidated Statements of Financial Position, September 30, ~~2018~~2019 (Unaudited) and December 31, ~~2017~~2018	2

		Consolidated Statements of Comprehensive Income, Three Months Ended September 30, ~~2018~~2019 and ~~2017~~2018 (Unaudited)	4

		Consolidated Statements of Comprehensive Income, Nine Months Ended September 30, ~~2018~~2019 and ~~2017~~2018 (Unaudited)	5

		Consolidated Statements of Stockholders' Equity, Nine Months Ended September 30, ~~2018~~2019 and ~~2017~~2018 (Unaudited)	6

		Consolidated Statements of Cash Flows, Nine Months Ended September 30, ~~2018~~2019 and ~~2017~~2018 (Unaudited)	78

		Notes to Consolidated Financial Statements (Unaudited)	910

	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	3332

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	5956

	Item 4.	Controls and Procedures	6157

Part II.			~~Other Information~~ OTHER INFORMATION

	Item 1.	Legal Proceedings	6258

	Item 1A.	Risk Factors	6259

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	7659

	Item 3.	Defaults Upon Senior Securities	7659

	Item 4.	Mine Safety Disclosures	7659

	Item 5.	Other Information	7659

	Item 6.	Exhibits	7760

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Financial Position (In thousands)



	September 30, 2018		December 31, 2017
Assets	(Unaudited)
Investments:
Fixed maturities available-for-sale, at fair value (cost: $1,193,211 and $935,977 in 2018 and 2017, respectively)	$	1,200,154	974,609
Fixed maturities held-to-maturity, at amortized cost (fair value: $241,377 in 2017)	—		233,961
Equity securities, at fair value (cost: $15,289 in 2017)	15,529		16,164
Mortgage loans on real estate	188		195
Policy loans	79,012		73,735
Real estate held for investment (less $1,258 and $5,479 accumulated depreciation in 2018 and 2017, respectively)	5,743		7,416
Real estate held for sale (less $4,411 accumulated depreciation in 2018)	1,483		—
Other long-term investments	22		36
Total investments	1,302,131		1,306,116
Cash and cash equivalents	68,753		46,064
Accrued investment income	18,389		19,062
Reinsurance recoverable	3,626		3,715
Deferred policy acquisition costs	158,253		167,063
Cost of customer relationships acquired	16,163		17,499
Goodwill	12,624		12,624
Other intangible assets	958		961
Deferred tax asset	—		50,797
Property and equipment, net	6,329		6,624
Due premiums, net (less $1,564 and $1,611 allowance for doubtful accounts in 2018 and 2017, respectively)	12,338		12,765
Prepaid expenses	1,134		251
Other assets	1,214		912
Total assets	$	1,601,912	1,644,453



Securities registered pursuant to Section 12(b) of the Act			~~(Registrant's telephone number, including area code:)~~ ~~(512) 837-7100~~



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Nine Months Ended September 30, 2018 and 2017
(In thousands)
(Unaudited)

	Common Stock			Accumulated deficit		Accumulated other comprehensive income (loss)		Treasury stock		Total Stockholders' equity
	Class A		Class B	Accumulated deficit		Accumulated other comprehensive income (loss)		Treasury stock		Total Stockholders' equity
Balance at December 31, 2016	$	259,383	3,184	(16,248	)	13,792		(11,011	)	249,100
Comprehensive income:
Net income	—		—	6,077		—		—		6,077
Unrealized investment gains, net	—		—	—		9,044		—		9,044
Total comprehensive income	—		—	6,077		9,044		—		15,121
Balance at September 30, 2017	259,383		3,184	(10,171	)	22,836		(11,011	)	264,221

