DRAFT 6
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

FORM 10-Q

x☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 20192020
OR
o☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
COMMISSION FILE NUMBER:  000-16509
citizenslogoa34.jpg
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CITIZENS, INC.
(Exact name of registrant as specified in its charter)

Colorado84-0755371
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
2900 Esperanza Crossing, 2nd Floor
Austin, Texas78758
(Address of principal executive offices)(Zip Code)
(512) 837-7100N/A
(Registrant's telephone number, including area code:)
(Former name, former address and former fiscal year,
if changed since last report:)

14231 Tandem Blvd, 2nd Floor, Austin, TX 78728

Registrant's telephone number: (512) 837-7100

Securities registered pursuant to Section 12(b) of the Act
Class A Common StockCIA New York Stock ExchangeNYSE
(Title of Each Class)each class)(Trading Symbol(s)symbol(s))(Name of Each Exchangeeach exchange on Which Registered)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.x Yes oNo

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 oNo

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," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act:
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. x Yes o  No
Large accelerated filer		☐Accelerated filer☒
Non-accelerated filer☐Smaller reporting company☐
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). x Yes 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," "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
companyo
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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
☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes x No
As of August 2, 2019,July 31, 2020, the Registrant had 52,364,99352,490,804 shares of Class A common stock no par value, outstanding and 1,001,714 shares of Class B common stock no par value, outstanding.




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DRAFT 6
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TABLE OF CONTENTS
Page Number
Part I. FINANCIAL INFORMATION
Page Number
Part I. FINANCIAL INFORMATION
Item 1.
2
4
Consolidated Statements of Comprehensive Income, Six Months Ended June 30, 2020 and 2019 and 2018 (Unaudited)
54
65
76
98
Item 2.
2931
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
5354
Item 4.
Controls and Procedures
5456
Part II. OTHER INFORMATION
Item 1.
5457
Item 1A.
5557
Item 2.
5759
Item 3.
5759
Item 4.
5760
Item 5.
5760
Item 6.
5860





June 30, 2019 Form2020 | 10-Q 1

Table of ContentsDRAFT 6

PART I.  FINANCIAL INFORMATION


Item 1. FINANCIAL STATEMENTS



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Financial Position
    
    
(In thousands)June 30, 2019 December 31, 2018
Assets(Unaudited)  
Investments:   
Fixed maturities available-for-sale, at fair value (cost: $1,274,085 and $1,223,747 in 2019 and 2018, respectively)$1,341,339
 1,231,039
Equity securities, at fair value15,827
 15,068
Mortgage loans on real estate182
 186
Policy loans81,545
 80,825
Real estate held for investment (less $1,284 accumulated depreciation in 2018)—
 5,718
Real estate held-for-sale (less $1,325 and $4,411 accumulated depreciation in 2019 and 2018, respectively)2,571
 1,483
Other long-term investments22
 22
Short-term investments2,455
 7,865
Total investments1,443,941
 1,342,206
Cash and cash equivalents34,568
 45,492
Accrued investment income18,920
 18,467
Reinsurance recoverable3,456
 3,664
Deferred policy acquisition costs152,313
 155,747
Cost of customer relationships acquired14,169
 15,225
Goodwill12,624
 12,624
Other intangible assets954
 956
Property and equipment, net7,147
 5,943
Due premiums, net (less $1,607 and $1,990 allowance for doubtful accounts in 2019 and 2018, respectively)10,557
 13,325
Prepaid expenses1,472
 284
Other assets2,039
 1,628
Total assets$1,702,160
 1,615,561
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Consolidated Balance Sheets
(In thousands)June 30, 2020December 31, 2019
Assets(Unaudited)
Investments:  
Fixed maturities available-for-sale, at fair value (amortized cost: $1,295,628 and $1,293,853 in 2020 and 2019, respectively)$1,417,317  1,377,959  
Equity securities, at fair value20,698  16,033  
Policy loans84,171  82,005  
Real estate held-for-sale2,571  2,571  
Other long-term investments (portion measured at fair value $9,079 in 2020; less allowance for losses of $11 in 2020)9,452  385  
Short-term investments—  1,301  
Total investments1,534,209  1,480,254  
Cash and cash equivalents52,375  46,205  
Accrued investment income16,884  17,453  
Receivable for securities3,320  —  
Reinsurance recoverable2,971  3,696  
Deferred policy acquisition costs145,494  149,249  
Cost of insurance acquired12,574  13,455  
Goodwill and other intangible assets13,573  13,575  
Property and equipment, net16,592  5,904  
Due premiums11,952  12,656  
Other assets (less allowance for losses of $472 in 2020)2,992  2,489  
Total assets$1,812,936  1,744,936  

See accompanying Notes to Consolidated Financial Statements.




June 30, 2019 Form2020 | 10-Q 2

Table of ContentsDRAFT 6


CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Financial Position, Continued

    
(In thousands, except share amounts)June 30, 2019 December 31, 2018
Liabilities and Stockholders' Equity(Unaudited)  
Liabilities:   
Policy liabilities:   
Future policy benefit reserves:   
Life insurance$1,200,277
 1,179,946
Annuities76,302
 76,377
Accident and health970
 944
Dividend accumulations27,668
 26,250
Premiums paid in advance43,795
 48,553
Policy claims payable7,747
 7,614
Other policyholders' funds15,655
 10,760
Total policy liabilities1,372,414
 1,350,444
Commissions payable2,191
 1,901
Current federal income tax payable48,426
 41,281
Deferred federal income tax payable9,803
 5,709
Payable for securities in process of settlement4,975
 —
Other liabilities27,919
 28,493
Total liabilities1,465,728
 1,427,828
Commitments and contingencies (Note 7)


 

Stockholders' equity: 
  
Class A, no par value, 100,000,000 shares authorized, 52,364,993 and 52,215,852 shares issued and outstanding in 2019 and 2018, respectively, including shares in treasury of 3,135,738 in 2019 and 2018261,003
 259,793
Class B, no par value, 2,000,000 shares authorized, 1,001,714 shares issued and outstanding in 2019 and 20183,184
 3,184
Accumulated deficit(77,966) (69,599)
Accumulated other comprehensive income: 
  
Net unrealized gains on securities, net of tax61,222
 5,366
Treasury stock, at cost(11,011) (11,011)
Total stockholders' equity236,432
 187,733
Total liabilities and stockholders' equity$1,702,160
 1,615,561
Consolidated Balance Sheets, Continued


(In thousands, except share amounts)June 30, 2020December 31, 2019
Liabilities and Stockholders' Equity(Unaudited)
Liabilities:  
Policy liabilities:  
Future policy benefit reserves:  
Life insurance$1,235,083  1,218,757  
Annuities77,954  76,380  
Accident and health882  1,031  
Dividend accumulations31,672  29,211  
Premiums paid in advance41,803  43,102  
Policy claims payable9,204  8,059  
Other policyholders' funds19,976  18,192  
Total policy liabilities1,416,574  1,394,732  
Commissions payable1,913  2,514  
Current federal income tax payable47,730  44,622  
Deferred federal income tax payable15,320  12,428  
Payable for securities in process of settlement1,517  —  
Other liabilities40,089  30,804  
Total liabilities1,523,143  1,485,100  
Commitments and contingencies (Note 7)
Stockholders' Equity:  
Common stock:
Class A, 0 par value, 100,000,000 shares authorized, 52,490,804 and 52,364,993 shares issued and outstanding in 2020 and 2019, respectively, including shares in treasury of 3,135,738 in 2020 and 2019261,901  261,515  
Class B, 0 par value, 2,000,000 shares authorized, 1,001,714 shares issued and outstanding in 2020 and 20193,184  3,184  
Accumulated deficit(75,975) (70,969) 
Accumulated other comprehensive income:  
Net unrealized gains on fixed maturity securities, net of tax111,694  77,117  
Treasury stock, at cost(11,011) (11,011) 
Total stockholders' equity289,793  259,836  
Total liabilities and stockholders' equity$1,812,936  1,744,936  

See accompanying Notes to Consolidated Financial Statements.






June 30, 2019 Form2020 | 10-Q 3

Table of ContentsDRAFT 6


CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(Unaudited)

Three Months Ended June 30,
(In thousands, except per share data)
2019 2018
Revenues:   
Premiums:   
Life insurance$42,313
 44,631
Accident and health insurance345
 301
Property insurance1,146
 1,198
Net investment income15,315
 13,811
Realized investment losses, net(2,869) (178)
Other income616
 79
Total revenues56,866
 59,842
Benefits and Expenses: 
  
Insurance benefits paid or provided: 
  
Claims and surrenders27,024
 20,617
Increase in future policy benefit reserves9,472
 16,555
Policyholders' dividends1,423
 1,614
Total insurance benefits paid or provided37,919
 38,786
Commissions8,384
 8,669
Other general expenses11,949
 14,466
Capitalization of deferred policy acquisition costs(5,412) (5,640)
Amortization of deferred policy acquisition costs6,931
 7,200
Amortization of cost of customer relationships acquired418
 472
Total benefits and expenses60,189
 63,953
Income before federal income tax(3,323) (4,111)
Federal income tax expense (benefit)1,242
 (1,553)
Net loss(4,565) (2,558)
Per Share Amounts: 
  
Basic and diluted losses per share of Class A common stock(0.09) (0.05)
Basic and diluted losses per share of Class B common stock(0.04) (0.03)
Other Comprehensive Income (Loss): 
  
Unrealized gains (losses) on available-for-sale debt securities: 
  
Unrealized holding gains (losses) arising during period31,220
 (12,329)
Reclassification adjustment for losses (gains) included in net income(81) 87
Unrealized gains (losses) on available-for-sale debt securities, net31,139
 (12,242)
Income tax expense (benefit) on unrealized gains (losses) on available-for-sale debt securities2,163
 (2,571)
Other comprehensive income (loss)28,976
 (9,671)
Total comprehensive income (loss)$24,411
 (12,229)
Consolidated Statements of Operations and Comprehensive Income (Loss)

(Unaudited)

Three Months Ended June 30,Six Months Ended June 30,
(In thousands, except per share amounts)2020201920202019
Revenues: 
Premiums:  
Life insurance$40,185  42,313  80,131  83,293  
Accident and health insurance248  345  509  668  
Property insurance1,063  1,146  2,173  2,307  
Net investment income14,915  15,315  30,084  29,111  
Realized investment gains (losses), net1,448  (2,869) 142  3,092  
Other income482  616  1,024  801  
Total revenues58,341  56,866  114,063  119,272  
Benefits and Expenses:  
Insurance benefits paid or provided:  
Claims and surrenders27,754  27,024  54,203  50,057  
Increase in future policy benefit reserves8,237  9,472  17,708  21,771  
Policyholders' dividends1,328  1,423  2,561  2,605  
Total insurance benefits paid or provided37,319  37,919  74,472  74,433  
Commissions6,714  8,384  14,567  16,268  
Other general expenses11,139  11,949  22,612  26,081  
Capitalization of deferred policy acquisition costs(3,731) (5,412) (8,740) (10,240) 
Amortization of deferred policy acquisition costs6,061  6,931  12,180  13,208  
Amortization of cost of insurance acquired401  418  769  837  
Total benefits and expenses57,903  60,189  115,860  120,587  
Income (loss) before federal income tax438  (3,323) (1,797) (1,315) 
Federal income tax expense1,465  1,242  2,814  7,052  
Net income (loss)(1,027) (4,565) (4,611) (8,367) 
Per Share Amounts:  
Basic and diluted losses per share of Class A common stock(0.02) (0.09) (0.09) (0.17) 
Basic and diluted losses per share of Class B common stock(0.01) (0.04) (0.05) (0.08) 
Other Comprehensive Income:  
Unrealized gains on fixed maturity securities:  
Unrealized holding gains arising during period80,508  31,220  37,579  60,021  
Reclassification adjustment for losses (gains) included in net income (loss)(87) (81) 45  23  
Unrealized gains on fixed maturity securities, net80,421  31,139  37,624  60,044  
Income tax expense on unrealized gains on fixed maturity securities5,774  2,163  3,047  4,188  
Other comprehensive income74,647  28,976  34,577  55,856  
Total comprehensive income$73,620  24,411  29,966  47,489  

See accompanying Notes to Consolidated Financial Statements.






June 30, 2019 Form2020 | 10-Q 4

Table of ContentsDRAFT 6


CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(Unaudited)

Six Months Ended June 30,
(In thousands, except per share data)
2019 2018
Revenues:   
Premiums:   
Life insurance$83,293
 87,160
Accident and health insurance668
 592
Property insurance2,307
 2,407
Net investment income29,111
 27,582
Realized investment gains (losses), net3,092
 (753)
Other income801
 287
Total revenues119,272
 117,275
Benefits and Expenses: 
  
Insurance benefits paid or provided: 
  
Claims and surrenders50,057
 41,768
Increase in future policy benefit reserves21,771
 31,163
Policyholders' dividends2,605
 2,921
Total insurance benefits paid or provided74,433
 75,852
Commissions16,268
 17,628
Other general expenses26,081
 20,973
Capitalization of deferred policy acquisition costs(10,240) (11,603)
Amortization of deferred policy acquisition costs13,208
 14,806
Amortization of cost of customer relationships acquired837
 1,151
Total benefits and expenses120,587
 118,807
Income before federal income tax(1,315) (1,532)
Federal income tax expense7,052
 989
Net loss(8,367) (2,521)
Per Share Amounts: 
  
Basic and diluted losses per share of Class A common stock(0.17) (0.05)
Basic and diluted losses per share of Class B common stock(0.08) (0.03)
Other Comprehensive Income (Loss): 
  
Unrealized gains (losses) on available-for-sale debt securities: 
  
Unrealized holding gains (losses) arising during period60,021
 (30,427)
Reclassification adjustment for losses included in net income23
 346
Unrealized gains (losses) on available-for-sale debt securities, net60,044
 (30,081)
Income tax expense (benefit) on unrealized gains (losses) on available-for-sale debt securities4,188
 (6,306)
Other comprehensive income (loss)55,856
 (23,775)
Total comprehensive income (loss)$47,489
 (26,296)
Consolidated Statements of Stockholders' Equity

(Unaudited)
 Common StockAccumulated
deficit		Accumulated other comprehensive income (loss)Treasury
stock		Total
Stock-holders'
equity
(In thousands)Class AClass B
Balance at December 31, 2019$261,515  3,184  (70,969) 77,117  (11,011) 259,836  
Accounting standards adopted January 1, 2020—  —  (395) —  —  (395) 
Comprehensive income (loss):
Net income (loss)—  —  (3,584) —  —  (3,584) 
Unrealized investment gains (losses), net—  —  —  (40,070) —  (40,070) 
Total comprehensive income (loss)—  —  (3,584) (40,070) —  (43,654) 
Stock-based compensation(53) —  —  —  —  (53) 
Balance at March 31, 2020261,462  3,184  (74,948) 37,047  (11,011) 215,734  
Comprehensive income (loss):      
Net income (loss)—  —  (1,027) —  —  (1,027) 
Unrealized investment gains (losses), net—  —  —  74,647  —  74,647  
Total comprehensive income (loss)—  —  (1,027) 74,647  —  73,620  
Stock-based compensation439  —  —  —  —  439  
Balance at June 30, 2020$261,901  3,184  (75,975) 111,694  (11,011) 289,793  


Balance at December 31, 2018$259,793  3,184  (69,599) 5,366  (11,011) 187,733  
Comprehensive income (loss):
Net income (loss)—  —  (3,802) —  —  (3,802) 
Unrealized investment gains (losses), net—  —  —  26,880  —  26,880  
Total comprehensive income (loss)—  —  (3,802) 26,880  —  23,078  
Stock-based compensation1,083  —  —  —  —  1,083  
Balance at March 31, 2019260,876  3,184  (73,401) 32,246  (11,011) 211,894  
Comprehensive income (loss):      
Net income (loss)—  —  (4,565) —  —  (4,565) 
Unrealized investment gains (losses), net—  —  —  28,976  —  28,976  
Total comprehensive income (loss)—  —  (4,565) 28,976  —  24,411  
Stock-based compensation127  —  —  —  —  127  
Balance at June 30, 2019$261,003  3,184  (77,966) 61,222  (11,011) 236,432  

See accompanying Notes to Consolidated Financial Statements.