Balance at December 31, 2017	259,383		3,184	(54,375	)	26,332		(11,011	)	223,513
Accounting standards adopted January 1, 2018	—		—	(4,162	)	4,162		—		—
Balance at January 1, 2018	259,383		3,184	(58,537	)	30,494		(11,011	)	223,513
Comprehensive loss:
Net loss	—		—	(17,275	)	—		—		(17,275	)
Unrealized investment losses, net	—		—	—		(26,629	)	—		(26,629	)
Unrealized gain from held-to-maturity securities transferred to available-for-sale, net	—		—	—		820		—		820
Total comprehensive loss	—		—	(17,275	)	(25,809	)	—		(43,084	)
Stock-based compensation	310		—	—		—		—		310
Balance at September 30, 2018	$	259,693	3,184	(75,812	)	4,685		(11,011	)	180,739



	Nine Months Ended
	September 30, 2018
	Life Insurance			Home Service Insurance		Other Non-Insurance Enterprises		Consolidated
	(In thousands)
Revenues:
Premiums	$	102,537		35,051		—		137,588
Net investment income	30,331			9,894		944		41,169
Realized investment losses, net	(684		)	(535	)	(32	)	(1,251	)
Other income (loss)	931			(1	)	—		930
Total revenue	133,115			44,409		912		178,436
Benefits and expenses:
Insurance benefits paid or provided:
Claims and surrenders	49,522			17,322		—		66,844
Increase in future policy benefit reserves	29,509			3,307		—		32,816
Policyholders' dividends	4,483			33		—		4,516
Total insurance benefits paid or provided	83,514			20,662		—		104,176
Commissions	14,717			11,567		—		26,284
Other general expenses	12,607			15,438		5,330		33,375
Capitalization of deferred policy acquisition costs	(12,663		)	(4,501	)	—		(17,164	)
Amortization of deferred policy acquisition costs	22,912			3,306		—		26,218
Amortization of cost of customer relationships acquired	434			1,083		—		1,517
Total benefits and expenses	121,521			47,555		5,330		174,406
Income (loss) before income tax expense	$	11,594		(3,146	)	(4,418	)	4,030


	Three Months Ended
	September 30, 2018			September 30, 2017
Three Months Ended September 30,					2019		2018 (As Restated*)
(In thousands, except per share amounts)					2019		2018 (As Restated*)
	(In thousands, except per share amounts)
Basic and diluted earnings per share:
Numerator:
Net income (loss)	$	(14,754	)	3,449	$	2,046	(7,109	)
Net income (loss) allocated to Class A common stock	$	(14,605	)	3,415	$	2,026	(7,036	)
Net income (loss) allocated to Class B common stock	(149		)	34	20		(73	)
Net income (loss)	$	(14,754	)	3,449	$	2,046	(7,109	)

Denominator:
Weighted average shares of Class A outstanding - basic	49,080			49,080	49,229		49,080
Weighted average shares of Class A outstanding - diluted	49,127			49,080	49,327		49,127
Weighted average shares of Class B outstanding - basic and diluted	1,002			1,002	1,002		1,002
Basic and diluted earnings (loss) per share of Class A common stock	$	(0.30	)	0.07	$	0.04	(0.14	)
Basic and diluted earnings (loss) per share of Class B common stock	(0.14		)	0.03	0.02		(0.07	)



	September 30, 2018			December 31, 2017
	Carrying Value		% of Total Carrying Value	Carrying Value		% of Total Carrying Value
	(In thousands)			(In thousands)
Fixed maturity securities	$	1,200,154	87.6	$	1,208,570	89.3
Equity securities	15,529		1.1	16,164		1.2
Mortgage loans	188		—	195		—
Policy loans	79,012		5.8	73,735		5.5
Real estate and other long-term investments	7,248		0.5	7,452		0.6
Cash and cash equivalents	68,753		5.0	46,064		3.4
Total cash, cash equivalents and investments	$	1,370,884	100.0	$	1,352,180	100.0



Carrying Value (In thousands, except for %)	September 30, 2019				December 31, 2018
Carrying Value (In thousands, except for %)	Amount		%		Amount		%