June 30, 2019 Form2020 | 10-Q 5

Table of ContentsDRAFT 6


CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)


Six Months Ended June 30,
(In thousands)
20202019
Cash flows from operating activities: 
Net income (loss)$(4,611) (8,367) 
Adjustments to reconcile net gain (loss) to net cash provided by operating activities:  
Realized investment (gains) losses on sale of investments and other assets(142) (3,092) 
Net deferred policy acquisition costs3,440  2,968  
Amortization of cost of insurance acquired769  837  
Depreciation422  848  
Amortization of premiums and discounts on investments4,683  7,288  
Stock-based compensation632  1,587  
Deferred federal income tax benefit(76) (94) 
Change in:  
Accrued investment income569  (453) 
Reinsurance recoverable725  208  
Due premiums704  2,768  
Future policy benefit reserves17,593  21,629  
Other policyholders' liabilities4,091  1,688  
Federal income tax payable3,108  7,146  
Commissions payable and other liabilities(2,690) (284) 
Other, net(665) (3,271) 
Net cash provided by (used in) operating activities28,552  31,406  
Cash flows from investing activities:  
Purchases of fixed maturity securities, available-for-sale(113,141) (111,729) 
Sales of fixed maturity securities, available-for-sale2,982  10,414  
Maturities and calls of fixed maturity securities, available-for-sale101,852  48,568  
Purchases of equity securities(4,473) —  
Principal payments on mortgage loans5  4  
Increase in policy loans, net(2,166) (721) 
Sales of other long-term investments and real estate—  6,996  
Purchases of other long-term investments(9,140) —  
Purchases of property and equipment(38) (388) 
Maturities of short-term investments1,300  7,940  
Purchases of short-term investments—  (2,455) 
Net cash provided by (used in) investing activities(22,819) (41,371) 
See accompanying Notes to Consolidated Financial Statements.
CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
(Unaudited)
            
 Common Stock Accumulated
deficit		 Accumulated other comprehensive income (loss) Treasury
stock		 Total
Stock-holders'
equity
(In thousands)Class A Class B    
           
Balance at December 31, 2018$259,793
 3,184
 (69,599) 5,366
 (11,011) 187,733
Comprehensive income:           
Net loss—
 —
 (3,802) —
 —
 (3,802)
Unrealized investment gains, net—
 —
 —
 26,880
 —
 26,880
Total comprehensive income—
 —
 (3,802) 26,880
 —
 23,078
Stock-based compensation1,083
 —
 —
 —
 —
 1,083
Balance at March 31, 2019260,876
 3,184
 (73,401) 32,246
 (11,011) 211,894
Comprehensive income: 
  
  
  
  
  
Net loss—
 —
 (4,565) —
 —
 (4,565)
Unrealized investment gains, net—
 —
 —
 28,976
 —
 28,976
Total comprehensive income—
 —
 (4,565) 28,976
 —
 24,411
Stock-based compensation127
 —
 —
 —
 —
 127
Balance at June 30, 2019$261,003
 3,184
 (77,966) 61,222
 (11,011) 236,432

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, 2018259,383
 3,184
 (58,537) 30,494
 (11,011) 223,513
Comprehensive loss:           
Net income—
 —
 37
 —
 —
 37
Unrealized investment losses, net—
 —
 —
 (14,104) —
 (14,104)
Total comprehensive loss—
 —
 37
 (14,104) —
 (14,067)
Balance at March 31, 2018259,383
 3,184
 (58,500)
16,390
 (11,011) 209,446
Comprehensive loss: 
  
  
  
  
  
Net loss—
 —
 (2,558) —
 —
 (2,558)
Unrealized investment losses, net—
 —
 —
 (9,671) —
 (9,671)
Total comprehensive loss—
 —
 (2,558) (9,671) —
 (12,229)
Stock-based compensation213
 —
 —
 —
 —
 213
Balance at June 30, 2018$259,596
 3,184
 (61,058) 6,719
 (11,011) 197,430

See accompanying Notes to Consolidated Financial Statements.






June 30, 2019 Form2020 | 10-Q 6

Table of ContentsDRAFT 6

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
(Unaudited)
Six Months Ended June 30,
(In thousands)
20202019
Cash flows from financing activities:  
Annuity deposits$2,928  3,053  
Annuity withdrawals(2,245) (3,635) 
Other(246) (377) 
Net cash provided by (used in) financing activities437  (959) 
Net increase (decrease) in cash and cash equivalents6,170  (10,924) 
Cash and cash equivalents at beginning of year46,205  45,492  
Cash and cash equivalents at end of period$52,375  34,568  

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)

Six Months Ended June 30,
(In thousands)
2019 2018
Cash flows from operating activities:   
Net income (loss)$(8,367) (2,521)
Adjustments to reconcile net income (loss) to net cash provided by operating activities: 
  
Realized (gains) losses on sale of investments and other assets(3,092) 753
Net deferred policy acquisition costs2,968
 3,203
Amortization of cost of customer relationships acquired837
 1,151
Depreciation848
 708
Amortization of premiums and discounts on investments7,288
 8,332
Stock-based compensation1,587
 213
Deferred federal income tax benefit(94) (2,869)
Change in: 
  
Accrued investment income(453) (179)
Reinsurance recoverable208
 (256)
Due premiums2,768
 974
Future policy benefit reserves21,629
 31,665
Other policyholders' liabilities1,688
 4,420
Federal income tax payable7,146
 3,858
Commissions payable and other liabilities(284) (6,062)
Other, net(3,271) (1,404)
Net cash provided by operating activities31,406
 41,986
Cash flows from investing activities: 
  
Purchase of fixed maturities, available-for-sale(111,729) (76,003)
Sale of fixed maturities, available-for-sale10,414
 —
Maturities and calls of fixed maturities, available-for-sale48,568
 37,646
Maturities and calls of fixed maturities, held-to-maturity—
 17,549
Purchase of equity securities—
 (9)
Principal payments on mortgage loans4
 5
Increase in policy loans, net(721) (3,842)
Sale of other long-term investments and real estate6,996
 1
Purchase of property and equipment(388) (211)
Maturity of short-term investments7,940
 —
Purchase of short-term investments(2,455) —
Net cash used in investing activities(41,371) (24,864)
    
    

See accompanying Notes to Consolidated Financial Statements.
 



June 30, 2019 Form 10-Q 7
Table of Contents

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
(Unaudited)

Six Months Ended June 30,
(In thousands)
2019 2018
Cash flows from financing activities: 
  
Annuity deposits$3,053
 3,605
Annuity withdrawals(3,635) (3,458)
Other(377) —
Net cash provided by (used in) financing activities(959) 147
Net increase (decrease) in cash and cash equivalents(10,924) 17,269
Cash and cash equivalents at beginning of year45,492
 46,064
Cash and cash equivalents at end of period$34,568
 63,333




SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:


During the six months ended June 30, 20192020 and 2018,2019, various fixed maturity issuers exchanged securities with book values of $11.9$3.1 million and $2.5$11.9 million, respectively, for securities of equal value.


The Company had net unsettled security trades of $1.8 million at June 30, 2020 and $5.0 million at June 30, 2019 and $0 at2019.

The Company recognized right-of-use assets of $12.0 million in exchange for new operating lease liabilities during the six months ended June 30, 2018.2020.




See accompanying Notes to Consolidated Financial Statements.






June 30, 2019 Form2020 | 10-Q 87

Table of ContentsDRAFT 6


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



(1) FINANCIAL STATEMENTS


BASIS OF PRESENTATION AND CONSOLIDATION


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


The consolidated statements of financial positionbalance sheets as of June 30, 2019,2020, the consolidated statements of operations and comprehensive income (loss) and stockholders' equity for the three and six months ended June 30, 20192020 and June 30, 20182019 and the consolidated statements of cash flows for the six months ended June 30, 20192020 and June 30, 20182019 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 June 30, 20192020 and for comparative periods have been made. The consolidated financial statements have been prepared in accordance with United States Generally Accepted Accounting PrinciplesU.S. 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").  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, 2018.2019.  Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period.


We provide primarily life insurance and a small amount of health insurance policies through our insurance subsidiaries - CICA, CICA Ltd., CNLIC, SPLIC MGLIC and CNLIC.MGLIC.  CICA and CNLIC issued ordinary whole-life policies, credit life and disability, and accident and health related policies, throughout the Midwest and southern U.S. until they ceased most domestic sales beginning January 1, 2017. CICA Ltd. primarily issues endowment and ordinary whole-life policies to non-U.S. residents. SPLIC offers final expense and home service life insurance in Louisiana, Arkansas and Mississippi, andMississippi. SPFIC a wholly-owned subsidiary of SPLIC, writes a limited amount of property insurance in Louisiana.Louisiana and Arkansas. MGLIC provides industrial life policies through independent funeral homes in Mississippi.


CTI provides data processing systems and services to the Company.

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.


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



June 30, 2020 | 10-Q 8

Table of ContentsDRAFT 6

CITIZENS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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, 2018,2019, which should be read in conjunction with these accompanying consolidated financial statements.



Investment securities. We assess all available-for-sale ("AFS") fixed maturity securities in an unrealized loss position for expected credit losses. First, we assess whether we intend to sell, or it is more likely than not that we will be required to sell, the security before recovery of its amortized cost. If either of the criteria is met, the security's amortized cost is written down to its fair value. For AFS fixed maturity securities that do not meet either criteria, we evaluate whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. Any impairment that has not been recorded through an allowance for credit losses is recognized in accumulated other comprehensive income on our consolidated balance sheets. Changes in the allowance for credit losses are recorded through realized capital losses.



The Company made a policy election to exclude accrued interest from the amortized cost of AFS fixed maturity securities and report accrued interest separately in accrued investment income in the consolidated balance sheets. AFS fixed maturity securities are placed on non-accrual status when we no longer expect to receive all contractual amounts due. Accrued interest receivable is reversed against interest income when a security is placed on non-accrual status. Accordingly, we do not recognize an allowance for credit loss against accrued interest receivable.
June 30, 2019 Form 10-Q 9

TableWe initially estimate the fair value of Contentsinvestments in private equity limited partnerships by reference to the transaction price. Subsequently, we obtain the fair value of these investments from net asset value information provided by the general partner or manager of the investments, the financial statements of which are audited annually. Recognition of investment income on these funds is delayed due to the availability of the related financial statements, which are generally obtained from the partnerships' general partners. As a result, our private equity investments are generally reported on a three-month delay. These investments are included in other long-term investments.


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

(2) ACCOUNTING PRONOUNCEMENTS


ACCOUNTING STANDARDS RECENTLY ADOPTED


In FebruaryJune 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-02, Leases (Topic 842). The ASU requires organizations that lease assets, referred to as "lessees," to recognize on the consolidated statement of financial position the rights and obligations created by those leases. The ASU also requires disclosures to 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 ASU on leases 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 Insurance segment. The Company adopted this standard effective January 1, 2019 and recognizes these lease agreements on the 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 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 (yield to worst), thus this guidance 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 in the first quarter of 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 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 debtAFS fixed maturity 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 currentprior 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. CurrentPrior U.S. GAAP prohibitsprohibited reflecting those improvements in current-period earnings. For public business entities, the amendments in this ASU will be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is evaluatingadopted this standard effective January 1, 2020 using the impact this guidance will have on our consolidated financial statements. This guidance could have a material impact on the Company's consolidated financial statements.modified retrospective approach. The adoption resulted in an increase in accumulated deficit of $0.4 million related to agents' debit balance collectability.




June 30, 2019 Form2020 | 10-Q 109

Table of ContentsDRAFT 6


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


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;
Simplifies amortization of deferred acquisition costs. Previous earnings-based amortization methods have been replaced with a more level amortization basis; and
Requires enhanced disclosures. The new disclosures include rollforwards and information about significant assumptions and the effects of changes in those assumptions.

For calendar-year public companies, the changes will be effective on January 1, 2021. In July 2019, the FASB tentatively agreed to defer the original effective date by one year. If finalized, the new guidance will be effective for annual and interim reporting periods beginning January 1, 2022. The Company is evaluating the impact this guidance will have on our consolidated financial statements. This new guidance is expected to have a material impact on our consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-13, Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements. Among the changes, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. This ASU will be effective for interim and annual reporting periods beginning after December 15, 2019; however, early adoption is permitted. Entities are also allowed to elect early adoption of the eliminated or modified disclosure requirements and delay adoption of the new disclosure requirements until their effective date. As this ASU only revises disclosure requirements, it is not expected to have a material impact on the Company’s 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 Isis a Service Contract.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. We adopted this standard effective January 1, 2020. The adoption had no impact on our consolidated financial statements.

ACCOUNTING STANDARDS NOT YET ADOPTED

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;
•Simplifies amortization of deferred acquisition costs. Previous earnings-based amortization methods have been replaced with a more level amortization basis; and
•Requires enhanced disclosures. The new disclosures include rollforwards and information about significant assumptions and the effects of changes in those assumptions.

For calendar-year public companies, the changes will be effective on January 1, 2022. In July 2020, the FASB tentatively agreed to defer the original effective date by one year. If finalized, the new guidance will be effective for interimannual and annualinterim reporting periods beginning after December 15, 2019;January 1, 2023, however early adoption is permitted. We areThe Company is evaluating the impact of this guidance will have on our limited cloud computing arrangements and our consolidated financial statements. This new guidance is expected to have a material impact on our consolidated financial statements.


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


(3) SEGMENT INFORMATION


The Company has two2 reportable segments:  Life Insurance and Home Service Insurance.  The Life Insurance and



June 30, 2019 Form 10-Q 11
Table of Contents

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

Home Service Insurance portions of the Company constitute separate businesses. CICA, CICA Ltd. and CNLIC constitute the Life Insurance segment, and SPLIC, SPFIC and MGLIC constitute the Home Service Insurance segment. In addition to the Life Insurance and Home Service Insurance business, the Company also operates other non-insurance ("Other Non-Insurance Enterprises") portions of the Company, which primarily include the Company's IT and Corporate-support functions, and are included in the tables presented below to properly reconcile the segment information with the consolidated financial statements of the Company.


The accounting policies of the reportable segments and Other Non-Insurance Enterprises are presented in accordance with U.S. GAAP and are the same as those used in the preparation of the consolidated financial

June 30, 2020 | 10-Q 10

Table of ContentsDRAFT 6

CITIZENS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
statements.  The Company evaluates profit and loss performance based on U.S. GAAP income before federal income taxes for its two2 reportable segments.


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

Life InsuranceHome Service InsuranceOther Non-Insurance EnterprisesConsolidated
Life Insurance Home Service Non-Insurance Enterprises Consolidated
Three Months Ended June 30, 2019 
Three Months Ended June 30, 2020Three Months Ended June 30, 2020Life InsuranceHome Service InsuranceOther Non-Insurance EnterprisesConsolidated
(In thousands)Life Insurance Home Service Non-Insurance Enterprises Consolidated(In thousands)
 
Revenues: Revenues:    
Premiums$32,140
 11,664
 —
 43,804
Premiums$30,062  11,434  —  41,496  
Net investment income11,612
 3,325
 378
 15,315
Net investment income11,345  3,256  314  14,915  
Realized investment gains (losses), net68
 152
 (3,089) (2,869)
Realized investment gains, netRealized investment gains, net391  924  133  1,448  
Other income614
 1
 1
 616
Other income482  —  —  482  
Total revenue44,434
 15,142
 (2,710) 56,866
Total revenue42,280  15,614  447  58,341  
Benefits and expenses:   
  
  
Benefits and expenses:   
Insurance benefits paid or provided: 
  
  
  
Insurance benefits paid or provided:    
Claims and surrenders21,316
 5,708
 —
 27,024
Claims and surrenders20,888  6,866  —  27,754  
Increase in future policy benefit reserves8,519
 953
 —
 9,472
Increase in future policy benefit reserves7,384  853  —  8,237  
Policyholders' dividends1,413
 10
 —
 1,423
Policyholders' dividends1,319  9  —  1,328  
Total insurance benefits paid or provided31,248
 6,671
 —
 37,919
Total insurance benefits paid or provided29,591  7,728  —  37,319  
Commissions4,676
 3,708
 —
 8,384
Commissions3,294  3,420  —  6,714  
Other general expenses6,458
 5,332
 159
 11,949
Other general expenses4,446  4,591  2,102  11,139  
Capitalization of deferred policy acquisition costs(4,020) (1,392) —
 (5,412)Capitalization of deferred policy acquisition costs(2,716) (1,015) —  (3,731) 
Amortization of deferred policy acquisition costs6,053
 878
 —
 6,931
Amortization of deferred policy acquisition costs5,419  642  —  6,061  
Amortization of cost of customer relationships acquired138
 280
 —
 418
Amortization of cost of insurance acquiredAmortization of cost of insurance acquired127  274  —  401  
Total benefits and expenses44,553
 15,477
 159
 60,189
Total benefits and expenses40,161  15,640  2,102  57,903  
Loss before income tax expense$(119) (335) (2,869) (3,323)
Income (loss) before federal income tax expenseIncome (loss) before federal income tax expense$2,119  (26) (1,655) 438  





June 30, 2019 Form2020 | 10-Q 1211

Table of ContentsDRAFT 6


CITIZENS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)Unaudited)
Life InsuranceHome Service InsuranceOther Non-Insurance EnterprisesConsolidated
Six Months Ended June 30, 2020
(In thousands)
Revenues:    
Premiums$59,881  22,932  —  82,813  
Net investment income22,825  6,588  671  30,084  
Realized investment gains (losses), net1,126  (793) (191) 142  
Other income1,006  18  —  1,024  
Total revenue84,838  28,745  480  114,063  
Benefits and expenses:   
Insurance benefits paid or provided:    
Claims and surrenders41,048  13,155  —  54,203  
Increase in future policy benefit reserves15,530  2,178  —  17,708  
Policyholders' dividends2,544  17  —  2,561  
Total insurance benefits paid or provided59,122  15,350  —  74,472  
Commissions7,772  6,795  —  14,567  
Other general expenses9,394  8,907  4,311  22,612  
Capitalization of deferred policy acquisition costs(6,637) (2,103) —  (8,740) 
Amortization of deferred policy acquisition costs10,737  1,443  —  12,180  
Amortization of cost of insurance acquired245  524  —  769  
Total benefits and expenses80,633  30,916  4,311  115,860  
Income (loss) before federal income tax expense$4,205  (2,171) (3,831) (1,797) 


 Life Insurance Home Service Non-Insurance Enterprises Consolidated
Six Months Ended June 30, 2019   
(In thousands)   
        
Revenues:       
Premiums$63,054
 23,214
 —
 86,268
Net investment income21,781
 6,411
 919
 29,111
Realized investment gains (losses), net5,525
 636
 (3,069) 3,092
Other income797
 2
 2
 801
Total revenue91,157
 30,263
 (2,148) 119,272
Benefits and expenses:   
  
  
Insurance benefits paid or provided: 
  
  
  
Claims and surrenders38,478
 11,579
 —
 50,057
Increase in future policy benefit reserves19,832
 1,939
 —
 21,771
Policyholders' dividends2,585
 20
 —
 2,605
Total insurance benefits paid or provided60,895
 13,538
 —
 74,433
Commissions9,049
 7,219
 —
 16,268
Other general expenses12,663
 10,402
 3,016
 26,081
Capitalization of deferred policy acquisition costs(7,722) (2,518) —
 (10,240)
Amortization of deferred policy acquisition costs11,494
 1,714
 —
 13,208
Amortization of cost of customer relationships acquired260
 577
 —
 837
Total benefits and expenses86,639
 30,932
 3,016
 120,587
Income (loss) before federal income tax expense$4,518
 (669) (5,164) (1,315)





June 30, 2019 Form2020 | 10-Q 1312

Table of ContentsDRAFT 6


CITIZENS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)Unaudited)
Life InsuranceHome Service InsuranceOther Non-Insurance EnterprisesConsolidated
Three Months Ended June 30, 2019
(In thousands)
Revenues:    
Premiums$32,140  11,664  —  43,804  
Net investment income11,612  3,325  378  15,315  
Realized investment gains (losses), net68  152  (3,089) (2,869) 
Other income614  1  1  616  
Total revenue44,434  15,142  (2,710) 56,866  
Benefits and expenses:    
Insurance benefits paid or provided:    
Claims and surrenders21,316  5,708  —  27,024  
Increase in future policy benefit reserves8,519  953  —  9,472  
Policyholders' dividends1,413  10  —  1,423  
Total insurance benefits paid or provided31,248  6,671  —  37,919  
Commissions4,676  3,708  —  8,384  
Other general expenses6,458  5,332  159  11,949  
Capitalization of deferred policy acquisition costs(4,020) (1,392) —  (5,412) 
Amortization of deferred policy acquisition costs6,053  878  —  6,931  
Amortization of cost of insurance acquired138  280  —  418  
Total benefits and expenses44,553  15,477  159  60,189  
Loss before federal income tax expense$(119) (335) (2,869) (3,323) 


 Life Insurance Home Service Non-Insurance Enterprises Consolidated
Three Months Ended June 30, 2018   
(In thousands)   
        
Revenues:       
Premiums$34,393
 11,737
 —
 46,130
Net investment income10,139
 3,316
 356
 13,811
Realized investment losses, net(24) (151) (3) (178)
Other income79
 —
 —
 79
Total revenue44,587
 14,902
 353
 59,842
Benefits and expenses: 
  
  
  
Insurance benefits paid or provided: 
  
  
  
Claims and surrenders15,019
 5,598
 —
 20,617
Increase in future policy benefit reserves15,383
 1,172
 —
 16,555
Policyholders' dividends1,605
 9
 —
 1,614
Total insurance benefits paid or provided32,007
 6,779
 —
 38,786
Commissions4,777
 3,892
 —
 8,669
Other general expenses6,908
 5,392
 2,166
 14,466
Capitalization of deferred policy acquisition costs(4,150) (1,490) —
 (5,640)
Amortization of deferred policy acquisition costs6,240
 960
 —
 7,200
Amortization of cost of customer relationships acquired132
 340
 —
 472
Total benefits and expenses45,914
 15,873
 2,166
 63,953
Loss before income tax expense$(1,327) (971) (1,813) (4,111)





June 30, 2019 Form2020 | 10-Q 1413

Table of ContentsDRAFT 6


CITIZENS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)Unaudited)
Life InsuranceHome Service InsuranceOther Non-Insurance EnterprisesConsolidated
Six Months Ended June 30, 2019
(In thousands)
Revenues:    
Premiums$63,054  23,214  —  86,268  
Net investment income21,781  6,411  919  29,111  
Realized investment gains (losses), net5,525  636  (3,069) 3,092  
Other income797  2  2  801  
Total revenue91,157  30,263  (2,148) 119,272  
Benefits and expenses:    
Insurance benefits paid or provided:    
Claims and surrenders38,478  11,579  —  50,057  
Increase in future policy benefit reserves19,832  1,939  —  21,771  
Policyholders' dividends2,585  20  —  2,605  
Total insurance benefits paid or provided60,895  13,538  —  74,433  
Commissions9,049  7,219  —  16,268  
Other general expenses12,663  10,402  3,016  26,081  
Capitalization of deferred policy acquisition costs(7,722) (2,518) —  (10,240) 
Amortization of deferred policy acquisition costs11,494  1,714  —  13,208  
Amortization of cost of insurance acquired260  577  —  837  
Total benefits and expenses86,639  30,932  3,016  120,587  
Income (loss) before federal income tax expense$4,518  (669) (5,164) (1,315) 


 Life Insurance Home Service Non-Insurance Enterprises Consolidated
Six Months Ended June 30, 2018   
(In thousands)   
        
Revenues:       
Premiums$66,753
 23,406
 —
 90,159
Net investment income20,269
 6,618
 695
 27,582
Realized investment losses, net(209) (503) (41) (753)
Other income (loss)288
 (1) —
 287
Total revenue87,101
 29,520
 654
 117,275
Benefits and expenses: 
  
  
  
Insurance benefits paid or provided: 
  
  
  
Claims and surrenders30,310
 11,458
 —
 41,768
Increase in future policy benefit reserves28,965
 2,198
 —
 31,163
Policyholders' dividends2,902
 19
 —
 2,921
Total insurance benefits paid or provided62,177
 13,675
 —
 75,852
Commissions10,005
 7,623
 —
 17,628
Other general expenses(1)
6,024
 10,936
 4,013
 20,973
Capitalization of deferred policy acquisition costs(8,790) (2,813) —
 (11,603)
Amortization of deferred policy acquisition costs12,780
 2,026
 —
 14,806
Amortization of cost of customer relationships acquired284
 867
 —
 1,151
Total benefits and expenses82,480
 32,314
 4,013
 118,807
Income (loss) before federal income tax expense$4,621
 (2,794) (3,359) (1,532)





June 30, 2019 Form2020 | 10-Q 1514

Table of ContentsDRAFT 6


CITIZENS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)Unaudited)
(4) STOCKHOLDERS' EQUITY AND RESTRICTIONS


(4) EARNINGS PER SHARE


The following tables set forth the computation of basic and diluted earnings per share.

Three Months Ended June 30,2019 2018Three Months Ended June 30,20202019
(In thousands, except per share amounts) (In thousands, except per share amounts)
   
Basic and diluted earnings per share:   Basic and diluted earnings per share:  
Numerator:   Numerator:  
Net loss$(4,565) (2,558)Net loss$(1,027) (4,565) 
Net loss allocated to Class A common stock$(4,519) (2,532)Net loss allocated to Class A common stock$(1,017) (4,519) 
Net loss allocated to Class B common stock(46) (26)Net loss allocated to Class B common stock(10) (46) 
Net loss$(4,565) (2,558)Net loss$(1,027) (4,565) 
   
Denominator:   Denominator:  
Weighted average shares of Class A outstanding - basic49,229
 49,080
Weighted average shares of Class A outstanding - basic49,345  49,229  
Weighted average shares of Class A outstanding - diluted49,280
 49,109
Weighted average shares of Class A outstanding - diluted49,528  49,280  
Weighted average shares of Class B outstanding - basic and diluted1,002
 1,002
Weighted average shares of Class B outstanding - basic and diluted1,002  1,002  
Basic and diluted loss per share of Class A common stock$(0.09) (0.05)Basic and diluted loss per share of Class A common stock$(0.02) (0.09) 
Basic and diluted loss per share of Class B common stock(0.04) (0.03)Basic and diluted loss per share of Class B common stock(0.01) (0.04) 


Six Months Ended June 30,20202019
(In thousands, except per share amounts)
Basic and diluted earnings per share:
Numerator:
Net loss$(4,611) (8,367) 
Net loss allocated to Class A common stock$(4,565) (8,283) 
Net loss allocated to Class B common stock(46) (84) 
Net loss$(4,611) (8,367) 
Denominator:
Weighted average shares of Class A outstanding - basic49,322  49,229  
Weighted average shares of Class A outstanding - diluted49,506  49,280  
Weighted average shares of Class B outstanding - basic and diluted1,002  1,002  
Basic and diluted loss per share of Class A common stock$(0.09) (0.17) 
Basic and diluted loss per share of Class B common stock(0.05) (0.08) 


CAPITAL AND SURPLUS

Each of our regulated insurance subsidiaries is required to meet stipulated regulatory capital requirements. These include capital requirements imposed by the U.S. National Association of Insurance Commissioners ("NAIC") and the Bermuda Monetary Authority ("BMA"). All insurance subsidiaries exceeded the minimum capital requirements at June 30, 2020.

Six Months Ended June 30,2019 2018
(In thousands, except per share amounts) 
    
Basic and diluted earnings per share:   
Numerator:   
Net loss$(8,367) (2,521)
Net loss allocated to Class A common stock$(8,283) (2,496)
Net loss allocated to Class B common stock(84) (25)
Net loss$(8,367) (2,521)
    
Denominator:   
Weighted average shares of Class A outstanding - basic49,229
 49,080
Weighted average shares of Class A outstanding - diluted49,280
 49,109
Weighted average shares of Class B outstanding - basic and diluted1,002
 1,002
Basic and diluted loss per share of Class A common stock$(0.17) (0.05)
Basic and diluted loss per share of Class B common stock(0.08) (0.03)





June 30, 2019 Form2020 | 10-Q 1615

Table of ContentsDRAFT 6


CITIZENS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)Unaudited)
CICA Ltd. is a wholly-owned subsidiary of Citizens and is domiciled in Bermuda. The BMA requires insurers domiciled in Bermuda to maintain available statutory economic capital and surplus at a level equal to or in excess of its enhanced capital requirement (“ECR”), which the Company calculates by using the Bermuda Solvency Capital Requirement (“BSCR”). The BMA has established a target capital level (“TCL”) that requires insurers to maintain available statutory economic capital and surplus equal to 120% of its ECR. We normally experience fluctuations in the fair values of our assets and liabilities, which impact our ECR ratio. As of March 31, 2020, CICA Ltd.’s available statutory economic capital and surplus was below the TCL by $8.9 million.


Two key components of available statutory economic capital and surplus were adversely affected at March 31, 2020 due to the disruption that the COVID-19 pandemic has had on the worldwide economy: 1) the fair value of our assets decreased, and 2) interest rates prescribed by the BMA decreased resulting in an increase of our statutory economic insurance liabilities. Since CICA Ltd. failed to meet the TCL at March 31, 2020, we complied with applicable regulations by notifying the BMA in writing and filing a report with the BMA within the required timeframe to provide details of the circumstances leading to the failure. We have had several detailed discussions with the BMA during the second quarter of 2020 and continue to provide details on CICA Ltd.’s financial performance, interest rate sensitivities and corporate strategies. At June 30, 2020, CICA Ltd. was above the TCL threshold and although we continue to hold discussions with the BMA, there has been no capital or management action required.