Fixed maturity securities	$	1,369,648	90.1	%	$	1,231,039	88.7	%
Equity securities	15,845		1.0	%	15,068		1.1	%
Mortgage loans	180		—	%	186		—	%
Policy loans	81,964		5.4	%	80,825		5.8	%
Real estate and other long-term investments	2,593		0.2	%	7,223		0.5	%
Short-term investments	2,453		0.2	%	7,865		0.6	%
Cash and cash equivalents	47,147		3.1	%	45,492		3.3	%
Total cash, cash equivalents and investments	$	1,519,830	100.0	%	$	1,387,698	100.0	%


	September 30, 2018					Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	Cost or Amortized Cost		Gross Unrealized Gains	Gross Unrealized Losses	Fair Value
September 30, 2019
(In thousands)						Cost or Amortized Cost			Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(In thousands)
Fixed maturities:
Available-for-sale:
U.S. Treasury securities	$	9,887	1,250	6	11,131	$	9,729	1,775		—		11,504
U.S. Government-sponsored enterprises	3,546		662	—	4,208	3,522		1,124		—		4,646
States and political subdivisions	740,333		4,973	4,376	740,930	567,551		29,392		125		596,818
Foreign governments	118		—	1	117
Corporate	404,183		9,655	4,706	409,132	560,701		45,148		1,741		604,108
Commercial mortgage-backed	3,662		13	49	3,626	1,107		—		—		1,107
Residential mortgage-backed	31,482		105	577	31,010	118,101		15,787		23		133,865
Asset-backed						17,480		11		11		17,480
Foreign governments						102		18		—		120
Total fixed maturities	$	1,193,211	16,658	9,715	1,200,154	$	1,278,293	93,255		1,900		1,369,648


	September 30, 2018		December 31, 2017
	Fair Value		Fair Value
Fair Value (In thousands)				September 30, 2019		December 31, 2018
	(In thousands)
Equity securities:
Stock mutual funds	$	3,196	3,217	$	3,166	2,906
Bond mutual funds	12,096		12,367	12,242		11,774
Common stock	96		24	127		94
Preferred stock	141		556
Non-redeemable preferred stock				310		294
Total equity securities	$	15,529	16,164	$	15,845	15,068



	September 30, 2018
	Less than 12 months				Greater than 12 months			Total
	Fair Value		Unrealized Losses	# of Securities	Fair Value	Unrealized Losses	# of Securities	Fair Value	Unrealized Losses	# of Securities
	(In thousands, except for # of securities)
Fixed maturities:
Available-for-sale securities:
U.S. Treasury securities	$	757	6	2	—	—	—	757	6	2
States and political subdivisions	494,116		3,659	479	31,452	717	42	525,568	4,376	521
Corporate	206,965		4,193	160	6,366	513	6	213,331	4,706	166
Commercial mortgage-backed	2,725		49	4	—	—	—	2,725	49	4
Residential mortgage-backed	27,048		574	21	101	3	3	27,149	577	24
Foreign	117		1	1	—	—	—	117	1	1
Total available-for-sale securities	$	731,728	8,482	667	37,919	1,233	51	769,647	9,715	718


	September 30, 2018
	Amortized Cost		Fair Value
	(In thousands)
September 30, 2019				Amortized Cost		Fair Value
(In thousands)				Amortized Cost		Fair Value
Fixed maturity securities:
Due in one year or less	$	43,088	43,190	$	111,775	112,511
Due after one year through five years	142,943		146,280	118,968		124,385
Due after five years through ten years	230,995		232,627	198,215		212,237
Due after ten years	776,185		778,057	849,335		920,515
Total fixed maturity securities	$	1,193,211	1,200,154	$	1,278,293	1,369,648


	Fixed Maturities, Available-for-Sale					Equity Securities				Fixed Maturity Securities, Available-for-Sale
	Three Months Ended			Nine Months Ended		Three Months Ended		Nine Months Ended		Three Months Ended			Nine Months Ended
	September 30,			September 30,		September 30,		September 30,		September 30,			September 30,
	2018		2017	2018	2017	2018	2017	2018	2017
	(In thousands)
(In thousands)										2019		2018	2019	2018