(5) INVESTMENTS


The Company invests primarily in fixed maturity securities, which totaled 90.7%89.2% of total cash cash equivalents and investmentsinvested assets at June 30, 2019. The Company's cash, cash equivalents and investments are listed2020, as shown below.


Carrying Value
(In thousands, except for %)
June 30, 2020December 31, 2019
Amount%Amount%
Cash and invested assets:
Fixed maturity securities$1,417,317  89.2 %$1,377,959  90.2 %
Equity securities20,698  1.3 %16,033  1.1 %
Policy loans84,171  5.3 %82,005  5.4 %
Real estate and other long-term investments12,023  0.8 %2,956  0.2 %
Short-term investments—  — %1,301  0.1 %
Cash and cash equivalents52,375  3.4 %46,205  3.0 %
Total cash and invested assets$1,586,584  100.0 %$1,526,459  100.0 %


June 30, 2020 | 10-Q 16

Carrying Value
(In thousands, except for %)
June 30, 2019 December 31, 2018
Amount % Amount %
        
Fixed maturity securities$1,341,339
 90.7% $1,231,039
 88.7%
Equity securities15,827
 1.1% 15,068
 1.1%
Mortgage loans182
 —% 186
 —%
Policy loans81,545
 5.5% 80,825
 5.8%
Real estate and other long-term investments2,593
 0.2% 7,223
 0.5%
Short-term investments2,455
 0.2% 7,865
 0.6%
Cash and cash equivalents34,568
 2.3% 45,492
 3.3%
Total cash, cash equivalents and investments$1,478,509
 100.0% $1,387,698
 100.0%
Table of ContentsDRAFT 6


CITIZENS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following tables represent the cost or amortized cost, gross unrealized gains and losses and fair value of fixed maturities as of the dates indicated.

Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Fair
Value
June 30, 2020
(In thousands)
Fixed maturity securities:    
Available-for-sale:    
U.S. Treasury securities$9,570  2,070  —  11,640  
U.S. Government-sponsored enterprises3,503  1,378  —  4,881  
States and political subdivisions427,529  28,965  675  455,819  
Corporate:
Financial193,818  20,018  555  213,281  
Consumer157,302  20,113  1,450  175,965  
Energy81,201  4,854  1,904  84,151  
All Other255,584  27,951  1,048  282,487  
Commercial mortgage-backed278  —  7  271  
Residential mortgage-backed118,250  23,467  —  141,717  
Asset-backed48,491  165  1,672  46,984  
Foreign governments102  19  —  121  
Total fixed maturity securities$1,295,628  129,000  7,311  1,417,317  

Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Fair
Value
December 31, 2019
(In thousands)
Fixed maturity securities:    
Available-for-sale:    
U.S. Treasury securities$9,709  1,638  —  11,347  
U.S. Government-sponsored enterprises3,516  1,015  —  4,531  
States and political subdivisions512,239  24,285  240  536,284  
Corporate:
Financial169,146  13,094  135  182,105  
Consumer148,575  12,591  464  160,702  
Energy74,315  4,765  115  78,965  
All Other212,714  16,022  420  228,316  
Commercial mortgage-backed1,105  —  5  1,100  
Residential mortgage-backed118,130  12,223  66  130,287  
Asset-backed44,302  11  110  44,203  
Foreign governments102  17  —  119  
Total fixed maturity securities$1,293,853  85,661  1,555  1,377,959  
 
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
June 30, 2019   
(In thousands)   
        
Fixed maturities:       
Available-for-sale:       
U.S. Treasury securities$9,749
 1,733
 —
 11,482
U.S. Government-sponsored enterprises3,528
 1,015
 —
 4,543
States and political subdivisions651,598
 25,193
 351
 676,440
Corporate481,406
 30,533
 2,171
 509,768
Commercial mortgage-backed1,109
 2
 —
 1,111
Residential mortgage-backed116,364
 11,280
 2
 127,642
Asset-backed10,229
 5
 1
 10,233
Foreign governments102
 18
 —
 120
Total fixed maturities$1,274,085
 69,779
 2,525
 1,341,339





June 30, 2019 Form2020 | 10-Q 17

Table of ContentsDRAFT 6


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

 
Cost or
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
December 31, 2018   
(In thousands)   
  
Fixed maturities:       
Available-for-sale securities:       
U.S. Treasury securities$9,864
 1,410
 —
 11,274
U.S. Government-sponsored enterprises3,540
 740
 —
 4,280
States and political subdivisions713,991
 7,614
 1,490
 720,115
Corporate384,817
 6,725
 9,746
 381,796
Commercial mortgage-backed39,694
 386
 66
 40,014
Residential mortgage-backed66,960
 1,726
 2
 68,684
Asset-backed4,764

1

8

4,757
Foreign governments117
 2
 —
 119
Total fixed maturities$1,223,747
 18,604
 11,312
 1,231,039
Most of the Company's equity securities are diversified stock and bond mutual funds.
 
Fair Value
(In thousands)
June 30, 2019 December 31, 2018
Fair Value
(In thousands)
June 30, 2020December 31, 2019
   
Equity securities:   Equity securities: 
Stock mutual funds$3,142
 2,906
Stock mutual funds$2,796  3,274  
Bond mutual funds12,255
 11,774
Bond mutual funds11,810  12,311  
Common stock120
 94
Common stock1,064  134  
Non-redeemable preferred stock310
 294
Non-redeemable preferred stock5,028  314  
Total equity securities$15,827
 15,068
Total equity securities$20,698  16,033  


VALUATION OF INVESTMENTS


Available-for-sale securities are reported in the consolidated financial statements at fair value. Equity securities are measured at fair value with the change in fair value recorded through net income. The Company recognized net realized gains of $155,000$1.3 million and $757,000$0.2 million on equity securities held for the three and six months ended June 30, 20192020 and lossesgains of $86,000$0.2 million and $388,000$0.8 million for the same periods ended June 30, 2018, respectively.2019. In the first quarter of 2019, the Company sold its former corporate office in Austin, Texas for a gross sales price of $7.5 million, resulting in a gain on the sale of $5.5 million. The building was owned by CICA within our Life Insurance segment. An impairment loss of $3.1 million was recorded during the second quarter of 2019 related to our Citizens Academy training facility property located near Austin, Texas. It was determined during the quarter that the property met the held-for-sale criteria. As a result, this investment was reclassified from real estate held for investment to real estate held-for-sale. This resulted in an impairment loss of $3.1 million as the carrying amount of the property was written down to the net realizable value. This investment is considered a Level 3 asset in the fair value hierarchy.hierarchy and is reported within other non-insurance enterprises.


The Company monitors all debtfixed maturity securities on an on-going basis relative to changes in credit ratings, market prices, earnings trends and financial performance, in addition to specific region or industry reviews.  The assessment of whether other-than-temporary impairments ("OTTI") have occurred is based on a case-by-case evaluation of underlying reasons for the decline in fair value.  The Company determines OTTI by reviewing relevant evidence related to the specific security issuer as well as the Company's intent to sell the security, or if it is more likely than not that the Company would be required to sell a security before recovery of its amortized cost.

When an OTTI has occurred, the amount of the OTTI recognized in earnings depends on whether the Company intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost



June 30, 2019 Form 10-Q 18
Table of Contents

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

basis.  If the Company intends to sell the security or it is more likely that the Company will be required to sell the security before recovery of its amortized cost basis, the OTTI is recognized in earnings equal to the entire difference between the investment's amortized cost and its fair value at the balance sheet date.  If the Company does not intend to sell the security and it is more likely than not that the Company will not be required to sell the security before recovery of its amortized cost basis, the OTTI is separated into the following: (a) the amount representing the credit loss; and (b) the amount related to all other factors.  The amount of the total OTTI related to the credit loss is recognized in earnings.  The amount of the total OTTI related to other factors is recognized in other comprehensive income, net of applicable taxes.  The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.  The new amortized cost basis is not adjusted for subsequent recoveries in fair value.

The Company evaluates whether a credit impairment exists for fixed maturity securities by considering primarily the following factors: (a) changes in the financial condition of the security's underlying collateral; (b) whether the issuer is current on contractually obligated interest and principal payments; (c) changes in the financial condition, credit rating and near-term prospects of the issuer; (d) the length of time to which the fair value has been less than the amortized cost of the security; and (e)(d) the payment structure of the security.  The Company's best estimate of expected future cash flows used to determine the credit loss amount is a quantitative and qualitative process.  Quantitative review includes information received from third partythird-party sources such as financial statements, pricing and rating changes, liquidity and other statistical information.  Qualitative factors include judgments related to business strategies, economic impacts on the issuer, and overall judgment related to estimates and industry factors.  factors as well as the Company's intent to sell the security, or if it is more likely than not that the Company would be required to sell a security before recovery of its amortized cost.

The Company's best estimate of future cash flows involves assumptions including, but not limited to, various performance indicators, such as historical and projected default and recovery rates, credit ratings, and current delinquency rates.  These assumptions require the use of significant management judgment and include the probability of issuer default and estimates regarding timing and amount of expected recoveries, which may include estimating the underlying collateral value.  In addition, projections of expected future debtfixed maturity security cash flows may change based upon new information regarding the performance of the issuer. Any credit losses are presented as an allowance rather than as a write-down on AFS fixed maturity securities management does not intend to sell or believes that it is more likely than not we will be required to sell.


NoWe adopted ASU 2016-13 using the prospective transition approach for fixed maturity securities for which other-than-temporary impairment had been recognized prior to January 1, 2020. As a result, the amortized cost remains the same before and after adoption. The effective interest rate on these fixed maturity securities was not changed.

June 30, 2020 | 10-Q 18

Table of ContentsDRAFT 6

CITIZENS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Amounts previously recognized in accumulated other comprehensive income as of January 1, 2020 relating to improvements in cash flow expected to be collected will be accreted into income over the remaining life of the asset. Recoveries of amounts previously written off relating to improvements in cash flows after January 1, 2020 will be recorded in earnings when received.

For the three and six months ended June 30, 2020, the Company recorded 0 credit valuation losses on fixed maturity securities and recognized 0 fixed maturity investment impairments were recognized for the three and six months ended June 30, 2019 or the three months ended June 30, 2018.  OTTI of $225,000 was recognized on one fixed maturity security issuer for the six months ended June 30, 2018.2019.


The following tables presenttable presents the fair values and gross unrealized losses of fixed maturity securities that are not deemed to have remainedcredit losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position forat June 30, 2020.

June 30, 2020Less than 12 monthsGreater than 12 monthsTotal
(In thousands, except for # of securities)Fair
Value		Unrealized
Losses		# of
Securities		Fair
Value		Unrealized
Losses		# of
Securities		Fair
Value		Unrealized
Losses		# of
Securities
Fixed maturities:         
Available-for-sale securities:         
States and political subdivisions$15,281  640  19  $525  35  2  $15,806  675  21  
Corporate:
Financial24,114  555  25  —  —  —  24,114  555  25  
Consumer22,907  1,121  21  1,368  329  1  24,275  1,450  22  
Energy26,644  1,904  34  —  —  —  26,644  1,904  34  
All Other29,026  1,048  33  —  —  —  29,026  1,048  33  
Commercial mortgage-backed218  7  1  —  —  —  218  7  1  
Residential mortgage-backed86  —  1  —  —  —  86  —  1  
Asset-backed42,222  1,672  40  —  —  —  42,222  1,672  40  
Total fixed maturities$160,498  6,947  174  $1,893  364  3  $162,391  7,311  177  

In each category of our fixed maturity securities described below, we do not intend to sell our investments and it is not more likely than not that the periods indicated.Company will be required to sell the investments before recovery of their amortized cost bases. While the losses are currently unrealized, we continue to monitor all fixed maturity securities on an on-going basis as future information may become available which could result in an allowance being recorded.


States and political subdivisions. The Company's investments in states and political subdivisions were purchased at a premium, relative to their face amount, and the contractual cash flows are guaranteed by the respective state or political subdivision. Accordingly, it is expected that the securities will not be settled at a price less than the amortized cost bases of the Company's investments.

Corporate. We did not recognize credit losses on corporate securities with unrealized losses that were due to interest rate sensitivity and changes in credit spreads. We believe that fluctuations caused by movements in interest rates and credit spreads have little bearing on the recoverability of our investments. While we are experiencing unrealized losses across several corporate sectors, the energy and automobile sectors have been impacted the most and some issuers within these sectors have been downgraded to below investment grade. We have assessed our exposure in the energy sector and believe our investments have access to sufficient liquidity to meet their debt obligations. The auto industry has been able to issue debt during the quarter which has increased their liquidity significantly. The automobile sector is included in the Consumer subtotal above.

June 30, 2019Less than 12 monthsGreater than 12 monthsTotal
(In thousands, except for # of securities)
Fair
Value
Unrealized
Losses
# of
Securities
Fair
Value
Unrealized
Losses
# of
Securities
Fair
Value
Unrealized
Losses
# of
Securities
          
Fixed maturities:         
Available-for-sale securities:         
States and political subdivisions$44,983
198
39
24,021
153
33
69,004
351
72
Corporate57,128
1,868
39
10,304
303
12
67,432
2,171
51
Residential mortgage-backed—
—
—
94
2
4
94
2
4
Asset-backed1,345
1
2
—
—
—
1,345
1
2
Total fixed maturities$103,456
2,067
80
34,419
458
49
137,875
2,525
129





June 30, 2019 Form2020 | 10-Q 19

Table of ContentsDRAFT 6


CITIZENS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)Unaudited)
Asset-backed. Our asset-backed securities are primarily senior tranches of pools of aircraft leases to airlines around the world. If an airline was to go bankrupt and default on its lease, the trust would repossess the plane and relet or sell it. There have been no defaults on leases to date, however the leases contain a feature that allows lessors to defer their lease payments for three months, with the funds recaptured with interest when payments resume. Several of the lessors have requested this deferral. We do not expect to realize any losses for these securities and see the current valuations as a result of general market conditions. Currently all of these securities are rated investment grade.


The following table presents the fair values and gross unrealized losses of fixed maturity securities that are not deemed to have other than temporary impairments ("OTTI"), aggregated by investment category and length of time that individual securities have been in a continuous loss position at December 31, 2019.
December 31, 2018Less than 12 monthsGreater than 12 monthsTotal
(In thousands, except for # of securities)
Fair
Value
Unrealized
Losses
# of
Securities		Fair
Value		Unrealized
Losses		# of
Securities		Fair
Value		Unrealized
Losses		# of
Securities
          
Fixed maturities:         
Available-for-sale securities:         
States and political subdivisions$227,132
883
233
33,891
607
46
261,023
1,490
279
Corporate230,030
8,770
191
9,936
976
8
239,966
9,746
199
Commercial mortgage-backed14,992
66
11
—
—
—
14,992
66
11
Residential mortgage-backed18
—
3
98
2
4
116
2
7
Asset-backed3,747
8
4
—
—
—
3,747
8
4
Total fixed maturities$475,919
9,727
442
43,925
1,585
58
519,844
11,312
500

December 31, 2019Less than 12 monthsGreater than 12 monthsTotal
(In thousands, except for # of securities)Fair
Value		Unrealized
Losses		# of
Securities		Fair
Value		Unrealized
Losses		# of
Securities		Fair
Value		Unrealized
Losses		# of
Securities
Fixed maturities:         
Available-for-sale securities:         
States and political subdivisions$24,064  163  24  $1,961  77  6  $26,025  240  30  
Corporate:
Financial13,581  135  15  —  —  —  13,581  135  15  
Consumer22,671  464  20  —  —  —  22,671  464  20  
Energy4,208  34  4  898  81  2  5,106  115  6  
All Other22,437  285  30  2,771  135  3  25,208  420  33  
Commercial mortgage-backed1,100  5  2  —  —  —  1,100  5  2  
Residential mortgage-backed1,656  65  11  91  1  3  1,747  66  14  
Asset-backed36,039  110  27  —  —  —  36,039  110  27  
Total fixed maturities$125,756  1,261  133  $5,721  294  14  $131,477  1,555  147  
 
We have reviewed the securities in an unrealized loss position for the periodsperiod ended June 30, 2019 and December 31, 20182019 and determined that no0 OTTI exists that havehas not been recognized based on our evaluation of the credit worthiness of the issuers and the fact that we do not intend to sell the investments nor is it likely that we will be required to sell the securities before recovery of their amortized costcosts bases which may be maturity.  We continue to monitor all securities on an on-going basis and future information may become available which could result in other-than-temporary impairments being recorded.