Proceeds	$	1,084	—	1,084	508	—	—	—	1,940	$	29,294	1,084	39,708	1,084
Gross realized gains	$	54	—	53	6	—	—	—	—	$	125	54	234	54
Gross realized losses	$	—	—	—	—	—	—	—	30	$	22	—	387	—


	September 30, 2018
September 30, 2019						Level 1		Level 2	Level 3	Total Fair Value
(In thousands)						Level 1			Level 3	Total Fair Value
Financial Assets	Level 1		Level 2	Level 3	Total Fair Value			Level 2
	(In thousands)
Available-for-sale investments
Fixed maturities:
Fixed maturities available-for-sale
U.S. Treasury and U.S. Government-sponsored enterprises	$	11,131	4,208	—	15,339	$	11,504	4,646	—	16,150
States and political subdivisions	—		740,930	—	740,930	—		596,818	—	596,818
Corporate	211		408,921	—	409,132	52		604,056	—	604,108
Commercial mortgage-backed	—		3,626	—	3,626	—		1,107	—	1,107
Residential mortgage-backed	—		31,010	—	31,010	—		133,865	—	133,865
Asset-backed						—		17,480	—	17,480
Foreign governments	—		117	—	117	—		120	—	120
Total fixed maturities available-for-sale	11,342		1,188,812	—	1,200,154	11,556		1,358,092	—	1,369,648

Equity securities
Stock mutual funds	3,196		—	—	3,196	3,166		—	—	3,166
Bond mutual funds	12,096		—	—	12,096	12,242		—	—	12,242
Common stock	96		—	—	96	127		—	—	127
Non-redeemable preferred stock	141		—	—	141	310		—	—	310
Total equity securities	15,529		—	—	15,529	15,845		—	—	15,845
Total financial assets	$	26,871	1,188,812	—	1,215,683	$	27,401	1,358,092	—	1,385,493



	Restricted Stock Units
	Units	Aggregate Fair Value ⁽¹⁾

Outstanding at January 1, 2018	—	$	—
Granted	148,883	1,070,500
Less:
Vested	—	—
Forfeited	22,322	160,495
Outstanding at September 30, 2018	126,561	$	910,005


	Nine Months Ended			Year Ended		Nine Months Ended		Nine Months Ended			Year Ended		Nine Months Ended
	September 30,			December 31,		September 30,		September 30,			December 31,		September 30,
	2018			2017		2017
	(In thousands, except for %)
(In thousands, except for %)								2019			2018		2018
Net investment income, annualized	$	40,439		38,578		38,228		$	44,163		39,985		40,439
Average invested assets, at amortized cost	945,241			890,705		882,034		1,010,578			958,135		945,241
Annualized yield on average invested assets	4.28		%	4.33	%	4.33	%	4.37		%	4.17	%	4.28	%


	September 30, 2018										General Obligation			Special Revenue		Other		Total		% Based on Amortized Cost
	General Obligation			Special Revenue		Other		Total		% Based on										% Based on Amortized Cost
	Fair Value		Amortized Cost	Fair Value	Amortized Cost	Fair Value	Amortized Cost	Fair Value	Amortized Cost	Amortized Cost
	(In thousands)
(In thousands, except for %)											Fair Value		Amortized Cost	Fair Value	Amortized Cost	Fair Value	Amortized Cost	Fair Value	Amortized Cost	% Based on Amortized Cost
Municipal securities including third party guarantees											Municipal securities including third party guarantees									% Based on Amortized Cost
AAA	$	57,538	57,448	30,451	30,482	—	—	87,989	87,930	11.9	$	42,617	41,626	14,515	14,050	—	—	57,132	55,676	9.8	%
AA	156,110		156,032	250,236	250,129	24,565	24,492	430,911	430,653	58.2	131,634		126,823	190,960	183,750	18,898	17,432	341,492	328,005	57.8	%
A	29,587		29,885	147,653	147,077	10,775	10,446	188,015	187,408	25.3	21,942		20,682	133,469	122,146	7,820	7,130	163,231	149,958	26.4	%
BBB	7,145		7,289	15,306	15,251	1,923	1,939	24,374	24,479	3.3	5,419		5,273	18,640	18,032	1,570	1,450	25,629	24,755	4.4	%
BB and other	4,127		4,227	5,514	5,636	—	—	9,641	9,863	1.3	5,808		5,696	3,526	3,461	—	—	9,334	9,157	1.6	%
Total	$	254,507	254,881	449,160	448,575	37,263	36,877	740,930	740,333	100.0	$	207,420	200,100	361,110	341,439	28,288	26,012	596,818	567,551	100.0	%

Municipal securities excluding third party guarantees											Municipal securities excluding third party guarantees
AAA											$	17,390	17,235	1,032	1,023	—	—	18,422	18,258	3.2	%
AA											94,931		92,780	126,363	122,714	11,823	10,704	233,117	226,198	39.9	%
A											51,317		49,182	160,533	147,546	10,751	9,857	222,601	206,585	36.4	%
BBB											10,728		10,123	33,784	32,611	—	—	44,512	42,734	7.5	%
BB and other											33,054		30,780	39,398	37,545	5,714	5,451	78,166	73,776	13.0	%
Total											$	207,420	200,100	361,110	341,439	28,288	26,012	596,818	567,551	100.0	%


	Fair Value		Amortized Cost	% of Total Fair Value
(In thousands)						Fair Value		Amortized Cost	% of Total Fair Value
	(In thousands)
Utilities	$	154,206	153,612	20.8	%	$	132,188	124,107	22.2	%
Education	109,277		108,875	14.8	%	89,985		84,497	15.1	%
General Obligations	78,550		78,664	10.6	%



Exhibit Number		The following exhibits are filed herewith:

3.1		Restated and Amended Articles of Incorporation dated March 4, 2004 (incorporated herein by reference to Exhibit 3.1 to the Registrant's Annual Report on Form 10-K for the Year Ended December 31, 2003, filed on March 15, 2004)

3.2		Third Amended and Restated Bylaws dated November 2, 2017 (incorporated herein by reference to Exhibit 3.1 to the Registrant's Current Report on Form 8-K, filed on November 8, 2017)

~~10.1~~		Amendment, dated October 15, 2018, to the Employment Agreement, dated January 16, 2017, by and between Citizens, Inc. and Geoffrey M. Kolander*

~~10.2~~		Amendment, dated October 15, 2018, to the Employment Agreement, dated January 16, 2017, by and between Citizens, Inc. and Kay E. Osbourn*

11		~~Statement re: Computation of per share earnings (see financial statements)~~

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act*

31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act*

32.1		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act*

32.2		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act*

101.INS		XBRL Instance Document*

101.SCH		XBRL Taxonomy Extension Schema*

101.CAL		XBRL Taxonomy Extension Calculation Linkbase*

101.DEF		XBRL Taxonomy Extension Definition Linkbase*

101.LAB		XBRL Taxonomy Extension Label Linkbase*

101.PRE		XBRL Taxonomy Extension Presentation Linkbase*
		~~__________________~~



		CITIZENS, INC.


		By:	/s/ Geoffrey M. Kolander
			Geoffrey M. Kolander
			President and Chief Executive Officer


		By:	/s/ ~~Kay E. Osbourn~~Jeffery P. Conklin
			~~Kay E. Osbourn~~Jeffery P. Conklin
			~~Executive~~ Vice President, Chief Financial Officer and Treasurer
			~~and Chief Investment Officer~~


Date:	November ~~7, 2018~~6, 2019