The amortized cost and fair value of fixed maturity securities at June 30, 20192020 by contractual maturity are shown in the table below.  Actual maturities may differ from contractual maturities because borrowers may have the right to

June 30, 2020 | 10-Q 20

Table of ContentsDRAFT 6

CITIZENS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date have been reflected based upon final stated maturity.


June 30, 2020Amortized
Cost		Fair
Value
(In thousands)
Fixed maturity securities:  
Due in one year or less$75,437  75,900  
Due after one year through five years104,138  110,410  
Due after five years through ten years224,482  243,865  
Due after ten years891,571  987,142  
Total fixed maturity securities$1,295,628  1,417,317  
June 30, 2019Amortized
Cost		 Fair
Value
(In thousands) 
Fixed maturity securities:   
Due in one year or less$102,787
 103,200
Due after one year through five years131,248
 136,348
Due after five years through ten years214,674
 226,791
Due after ten years825,376
 875,000
Total fixed maturity securities$1,274,085
 1,341,339




June 30, 2019 Form 10-Q 20
Table of Contents

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


The Company uses the specific identification method of the individual security to determine the cost basis used in the calculation of realized gains and losses related to security sales.  

Fixed Maturities, Available-for-Sale Equity SecuritiesThree Months EndedSix Months Ended
Three Months Ended Six Months Ended Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
Fixed Maturity Securities, Available-for-SaleFixed Maturity Securities, Available-for-SaleJune 30,June 30,
(In thousands)20192018 20192018 20192018 20192018(In thousands)2020201920202019
        
        
Proceeds$2,755
—
 10,414
—
 —
—
 —
—
Proceeds$5,363  2,755  6,303  10,414  
Gross realized gains$107
—
 109
—
 —
—
 —
—
Gross realized gains$123  107  123  109  
Gross realized losses$182
—
 365
—
 —
—
 —
—
Gross realized losses$19  182  57  365  


There were sales of tenThe Company sold 5 and twenty6 available-for-sale fixed maturity securities for the three and six months ended June 30, 2019, respectively. No available-for-sale fixed maturity securities were sold during the three and six months ended June 30, 2018. No2020 and sold 10 and 20 available-for-sale fixed maturity securities during the three and six months ended June 30, 2019. NaN equity securities were sold during the three and six months ended June 30, 20192020 and 2018.2019.


(6) FAIR VALUE MEASUREMENTS


Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  We hold available-for-sale fixed maturity securities, which are carried at fair value. We also report our equity securities at fair value with changes in fair value reported through the consolidated statements of operations and comprehensive income.income (loss).


Fair value measurements are generally based upon observable and unobservable inputs.  Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our view of market assumptions in the absence of observable market information.  We utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.  All assets and liabilities carried at fair value are required to be classified and disclosed in one of the following three categories:


•Level 1 - Quoted prices for identical instruments in active markets.
•Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs or whose significant value drivers are observable.
•Level 3 - Instruments whose significant value drivers are unobservable.


Level 1 primarily consists of financial instruments whose value is based on quoted market prices such as U.S. Treasury securities and actively traded mutual fund and stock investments.


June 30, 2020 | 10-Q 21

Table of ContentsDRAFT 6

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

Level 2 includes those financial instruments that are valued by independent pricing services or broker quotes.  These pricing models are primarily industry-standard models that consider various inputs, such as interest rates, credit spreads and foreign exchange rates for the underlying financial instruments.  All significant inputs are observable or derived from observable information in the marketplace or are supported by observable levels at which transactions are executed in the marketplace.  Financial instruments in this category primarily include corporate securities, U.S. Government-sponsored enterprise securities, municipal securities issued by states and political subdivisions and certain mortgage and asset-backed securities.


Level 3 is comprised of financial instruments whose fair value is estimated based on non-binding broker prices utilizing significant inputs not based on or corroborated by readily available market information.  Real estate held-for-sale is in this category. There were no0 securities in this category at June 30, 2019.2020.




June 30, 2019 Form 10-Q 21
Table of Contents

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


The following tables set forth our assets that are measured at fair value on a recurring basis as of the dates indicated.

June 30, 2019Level 1 Level 2 Level 3 
Total
Fair Value
June 30, 2020June 30, 2020Level 1Level 2Level 3Total
Fair Value
(In thousands)Level 1 Level 2 Level 3 
Total
Fair Value
(In thousands)
Financial Assets Financial Assets
Fixed maturities available-for-sale       Fixed maturities available-for-sale    
U.S. Treasury and U.S. Government-sponsored enterprises$11,482
 4,543
 —
 16,025
U.S. Treasury and U.S. Government-sponsored enterprises$11,640  4,881  —  16,521  
States and political subdivisions—
 676,440
 —
 676,440
States and political subdivisions—  455,819  —  455,819  
Corporate50
 509,718
 —
 509,768
Corporate51  755,833  —  755,884  
Commercial mortgage-backed—
 1,111
 —
 1,111
Commercial mortgage-backed—  271  —  271  
Residential mortgage-backed—
 127,642
 —
 127,642
Residential mortgage-backed—  141,717  —  141,717  
Asset-backed—
 10,233
 —
 10,233
Asset-backed—  46,984  —  46,984  
Foreign governments—
 120
 —
 120
Foreign governments—  121  —  121  
Total fixed maturities available-for-sale11,532
 1,329,807
 —
 1,341,339
Total fixed maturities available-for-sale11,691  1,405,626  —  1,417,317  
       
Equity securities 
  
  
  
Equity securities    
Stock mutual funds3,142
 —
 —
 3,142
Stock mutual funds2,796  —  —  2,796  
Bond mutual funds12,255
 —
 —
 12,255
Bond mutual funds11,810  —  —  11,810  
Common stock120
 —
 —
 120
Common stock1,064  —  —  1,064  
Non-redeemable preferred stock310
 —
 —
 310
Non-redeemable preferred stock5,028  —  —  5,028  
Total equity securities15,827
 —
 —
 15,827
Total equity securities20,698  —  —  20,698  
Other long-term investments (1)
Other long-term investments (1)
—  —  —  9,079  
Total financial assets$27,359
 1,329,807
 —
 1,357,166
Total financial assets$32,389  1,405,626  —  1,447,094  

(1) In accordance with Subtopic 820-10, certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the balance sheet.





June 30, 2019 Form2020 | 10-Q 22

Table of ContentsDRAFT 6


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

December 31, 2018Level 1 Level 2 Level 3 
Total
Fair Value
December 31, 2019December 31, 2019Level 1Level 2Level 3Total
Fair Value
(In thousands)Level 1 Level 2 Level 3 
Total
Fair Value
(In thousands)
Financial Assets Financial Assets
Fixed maturities available-for-sale       Fixed maturities available-for-sale    
U.S. Treasury and U.S. Government-sponsored enterprises$11,274
 4,280
 —
 15,554
U.S. Treasury and U.S. Government-sponsored enterprises$11,348  4,530  —  15,878  
States and political subdivisions—
 720,115
 —
 720,115
States and political subdivisions—  536,284  —  536,284  
Corporate47
 381,749
 —
 381,796
Corporate52  650,036  —  650,088  
Commercial mortgage-backed—
 40,014
 —
 40,014
Commercial mortgage-backed—  1,100  —  1,100  
Residential mortgage-backed—
 68,684
 —
 68,684
Residential mortgage-backed—  130,287  —  130,287  
Asset-backed—
 4,757
 —
 4,757
Asset-backed—  44,203  —  44,203  
Foreign governments—
 119
 —
 119
Foreign governments—  119  —  119  
Total fixed maturities available-for-sale11,321
 1,219,718
 —
 1,231,039
Total fixed maturities available-for-sale11,400  1,366,559  —  1,377,959  
       
Equity securities 
  
  
  
Equity securities    
Stock mutual funds2,906
 —
 —
 2,906
Stock mutual funds3,274  —  —  3,274  
Bond mutual funds11,774
 —
 —
 11,774
Bond mutual funds12,311  —  —  12,311  
Common stock94
 —
 —
 94
Common stock134  —  —  134  
Non-redeemable preferred stock294
 —
 —
 294
Non-redeemable preferred stock314  —  —  314  
Total equity securities15,068
 —
 —
 15,068
Total equity securities16,033  —  —  16,033  
Total financial assets$26,389
 1,219,718
 —
 1,246,107
Total financial assets$27,433  1,366,559  —  1,393,992  
 
FINANCIAL INSTRUMENTS VALUATION


FINANCIAL INSTRUMENTS CARRIED AT FAIR VALUE


Fixed maturity securities, available-for-sale.  At June 30, 2019,2020, our fixed maturity securities, valued using a third-party pricing source, totaled $1.3$1.4 billion for Level 2 assets and comprised 98.0%97.1% of total reported fair value of our financial assets.  The Level 1 and Level 2 valuations are reviewed and updated quarterly through random testing by comparisons to separate pricing models, other third-party pricing services, and back tested to recent trades.  In addition, we obtain information annually relative to the third-party pricing models and review model parameters for reasonableness.  There were no0 Level 3 assets at June 30, 2019.2020. For the six months ended June 30, 2019,2020, there were no material changes to the valuation methods or assumptions used to determine fair values, and no0 broker or third-party prices were changed from the values received. There were no transfers between Levels 1 and 2 securities during the six months ended June 30, 2019.


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


Other long-term investments. We initially estimate the fair value of investments in private equity limited partnerships by reference to the transaction price. Subsequently, we obtain the fair value of these investments from net asset value information provided by the general partner or manager of the investments, the financial statements of which are audited annually. We hold an investment in a private equity fund that invests in privately-originated, performing senior secured debt primarily in middle market North America-based companies. Our unfunded commitment as of June 30, 2020 is $35.9 million. This investment is not redeemable because distributions from the funds will be received when the underlying investments of the funds are liquidated. The fund has a 10 year term but this life could be extended at the fund manager’s discretion in one year increments.

We hold an investment in a term asset-backed securities liquidity facility private equity fund, established by the U.S. Federal Reserve, that provides financing to U.S. company market participants for levered asset purchases with a

June 30, 2020 | 10-Q 23

Table of ContentsDRAFT 6

CITIZENS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
focus on asset-backed, commercial mortgage and collateralized loan obligation markets. Our unfunded commitment for this fund as of June 30, 2020 is $14.9 million. This investment is not redeemable because distributions from the funds will be received when the underlying investments of the funds are liquidated. The fund is expected to be liquidated in 3 years but this life could be extended at the fund manager's discretion in one year increments.

We review the fair value hierarchy classifications each reporting period.  Changes in the observability of the valuation attributes may result in a reclassification of certain financial assets.  Such reclassifications are reported as transfers in and out of Level 3 at the beginning fair value for the reporting period in which the changes occur. There were no0 transfers in or out of Level 3 during the six months ended June 30, 2019.2020.




June 30, 2019 Form 10-Q 23
Table of Contents

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


FINANCIAL INSTRUMENTS NOT CARRIED AT FAIR VALUE


Estimates of fair values are made at a specific point in time, based on relevant market prices and information about the financial instruments.  The estimated fair values of financial instruments presented below are not necessarily indicative of the amounts the Company might realize in actual market transactions.


The carrying amount and fair value for the financial assets and liabilities on the consolidated balance sheets not otherwise disclosed for the periods indicated are as follows:

June 30, 2019 December 31, 2018 June 30, 2020December 31, 2019
(In thousands)Carrying Value Fair Value Carrying Value Fair Value(In thousands)Carrying
Value		Fair
Value		Carrying
Value		Fair
Value
       
Financial Assets:       Financial Assets:    
Mortgage loans$182
 220
 186
 222
Mortgage loans$162  200  177  210  
Policy loans81,545
 81,545
 80,825
 80,825
Policy loans84,171  84,171  82,005  82,005  
Short-term investments2,455
 2,455
 7,865
 7,865
Short-term investments—  —  1,301  1,301  
Cash and cash equivalents34,568
 34,568
 45,492
 45,492
Cash and cash equivalents52,375  52,375  46,205  46,205  
Financial Liabilities: 
  
  
  
Financial Liabilities:    
Annuity - investment contracts57,069
 60,339
 56,658
 55,977
Annuity - investment contracts58,670  66,499  56,878  60,667  


Mortgage loans. Mortgage loans are secured principally by residential properties.  Weighted average interest rates for these loans were approximately 6.6%6.4% at June 30, 20192020 and December 31, 2018.2019. At June 30, 2019,2020, maturities ranged from 198 to 2320 years.  Management estimated the fair value using an annual interest rate of 6.25% at June 30, 2019.2020.  Our mortgage loans are considered Level 3 assets in the fair value hierarchy.


Policy loans. Policy loans had a weighted average annual interest rate of 7.7% at June 30, 20192020 and December 31, 2018,2019, and no specified maturity dates.  The aggregate fair value of policy loans approximates the carrying value reflected on the consolidated balance sheets.  These loans typically carry an interest rate that corresponds to the crediting rate applied to the related policy and contract reserves.  Policy loans are an integral part of the life insurance policies we have inforce,in force, cannot be valued separately and are not marketable.  Therefore, the fair value of policy loans approximates the carrying value and policy loans are considered Level 3 assets in the fair value hierarchy.

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

Annuity liabilities. The fair value of the Company's liabilities under annuity contract policies, which are considered Level 3 assets,liabilities, was estimated at June 30, 20192020 using discounted cash flows based upon spot rates ranging from 2.06%0.40% to 3.28%2.39% adjusted for various risk adjustments.adjustments and 1.67% to 3.02% at December 31, 2019. The fair value of liabilities under all insurance contracts are taken into consideration in the overall management of interest rate risk,

June 30, 2020 | 10-Q 24

Table of ContentsDRAFT 6

CITIZENS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
which seeks to minimize exposure to changing interest rates through the matching of investment maturities with amounts due under insurance contracts.


The following table summarizes the carrying amounts of other long-term investments.

Carrying Value
(In thousands)
June 30, 2020December 31, 2019
Other long-term investments:
Private equity$9,079  —  
FHLB common stocks190  187  
Mortgage loans162  177  
All other investments21  21  
Total other long-term investments$9,452  385  

We are a member of the Federal Home Loan Bank ("FHLB") of Dallas and such membership requires members to own stock in the FHLB. Our FHLB stock is carried at amortized cost, which approximates fair value.

(7) COMMITMENTS AND CONTINGENCIES


QUALIFICATION OF LIFE PRODUCTS


We have previously reported that a portion of the life insurance policies issued by our subsidiary insurance companies failed to qualify for the favorable U.S. federal income tax treatment afforded by SectionSections 7702 and 72(s) of the Internal Revenue Code ("IRC") of 1986. Further, we have determined that the structure of our policies sold to non-U.S. citizens,persons, which were novated to CICA Ltd. effective July 1, 2018, may have inadvertently generated U.S. source income over time. Based upon a reviewtime, which caused tax withholding and information reporting requirements for the Company under Chapters 3 and 4 of the options available to address these issues, we are in the process of remediating domestic



June 30, 2019 Form 10-Q 24
Table of Contents

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

life and annuity policies to U.S. citizens to comply with the IRC. For the novated policies sold to non-U.S. citizens,persons, we expect to settle any past liabilities with the Internal Revenue Service ("IRS"). related to tax withholding and information reporting failures. The Company has continued to refine its estimate of the tax, penalty and interest exposure and expenses related to these tax issues, as described below for the current reporting period. The products have been and continue to be appropriately reported as life insurance under U.S. GAAP for financial reporting.


TheseIn December 2019, the Company submitted corrected withholding tax issues resultreturns to the IRS in anorder to establish the tax liability amount for failing to withhold tax and report the U.S. source income generated by the novated policies to remediate the noncompliance matter described above. With the continued uncertainty that remains, including the acceptance of the submitted withholding tax returns, IRS review of our submission, and future negotiations, our estimated liability was approximately $10.0 million, after tax, as of June 30, 2019 of $10.0 million, after tax,2020 related to the projected IRS settlement amounts of $9.1 million and reserve increases totaling $0.9 million to bring policies into compliance.agreement with the IRS. The probability weighted range of financial estimates relative to this issue is $6.0$7.4 million to $52.5 million, after tax. This estimated range includes projected taxes and interest and penalties payable to the IRS, as well as estimated increased payout obligations to current holders of non-compliant domestic life insurance policies expected to result from remediation of those policies.

Accruals for loss contingencies are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. The estimated liabilityprocess of determining our best estimate and the estimated range will be updated as we continue to refine our estimates.

is a complex undertaking including insight from external consultants and involved management’s judgment based upon a variety of factors known at the time. The amount of our liabilities and expenses depends on a number of uncertainties, including the number of prior tax years for which we may be liable to the IRS and the methodology applicable to the calculation of the tax liabilities for policies. Given the range of potential outcomes and the significant variables assumed in establishing our estimates, actual amounts incurred may exceed our reserve and could exceed the high end of our estimated range of liabilities and expenses. To the extent the amount reserved by the Company is insufficient to meet the actual amount of our liabilities and expenses, or if our estimates of those liabilities and

June 30, 2020 | 10-Q 25

Table of ContentsDRAFT 6

CITIZENS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
expenses change in the future, our financial condition and results of operations may be materially adversely affected. Management believes that based upon current information, we have recorded the best estimate liability to date.

Accruals for loss contingencies are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. The process of determining our best estimate and the estimated range was a complex undertaking including insight from external consultants and involved management’s judgment based upon a variety of factors known at the time. We expect to incur additional costs ranging from $0.6 million to $0.9 million related to performing this analysis, but due to the uncertainty of actions, we cannot reasonably estimate these costs with any reliability. Actual amounts incurred may exceed this estimate and will be recorded as they become probable and can be reasonably estimated.

On May 17, 2017, we submitted an offer to enter into Closing Agreements with the IRS covering certain CICA and CNLIC domestic life insurance policies (the "Closing Agreements"), which was accepted by the IRS on June 7, 2019. Pursuant to the Closing Agreements, CICA and CNLIC agreed to pay the IRS $123,779 and $4,118, respectively, by August 6, 2019, and follow the corrective steps for the policies outlined in the Closing Agreements by September 5, 2019. These payments were made to the IRS on July 12, 2019. For certain life insurance policies that failed to satisfy the requirements of the cash value accumulation test of Section 7702 ("CVAT") of the IRC, we agreed to amend such policies retroactively to their original dates of issue by adding an endorsement (which provides that the death benefit of such policies will not be less than the amount of life insurance necessary to maintain CVAT compliance). For the life insurance policies that failed to satisfy the premium requirements of the guideline premium test of Section 7702 of the IRC, we agreed as needed to refund each policyholder the amount of premiums paid that exceeded the guideline premium limitation plus interest thereon. We expect to complete these corrective steps by September 5, 2019, the deadline set forth in the Closing Agreements.


LITIGATION AND REGULATORY ACTIONS


From time to time we are subject to legal and regulatory actions relating to our business. We may incur defense costs, including attorneys' fees, and other direct litigation costs associated with defending claims. If we suffer an adverse judgment as a result of litigation claims, it could have a material adverse effect on our business, results of operations and financial condition.





June 30, 2019 Form 10-Q 25
Table of Contents

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

(8) INCOME TAXES


Our provision for income taxes may not have the customary relationship of taxes to income. A reconciliation between the U.S. corporate income tax rate and the effective income tax rate is as follows:

Six Months Ended June 30,2019 2018
(In thousands, except for %)Amount % Amount %
Federal income tax expense:       
Expected tax expense (benefit)$(276) 21.0 % $(322) 21.0 %
Foreign income tax rate differential(111) 8.4 % —
 — %
Annualized effective tax rate adjustment3,264
 (248.2)% 974
 (63.6)%
Effect of uncertain tax position2,416
 (183.7)% 1,664
 (108.6)%
Nondeductible costs to remediate tax compliance issue—
 — % (1,267) 82.7 %
CICA Ltd. Subpart F income1,595
 (121.4)% —
 — %
Other164
 (12.4)% (60) 3.9 %
Total federal income tax expense$7,052
 (536.3)% $989
 (64.6)%

A reconciliation of federal income tax expense above is computed by applying the federal income tax rate of 21% in 2019 and 2018 to income before federal income tax expense.

CICA Ltd., a wholly owned subsidiary of Citizens, is considered a controlled foreign corporation for federal tax purposes. As a result, the insurance activity of CICA Ltd. is subject to Subpart F of the IRC and is included in Citizens’ taxable income. As ofFor the three and six months ended June 30, 2019,2020, the Subpart F income inclusion generated $1.6$0.7 million and $1.4 million of federal income tax expense.expense, respectively. A reconciliation between the U.S. corporate income tax rate and the effective income tax rate is as follows:

Three Months Ended June 30,20202019
(In thousands, except for %)Amount%Amount%
Federal income tax expense:
Expected tax expense (benefit)$92  21.0 %$(698) 21.0 %
Foreign income tax rate differential(489) (111.6)%(196) 5.9 %
Tax-exempt interest and dividends-received deduction(38) (8.7)%(59) 1.8 %
Annualized effective tax rate adjustment229  52.3 %(55) 1.7 %
Adjustment of prior year taxes(83) (18.9)%—  — %
Effect of uncertain tax position1,028  234.7 %1,224  (36.8)%
CICA Ltd. Subpart F income717  163.7 %884  (26.6)%
Other9  2.1 %142  (4.3)%
Total federal income tax expense$1,465  334.6 %$1,242  (37.3)%


Six Months Ended June 30,20202019
(In thousands, except for %)Amount%Amount%
Federal income tax expense:
Expected tax expense (benefit)$(377) 21.0 %$(276) 21.0 %
Foreign income tax rate differential(1,039) 57.8 %(111) 8.4 %
Tax-exempt interest and dividends-received deduction(78) 4.3 %(118) 9.0 %
Annualized effective tax rate adjustment846  (47.1)%3,264  (248.2)%
Adjustment of prior year taxes(88) 4.9 %—  — %
Effect of uncertain tax position2,043  (113.7)%2,416  (183.7)%
CICA Ltd. Subpart F income1,392  (77.5)%1,595  (121.4)%
Other115  (6.4)%282  (21.4)%
Total federal income tax expense$2,814  (156.7)%$7,052  (536.3)%

June 30, 2020 | 10-Q 26

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

Income tax expense consists of:


Six Months Ended June 30,20202019
(In thousands)
Federal income tax expense:
Current$2,890  7,146  
Deferred(76) (94) 
Total federal income tax expense$2,814  7,052  
Six Months Ended June 30,2019 2018
(In thousands) 
Federal income tax expense:   
Current$7,146
 3,858
Deferred(94) (2,869)
Total federal income tax expense$7,052
 989





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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


The components of deferred federal income taxes are as follows:


Net Deferred Tax Asset (Liability)
(In thousands)
June 30, 2020December 31, 2019
Deferred tax assets:  
Future policy benefit reserves$2,689  2,641  
Net operating and capital loss carryforwards160  230  
Investments644  702  
Deferred intercompany loss2,901  3,539  
Fixed assets482  —  
Lease liability2,627  238  
Other442  700  
Total gross deferred tax assets9,945  8,050  
Deferred tax liabilities:  
Deferred policy acquisition costs, cost of insurance acquired and intangible assets(8,390) (8,417) 
Unrealized gains on investments available-for-sale(10,101) (7,300) 
Tax reserves transition liability(4,110) (4,483) 
Right of use lease asset(2,627) (238) 
Other(37) (40) 
Total gross deferred tax liabilities(25,265) (20,478) 
Net deferred tax liability$(15,320) (12,428) 

(9) LEASES
Net Deferred Tax Asset (Liability)
(In thousands)
June 30, 2019 December 31, 2018
Deferred tax assets:   
Future policy benefit reserves$2,634
 2,795
Net operating and capital loss carryforwards193
 191
Accrued expenses13
 30
Investments1,890
 1,841
Deferred intercompany loss4,896
 5,190
Other748
 309
Total gross deferred tax assets10,374
 10,356
Deferred tax liabilities:   
Deferred policy acquisition costs, cost of customer relationships acquired and intangible assets(8,703) (8,745)
Unrealized gains on investments available-for-sale(6,299) (1,968)
Tax reserves transition liability(4,517) (4,864)
Other(658) (488)
Total gross deferred tax liabilities(20,177) (16,065)
Net deferred tax liability$(9,803) (5,709)


(9) LEASES

Effective January 1, 2019, the Company adopted the new lease accounting guidance in Accounting Standards Update No. 2016-02, Leases (Topic 842) ("ASC No. 842"). We also elected the package of practical expedients, which among other things, does not require reassessment of lease classification. As a result of the adoption of the new lease accounting guidance, the Company recognized on January 1, 2019 a lease liability of $1.8 million discounted using an incremental borrowing rate of 4.76% and a right-of-use asset of $1.8 million. There was $1.7 million of undiscounted lease liability remaining as of June 30, 2019. The Company uses its estimated incremental borrowing rate, which is derived from information available at lease commencement date, in determining present value of lease payments.

The Company leases home office space in Austin, Texas for Citizens and in Bermuda for CICA Ltd. as well as several district office locations related to our Home Service Insurance segment across Louisiana, Mississippi and Arkansas, which are classified as operating leases. Certain operating leases include renewal options that extend the lease term.terms. The exercise of lease renewal options is at our sole discretion when it is reasonably certain that we will exercise such option. Leases with an initial term of 12 months or less are immaterial to the consolidated financial statements and are recognized as lease expense on a straight-line basis over the lease term and not recorded on the consolidated balance sheet. See our Annual Report on Form 10-K for the year ended December 31, 2019 for a comprehensive discussion of leases.



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CITIZENS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company has $12.5 million of undiscounted lease liability remaining as of June 30, 2020. The Company evaluates its estimated incremental borrowing rate, which is derived from information available at lease commencement date, in determining present value of lease payments.

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

Lease TermJune 30, 2020
Lease TermJune 30, 2019
Weighted-average remaining lease term (years)(in years)
Operating leases1.6




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Operating leases		NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9.6
(Unaudited)

Maturities of our remaining lease liabilities as of June 30, 2019 are as follows.
(In thousands) 
Operating Lease Payments (a)
Maturity of Lease Liabilities  
2019 $539
2020 975
2021 187
2022 32
2023 —
After 2023 —
Total lease payments 1,733
Interest expense (64)
Present value of lease liabilities $1,669
(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.Liabilities on our consolidated balance sheets. Cash payments related to lease liabilities were $0.6$0.3 million and $1.1$0.7 million for the three and six months ended June 30, 2019, respectively,2020 and were reported in operating cash flows. Maturities of our remaining operating lease liabilities as of June 30, 2020 are as follows:


(In thousands)Operating Lease Payments
Maturity of Lease Liabilities
2020$739  
20211,414  
20221,274  
20231,273  
20241,305  
After 20248,160  
Total lease payments14,165  
Interest expense(1,659) 
Present value of lease liabilities$12,506  

In January 2019, the 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 spacearea is now under construction to our specifications, which requires the Company to recognize the related lease right of use asset and liability of $12.0 million. The building is expected to be completed in 2020. The long-term lease will commence after constructionthe fourth quarter of the building is complete and has a 121-month term, and therefore is not included in the tables above. Payments under the new long-term lease agreement will average approximately $112,340 per month. To bridge the gap between the expiration date of the current lease that expires in August 2019 and the lease commencement date of the new long-term lease, the Company entered into a lease with an unrelated party for a temporary transitional home office. The transitional lease will commence on August 15, 2019 and end on September 30, 2020. Payments under this lease will be $72,400 per month.


The Company does not engage in lease agreements among related parties.

(10) RELATED PARTY TRANSACTIONS


The Company has various routine related party transactions in conjunction with our holding company structure, such as a management service agreement related to costs incurred, a tax sharing agreement between entities, and inter-company dividends and capital contributions. There were no other changes related to these relationships during the six months ended June 30, 2019.2020.  See our Annual Report on Form 10-K for the year ended December 31, 20182019 for a comprehensive discussion of related party transactions.



(11) SUBSEQUENT EVENTS

The Company has evaluated the impact of subsequent events as defined by the accounting guidance through the date this report was issued.




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

On July 29, 2020, a change in control of the Company occurred, and the Harold E. Riley Foundation (the “Foundation”), a charitable organization established under 501(c)(3) of the Internal Revenue Code, is now the owner of 100% of the Company’s Class B common stock.

Prior to the change in control, the Harold E. Riley Trust (the “Trust”) was the beneficial owner of 100% of the Company’s Class B common stock. The Trust documents provided that upon Harold Riley’s death, which occurred in 2017, the Class B common stock would transfer from the Trust to the Foundation. Because the Class B common stock elects a simple majority of the Board of Directors of the Company, this transfer constitutes an acquisition of control by the Foundation, which requires prior regulatory approvals by the insurance regulators of Colorado, Louisiana, Mississippi and Texas, the states in which the Company's insurance subsidiaries are domiciled.

On July 29, 2020, Colorado’s stipulated requirements from their order dated May 21, 2020 relating to the approval of acquisition of control by the Foundation were fulfilled. Accordingly, Colorado, Louisiana, Mississippi and Texas insurance regulators have all now approved the acquisition of control of the Company by the Foundation. Additionally, the Bermuda Monetary Authority has provided its consent of the change in control. Thus, all regulatory approvals and requirements have been met to effectuate the change in control to the Foundation. Upon receipt of notice of the requisite regulatory approvals for the change in control, the Company transferred the Class B common stock from the Trust, as record holder, to the Foundation and, as such, control over the Company’s Class B common stock is now being exercised by the Foundation.

RESIGNATION OF CHIEF EXECUTIVE OFFICER

On July 29, 2020, following the change in control of the Company, Mr. Kolander notified the Company of his intention to resign from his position as Chief Executive Officer and President and as a member of the Board of Directors, and terminated the Employment Agreement by and between the Company and Mr. Kolander dated January 1, 2019 (the “2019 Employment Agreement”). Pursuant to Sections 1(e) and 6(g) of the 2019 Employment Agreement, Mr. Kolander terminated the 2019 Employment Agreement due to a “change in control,” which occurred upon the regulatory approval of the transfer of the shares of the Company’s Class B common stock from the Trust to the Foundation. Mr. Kolander’s resignation and separation from employment and a member of the Board of Directors will be effective no later than August 10, 2020.

In connection with Mr. Kolander’s resignation and separation from employment, Mr. Kolander signed a Chief Executive Officer Separation of Service and Consulting Agreement (the “Separation and Consulting Agreement”) with the Company and the Release attached as Exhibit “A” thereto, each dated July 29, 2020. Because Mr. Kolander signed the Release, pursuant to Sections 6(g) and (h) of the Employment Agreement, Mr. Kolander will be entitled to the cash severance amount set forth in Sections 6(g) and (h) of the 2019 Employment Agreement (which equals $8.8 million), less required withholdings and deductions. Additionally, all outstanding Restricted Stock Units held by Mr. Kolander will be fully vested on the date that Mr. Kolander resigns and separates from employment. The cash severance amount will be paid on the date that is six months and one day following the date that Mr. Kolander resigns and separates from employment. Thus the financial impact to the Company will occur in the third quarter of 2020 and the related expense will be recognized.

To assist in the orderly transition of his duties and responsibilities, Mr. Kolander entered into the Separation and Consulting Agreement with the Company. Under the Separation and Consulting Agreement, Mr. Kolander agreed to provide leadership transition guidance and business continuity assistance to the Company as a consultant from the separation date through December 31, 2020. Mr. Kolander will provide no more than 14 hours of consulting services per week at a rate of $14,000 per week. The consulting period can be terminated by either party upon 30 days written notice. The above summary of the Separation and Consulting Agreement is qualified by reference in its entirety to the Separation and Consulting Agreement, which was filed as an exhibit to our Current Report on Form 8-K filed on July 30, 2020.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
APPOINTMENT OF INTERIM CHIEF EXECUTIVE OFFICER

On July 29, 2020, the Board of Directors appointed Gerald W. Shields, a member of the Company’s Board of Directors, as Interim Chief Executive Officer, to be effective upon Mr. Kolander’s separation from employment. Following his appointment, Mr. Shields will continue to serve as Vice Chairman of the Board of Directors, but will step down from the Audit Committee, the Compensation Committee and the Executive Committee as of such date.


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CITIZENS, INC.MANAGEMENT'S DISCUSSION & ANALYSIS
CITIZENS, INC.MANAGEMENT'S DISCUSSION & ANALYSIS

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


FORWARD-LOOKING STATEMENTS


Certain statements contained inThis section and other parts of this report are not statements of historical fact and constituteQuarterly Report on Form 10-Q ("Form 10-Q") contain forward-looking statements, within the meaning of the federal securities laws, including, without limitation,Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties. Forward-looking statements specificallyprovide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Forward-looking statements can also be identified by words such as “future,” “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “will,” “would,” “could,” “can,” “may,” and similar terms. Forward-looking statements are not guarantees of future performance and the Company’s actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in Part II, Item 1A. of this Form 10-Q and in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019 under the heading “Risk Factors,” which are incorporated herein by reference.Additionally, the effects of the COVID-19 pandemic could cause our actual results to differ significantly for reasons such as:

•Securities market disruption or volatility and related effects such as decreased economic activity that affect our investment portfolio;
•Decreased premium revenue and cash flow from disruption to our distribution channel of independent agents, customer self-isolation, travel limitations, business restrictions and decreased economic activity;
•An unusually high level of claims, lapses or surrenders in our insurance operations, which could affect our liquidity and cash flow; and
•Inability of our workforce to perform necessary business functions.

The following discussion should be read in conjunction with the consolidated financial statements and accompanying notes included in Part I, Item 1 of this Form 10-Q. The Company assumes no obligation to revise or update any forward-looking statements within this document.  Many of these statements contain risk factorsfor any reason, except as well.  In addition, certain statements in future filingsrequired by the Company with thelaw.

The U.S. Securities and Exchange Commission ("SEC"), in press releases, and in oral and written statements made by 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 intended proposals for settlement with the IRS related to 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 regulatory oversight of our international business 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;
Our ability to maintain effective information systems;



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Changes in statutory or United States Generally Accepted Accounting Principles ("U.S. GAAP"), 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 disclosed in Part II, Item 1A. of this Form 10-Q and our Quarterly Report on Form 10-Q for the quarter ended March 31, 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 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 (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.SEC.  We are not including any of the information contained on our website as part of, or incorporating it by reference into, this report.Form 10-Q.


OVERVIEW


Citizens, Inc. ("Citizens" or the "Company") is an insurance holding company incorporated in Colorado serving the life insurance needs of individuals in the U.S.United States since 1969 and internationally since 1975. Through our insurance subsidiaries, we pursue a strategy of offering traditional insurance products in niche markets where we believe we canare able to achieve competitive advantages.  AsWe had approximately $1.8 billion of assets at June 30, 2019, we had2020 and approximately $1.7$4.6 billion of total assets and approximately $4.8 billion ofdirect insurance inforce.in force.  Our core insurance operations include issuing and servicing:include:


•Life Insurance segment - U.S. 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; and
ordinary whole life insurance policies to middle income households concentrated in the Midwest, Mountain West and southern U.S. through independent marketing consultants; and
•Home Service Insurance segment - final expense and limited liability property policies sold to middle and lower income households in Louisiana, Mississippi and Arkansas, and Mississippi through employee and independent agents in our home service insurance distribution channel and through funeral homes.


We were formed in 1969 and historically, our Company has experienced growth through acquisitions in

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As part of the domestic market and organic market expansion in the international market.  We strive to generate bottom line returns using knowledgecontinued strategic review of our niche markets andoperations, effective August 2020, we began to operate our well-established distribution channels.Home Service Insurance segment through independent agents, rather than employee agents, which involved converting employee agents to independent agents. For an additional discussion of the potential impacts on the business from the conversion, see Part II, Item 1A – Risk Factors.


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, began a strategic realignment of its Life and Home Service Insurance segments.  Specifically,segments in order to set a course for long-term profitable growth.

During 2020, we are focused on (1) product enhancementsthe following clearly defined priorities:

•continuing to build operational excellence, as our high impact and increasing our product profitability; (2) modernization of our IT operations with an emphasis on digitization, our future business needs and cyber risk; (3) effectively operating our international life insurance business in Bermuda through CICA Ltd.; and (4) assessing and optimizing our investment portfolio.  To date, our strategic realignment withinvalues-based culture takes root,



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the Company's Life Insurance segment is largely complete, and a leadership transition•growth initiatives within the Company’s  Home Service Insurance segment is underway.markets in which we operate, as we set targets for growing premium revenues and implementing growth strategies, and

•building new capabilities that will create business opportunities aligned with our essential purpose. 
Carrying that momentum forward, in 2019, we identified three areas of strategic 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 we seek to optimize value for the Company, its customers and its collaborators, we believe our efforts will continue to put the Company on a stronger financial footing and drive sustainable growth.


CURRENT FINANCIAL HIGHLIGHTS


Financial highlightsOur results of operations for the three months ended June 30, 2020 were negatively impacted by the acceleration in intensity of the COVID-19 pandemic in the U.S. and other countries where we do business. While it is difficult to quantify the full impact that the COVID-19 pandemic had on our business in the second quarter, we believe that the COVID-19 pandemic primarily negatively impacted our product sales (and thus first year premium revenue), claims in our Home Service Insurance segment and net investment income.

In the three months ended March 31, 2020, our first year premiums in the Life Insurance segment had increased 19% over the same prior year period. We believe these increases were primarily due to our strategic initiatives to make changes in our products and distribution, including investments made in our sales and marketing activities and increased sales of higher average premium policies. First year premiums in our Life Insurance segment declined 40.5% in the three months ended June 30, 2020 from the same period in 2019. We believe this was due primarily to the disruption in our sales processes and challenging economic conditions during the COVID-19 pandemic.

Prior to the second quarter of 2020, claims experience in our Home Service Insurance segment had fluctuated from period to period but were within the range of expected levels. We believe that because of the demographics of our policyholders in our Home Service Insurance segment and their reduced ability to sequester and avoid an airborne contagion, the COVID-19 pandemic had a negative impact on claims in that segment, driving the 32% increase in claims for the second quarter of 2020 compared to the same period in 2019.

The COVID-19 pandemic also negatively impacted our net investment income during the second quarter. Continued economic turmoil due to the COVID-19 pandemic has led to historically low treasury yields. Although we have begun to diversify into other asset classes, our investment portfolio is weighted heavily towards fixed maturity assets. While the stabilization in equity and fixed maturity markets from March 31, 2020 to June 30, 2020 resulted in a marked improvement in our shareholders' equity in the same period, the low treasury yields made identifying and executing on attractive risk-adjusted purchases for our fixed maturity portfolio more difficult. Thus while we recorded $80.3 million in unrealized investment gains and $1.4 million in realized investment gains during the second quarter, contributing to a 34.3% increase in our shareholders’ equity from March 31, 2020, our net

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investment income and portfolio yield declined from recent quarters. See Note 5. Investments in the notes to our consolidated financial statements for a discussion of these unrealized gains.

We continued to see quarantines, “stay-at-home” orders and similar mandates for many individuals and businesses requiring them to substantially restrict daily activities and to curtail or cease normal operations, in both Texas and Louisiana, where our home offices are located, and globally where we do business. In response, we began accelerating operational changes and sales practices in order to account for the impact of the COVID-19 pandemic and to ensure business continuity while adhering to federal and local government work guidelines. These changes included the following.

•implemented virtual sales training for international agents
•prioritized sales of lower face amount policies with reduced underwriting requirements
•discontinued and replaced certain products that no longer fall within acceptable levels of risk
•adopted new practices to virtually serve customers
•implemented new payment methods
◦announced our international policyholders can now pay U.S. Dollar-denominated premiums in their local currencies, along with a transaction fee to minimize currency fluctuations and our exchange rate risks
◦expanded digital payment options to policyholders in our Home Service Insurance segment
•revised resource structure to improve virtual collection efforts in historical door-to-door collection model
•continued remote working arrangements

We describe below in more detail areas of our results in which we believe our business may have been impacted by the COVID-19 pandemic during the quarter. We do foresee some adverse impact to near-term sales activity, premiums, claims, policy benefits, invested assets and regulatory capital as a result of the COVID-19 pandemic. Although the extent to which the COVID-19 pandemic may impact our future financial results and business remains uncertain as of the date of this Form 10-Q, we are closely monitoring developments related to the COVID-19 pandemic to assess its impact on our future results and business. For an additional discussion of the potential impacts on our business from the COVID-19 pandemic, see Part II, Item 1A – Risk Factors.

We had net loss of $1.0 million and $4.6 million in the three and six months ended June 30, 2020, respectively, compared to a net loss of $4.6 million and $8.4 million in the respective prior year periods, leading to a $0.07 and $0.08 per share improvement, respectively. Our total revenues of $58.3 million for the three months ended June 30, 2020 increased 2.6% from $56.9 million in the prior year period, and decreased by 4.4%, from $119.3 million in the first six months of 2019 to $114.1 million in the six months ended June 30, 2020. The decrease in the six month period was primarily due to lower premiums, which were affected by the COVID-19 pandemic as discussed above. In the three month period, the lower premiums were offset by realized investment gains in the current period versus a one-time realized loss related to a real estate transaction in the prior year period, as described below. Our total cost for benefits and expenses continued to decrease despite the higher claims, due in part to our strategic efforts to lower general expenses. This resulted in overall better net income in the three and six months ended June 30, 2020 compared to the prior periods.


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Financial highlights for the three and six months ended June 30, 2020 compared to the same periods in 20182019 were:


InsuranceREVENUE HIGHLIGHTS

•For the three months ended June 30, 2020, insurance premiums declined 5.0%5.3% to $41.5 million from $43.8 million for the second quarter of 2019 compared to the same period in 2018, totaling $43.8 million and $46.1 million, respectively.2019. The decline was driven primarily by fewerlower first year and renewal premiums in our Life Insurance segment. First year premiums in our Life Insurance segment excluding Brazil,declined 40.6% from the second quarter of 2019 as our sales processes were materially disrupted by the COVID-19 pandemic. The decrease in renewal premiums primarily reflects the changes we have made to our products and distribution, primarily: (1) in 2017, we repriced certain products in response to a countryprolonged low interest rate environment and (2) we exited in April 2018, increased slightly. terminated agreements with independent producers who did not align with our vision, values and culture, both of which decreased persistency.
•For the six months ended June 30, 2019,2020, insurance premiums declined 4.3%, totaling4.0% to $82.8 million from $86.3 million, compared to $90.2 million for the same period in 2018.2019. The decline was driven by fewer first year andlower renewal premiums in our Life Insurance segment.
Net investment income increased 10.9%segment for the six months and lower first year premiums for the second quarter of 20192020.
•Net investment income declined 2.6% for the second quarter ended June 30, 2020 compared to the same period of 2018,2019, totaling $15.3$14.9 million and $13.8$15.3 million, respectively. The increase was driven by a growing asset base derived from cash flows fromCOVID-19 pandemic negatively impacted our insurance operations, improvements in cash management, and a strategic focus on achieving greater yields while maintaining a prudent risk profile for our investment portfolio. Net investment income was lowersecond quarter performance as explained above.
•We recorded realized gains of $1.4 million during the second quarter of 2018 due2020 related to the need to maintain sufficient cash balances to fundfair value changes in 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 yieldequity securities owned on the consolidated portfolio as of the six months ended June 30, 2019 was an annualized rate of 4.30%2020, as equity markets rebounded sharply during the period as compared to 4.33% for the same period in 2018.
March 31, 2020. 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

BENEFITS AND EXPENSES HIGHLIGHTS

•Claims and surrenders expense increased 2.7% for investment to held-for-sale. A realized gain of $5.5 million was recorded in the firstsecond quarter of 2019 related to the sale of our former corporate headquarters in Austin, Texas. We also recorded realized gains of $757,000 during the first six months of 2019 related to fair value changes in our equity securities owned at June 30, 20192020 and realized losses of $23,000 related to dispositions of securities from our fixed maturity securities portfolio during the same period. OTTI of $225,000 was recorded8.3% for the six months ended June 30, 2018 related to a single issuer and we recorded equity losses of $388,000 during the same period.
Claims and surrenders expense increased 31.1% for the second quarter of 2019 and 19.8% for the six months ended June 30, 20192020 compared to the same periods in 2018.2019. The increase was driven primarily by an increase in surrender benefits and matured endowments in the Life Insurance segment during the six months, which were within expected levels.levels, and higher COVID-19 related claims in the second quarter in our Home Service Insurance segment. We are closely monitoring claim volumes to evaluate whether there is a delay in reporting or filing for benefits as a result of the COVID-19 pandemic in both of our segments.
General expenses•Future policy benefit reserves decreased 17.4%13.0% for the second quarter of 20192020 and increased 24.4%18.7% for the six months ended June 30, 20192020 compared to the same periods in 2018. For both2019, driven primarily by the release of reserves resulting from increased matured endowments in the Life Insurance segment and increased claims in the Home Service Insurance segment during the period.
•As a result of lower product sales in the second quarter and the six months ended in June 30, 2019, we had reduced audit and legal fees, partially offset by increased costs relating to higher executive compensation, comparedprimarily due to the same periods in 2018. In addition, generalimpact of the COVID-19 pandemic, capitalization of deferred policy acquisition costs decreased, as these costs are directly related to first year premium production.
•General expenses increased by $1.8 milliondecreased 6.8% for the second quarter of 20182020 and reduced



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by $5.4 million13.3% for the six months ended June 30, 2018 due2020, compared to a changethe same periods in 2019. The reduction for both periods was driven primarily by reduced audit and consulting expenses, while first half expenses were also positively impacted by reduced stock compensation expenses during the first quarter. After addressing prior deficiencies in our 7702/72(s) tax compliance best estimate liabilityinternal control environment, we are benefiting from the estimate at year end 2017.reductions in external audit fees and outside consulting expenses.



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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.

Six Months Ended June 30,2019 2018Six Months Ended June 30,20202019
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		 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$100,095,500
 1,481
 $67,586
 $113,258,180
 1,934
 $58,562
Life Insurance$84,017,811  1,315  $63,892  $100,095,500  1,481  $67,586  
Home Service Insurance84,521,648
 11,674
 7,240
 92,505,865
 13,041
 7,093
Home Service Insurance65,239,577  9,230  7,068  84,521,648  11,674  7,240  


The number of policies issued decreased 23.4%11.2% and 10.5%20.9%, respectively, for the Life Insurance and Home Service Insurance segments respectively, for the six months ended June 30, 20192020 compared to the same period in 2018.2019. The declinedecrease in new business applications in both our Life Insurance segment is driven by ceasing sales in Brazil and terminating agreements with several independent consultants in Latin America that did not align with our vision, values and culture.   Excluding these two factors, the number of policies issued by our International business has been flat for the period.  While the number of policies issued has declined in the Life and Home Service Insurance segments was driven primarily by disruptions in our sales practices caused by the COVID-19 pandemic.

The number of new business applications for our Life Insurance segment declined during 2019,April and May of this year and increased in June of this year as compared to the averagenumber of new business applications in the same months in 2019. The increase in June of this year, compared to April and May, was primarily due to adjustments to our business operations and sales practices to account for the impact of the COVID-19 pandemic, such as focused training on virtual selling and strategically prioritizing selling lower face amount issued has increased, resultingpolicies as many of our markets remain in overall premium incomelockdown. Lower face amount policies typically have less underwriting requirements and, in some cases, may not declining atrequire the completion of medical tests, which would otherwise be difficult to obtain during the COVID-19 pandemic. Due to these adjustments, average policy face amount declined by 5.5% during the six months ended June 30, 2020 compared to the same rateperiod in 2019 for the Life Insurance segment.

Home Service Insurance segment production for the first six months of 2020 was negatively affected by the impact of the COVID-19 pandemic, as policy issuances.a couple of our offices in Louisiana were forced to temporarily close during the month of March and because we discontinued and replaced certain products that no longer fall within acceptable levels of risk and rolled out new policies offering value to the policyholder without disproportionate exposure to the Company. Additionally, certain product offerings that require extensive person to person sales interaction were temporarily ceased during the second quarter. Other changes to our Home Service Insurance operations and collection processes were made, including limiting or reducing face to face interactions between our agents and our policyholders and emphasizing to our policyholders the availability of payment options such as debit/credit cards and traditional mail that obviate such personal interaction.



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




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CITIZENS, INC.MANAGEMENT'S DISCUSSION & ANALYSIS

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 Six Months EndedThree Months EndedSix Months Ended
June 30, June 30,June 30,June 30,
(In thousands)2019 2018 2019 2018(In thousands)2020201920202019
       
Revenues:       Revenues:    
Premiums:       Premiums:    
Life insurance$42,313
 44,631
 83,293
 87,160
Life insurance$40,185  42,313  80,131  83,293  
Accident and health insurance345
 301
 668
 592
Accident and health insurance248  345  509  668  
Property insurance1,146
 1,198
 2,307
 2,407
Property insurance1,063  1,146  2,173  2,307  
Net investment income15,315
 13,811
 29,111
 27,582
Net investment income14,915  15,315  30,084  29,111  
Realized investment gains (losses), net(2,869) (178) 3,092
 (753)
Realized investment gains, netRealized investment gains, net1,448  (2,869) 142  3,092  
Other income616
 79
 801
 287
Other income482  616  1,024  801  
Total revenues$56,866
 59,842
 119,272
 117,275
Total revenues$58,341  56,866  114,063  119,272  


Premium Income.  Premium income derived from life, accident and health, and property insurance sales decreased 5.0%5.3% and 4.0% for the second quarter of 2019 and 4.3% for six months ended June 30, 20192020 compared to the same periods in 2018.2019. The overall decrease isin premium income was driven primarily by a decline throughout the first six month of 2020 in renewal premiums for the reasons described above in “Current Financial Highlights” and a COVID-19-related decline in first year and renewal premiums during the second quarter, in our Life Insurance segment. However, excluding sales from Brazil, a country we exited in April 2018, first year premiums increased slightly in the in the second quarter of 2019 compared to the same period in 2018. See the detail distribution of premiums within Segment Operations discussed below.


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

June 30, December 31, June 30,June 30,December 31,June 30,
(In thousands, except for %)2019 2018 2018(In thousands, except for %)202020192019

    
Net investment income, annualized$58,222
 54,205
 55,164
Net investment income, annualized$60,168  59,531  58,222  
Average invested assets, at amortized cost1,355,408
 1,300,755
 1,274,313
Average invested assets, at amortized cost1,403,295  1,365,036  1,355,408  
Annualized yield on average invested assets4.30% 4.17% 4.33%Annualized yield on average invested assets4.29 %4.36 %4.30 %


The annualized yield slightly declineddecreased during the first six months of 20192020 compared to the same period in 2018. We have traditionally invested in2019, as overall market yields for fixed maturity securities with a large percentage held in callable issues.  Indeclined to historic lows during the fourth quarterfirst six months of 2018, we began the process of repositioning 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. In addition, as2020. As a substantial proportion of our fixed maturity investments continue to be called or mature, we have faced challenges in the second quarter in finding investments with comparable yields in the continued low interest rate environment. In addition, concerns about potential negative COVID-19-related impacts on our liquidity, while not ultimately realized, resulted in us holding more cash than usual during the first half of 2020, which negatively impacted yields. As part of the ongoing process of managing our portfolio and optimizing performance, we are continuing to identify, consider, and invest in new asset classes.






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CITIZENS, INC.MANAGEMENT'S DISCUSSION & ANALYSIS

Investment income from debtfixed maturity securities accounted for approximately 87.6%88.0% of total investment income for the six months ended June 30, 2019.2020.  
Three Months EndedSix Months Ended
June 30,June 30,
(In thousands)2020201920202019
Gross investment income:    
Fixed maturity securities$13,512  13,747  27,380  26,261  
Equity securities199  168  379  325  
Policy loans1,629  1,600  3,252  3,201  
Long-term investments18  —  19  1  
Other investment income16  162  84  189  
Total investment income15,374  15,677  31,114  29,977  
Investment expenses(459) (362) (1,030) (866) 
Net investment income$14,915  15,315  30,084  29,111  
 Three Months Ended Six Months Ended
 June 30, June 30,
(In thousands)2019 2018 2019 2018
        
Gross investment income:       
Fixed maturity securities$13,747
 12,557
 26,261
 24,981
Equity securities168
 168
 325
 328
Mortgage loans3
 3
 6
 6
Policy loans1,600
 1,521
 3,201
 3,056
Long-term investments—
 —
 1
 —
Other investment income159
 60
 183
 90
Total investment income15,677
 14,309
 29,977
 28,461
Investment expenses(362) (498) (866) (879)
Net investment income$15,315
 13,811
 29,111
 27,582


Fixed maturity securities income increased 9.5%decreased 1.7% for the second quarter of 20192020 and 5.1%increased 4.3% for the six months ended June 30, 2019,2020, compared to the same periods in 2018.2019. We continue to adjust our investment management strategy to increase our investment yields while maintaining a prudent risk profile. Equity securities income increased as we were able to take advantage of market dislocations and identify and execute on some attractive equities purchases during the first quarter of 2020. In addition, the increase in policy loans, which represents policyholders utilizing their accumulated policy cash value to pay for premiums, contributed to the increase in investment income.


Realized Investment Gains (Losses), Net.  We recorded realized gains of $1.3 million during the second quarter of 2020 related to fair value changes in our equity securities owned at June 30, 2020, as equity markets rebounded sharply during the second quarter as compared to the first quarter. 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. We also recorded realized gains of $757,000 due to fair value changes related to equity securities still owned at June 30, 2019.



BENEFITS AND EXPENSES
 Three Months EndedSix Months Ended
June 30,June 30,
(In thousands)2020201920202019
 
Benefits and expenses:    
Insurance benefits paid or provided:    
Claims and surrenders$27,754  27,024  54,203  50,057  
Increase in future policy benefit reserves8,237  9,472  17,708  21,771  
Policyholders' dividends1,328  1,423  2,561  2,605  
Total insurance benefits paid or provided37,319  37,919  74,472  74,433  
Commissions6,714  8,384  14,567  16,268  
Other general expenses11,139  11,949  22,612  26,081  
Capitalization of deferred policy acquisition costs(3,731) (5,412) (8,740) (10,240) 
Amortization of deferred policy acquisition costs6,061  6,931  12,180  13,208  
Amortization of cost of insurance acquired401  418  769  837  
Total benefits and expenses$57,903  60,189  115,860  120,587  



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CITIZENS, INC.MANAGEMENT'S DISCUSSION & ANALYSIS

BENEFITS AND EXPENSES
 Three Months Ended Six Months Ended
 June 30, June 30,
(In thousands)2019 2018 2019 2018
        
Benefits and expenses:       
Insurance benefits paid or provided:       
Claims and surrenders$27,024
 20,617
 50,057
 41,768
Increase in future policy benefit reserves9,472
 16,555
 21,771
 31,163
Policyholders' dividends1,423
 1,614
 2,605
 2,921
Total insurance benefits paid or provided37,919
 38,786
 74,433
 75,852
Commissions8,384
 8,669
 16,268
 17,628
Other general expenses11,949
 14,466
 26,081
 20,973
Capitalization of deferred policy acquisition costs(5,412) (5,640) (10,240) (11,603)
Amortization of deferred policy acquisition costs6,931
 7,200
 13,208
 14,806
Amortization of cost of customer relationships acquired418
 472
 837
 1,151
Total benefits and expenses$60,189
 63,953
 120,587
 118,807
 
Claims and Surrenders.  A detail of claims and surrender benefits is provided below.

Three Months Ended Six Months EndedThree Months EndedSix Months Ended
June 30, June 30,June 30,June 30,
(In thousands)2019 2018 2019 2018(In thousands)2020201920202019
       
Claims and Surrenders:       Claims and Surrenders:
Death claims$5,943
 5,528
 12,430
 11,711
Death claims$7,046  5,943  13,635  12,430  
Surrender benefits13,426
 9,375
 23,165
 18,534
Surrender benefits10,675  13,426  22,730  23,165  
Endowments2,991
 3,314
 6,067
 6,506
Endowments2,619  2,991  5,358  6,067  
Matured endowments3,684
 1,206
 6,365
 2,630
Matured endowments6,148  3,684  9,901  6,365  
Property claims272
 429
 490
 814
Property claims316  272  803  490  
Accident and health benefits58
 33
 116
 114
Accident and health benefits61  58  114  116  
Other policy benefits650
 732
 1,424
 1,459
Other policy benefits889  650  1,662  1,424  
Total claims and surrenders$27,024
 20,617
 50,057
 41,768
Total claims and surrenders$27,754  27,024  54,203  50,057  


•Death claims increased 7.5%18.6% and 9.7% for the second quarter of 2019 and 6.1% for the six months ended June 30, 20192020 compared to the same periods in 2018.2019. The increase was concentrated in our Home Service Insurance segment and primarily reflected differing socioeconomic levels and related ability to mitigate exposure to COVID-19 for policyholders in this segment. Mortality experience isand the COVID-19 impacts will continue to be closely monitored by the CompanyCompany.
•Surrenders decreased 20.5% and the activity is within expected levels.
Surrenders increased 43.2%1.9% for the second quarter of 2019 and 25.0% for the six months ended June 30, 20192020 compared to the same periods in 2018.2019. Surrenders represented 0.5%less than 2% of total direct ordinary whole life insurance in force for the six months endedof $4.6 billion as of June 30, 2019.2020. The increasedecrease in surrender expense is primarily related to our international business, and were within expected levels. A significant portionreflects changes in the relative maturities of surrenders relateour policies and resulting tendency to surrender in the second quarter of 2020 compared to recent quarters. In addition, we saw an unusually high percentage of policyholders in our Life Insurance segment select the reduced paid up insurance ("RPU") option instead of surrendering their policies that have been in force over fifteen years and no longer have associated surrender charges. Total direct insurance in force asthe second quarter of June 30, 2019 was $4.8 billion, a slight decrease from 2018.2020.
•Matured endowments increased 205.5%66.9% and 55.6% for the second quarter of 2019 and 142.0% for the six months ended June 30, 20192020 compared to the same periods in 2018.2019. We anticipated this increase based upon



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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 decreased 42.8%13.0% and 18.7% for the second quarter of 2019 and decreased 30.1% for the six months ended June 30, 20192020 compared to the same periods in 2018 primarily due to increased surrenders and maturities from our international business.

Policyholders' Dividends.  Policyholders' dividends declined slightly for the second quarter and the six months ended June 30, 2019 compared to the same periods in 2018. This decrease was due toas a result of changes in persistency and production.maturity activity between periods.


Commissions. Commission expense for the second quarter and the six months ended June 30, 2019 fluctuated directly in relation2020 was slightly lower compared to the decreasesame periods in 2019 and primarily reflects the impact of the COVID-19 pandemic on our new sales generation, especially in the second quarter of 2020. Commission expense fluctuates directly with changes in first year and renewal premiums compared to premium levels for the same periods in 2018.premiums.


Other General Expenses. Expenses declined 17.4% infor the second quarter of 2019 compared to the same period in 2018 due to a decrease in audit and legal fees and our 7702/72(s) tax compliance best estimate liability. We have continued to refine our estimated liability related to these matters. The decrease was offset by additional costs relating to higher executive compensation. Expenses for the six months ended June 30, 2019 increased 24.4%2020 decreased 6.8% and 13.3% compared to the same periodperiods in 2018 as expenses during the 2018 period were reduced by $5.4 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 offset2019, driven primarily by lower Auditaudit, consulting and legal fees, during the six months ended June 30, 2019 comparedemployee-related expenses. We continue to the same period in 2018.execute on our strategic cost savings initiatives.


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

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contracts.  Capitalized costs decreased during the second quarter and the six months ended June 30, 20192020 compared to the same periods in 20182019 as we experienced a declinedecrease in first year premium production in these periods.  Commissions paid on renewal premiums are significantly lower than those paid on first year business. The decline in production also resulted in lower amortization during the second quarter and six months ended June 30, 2019 compared to the same periods in 2018.as previously noted. Amortization of deferred policy acquisition costs was lower during the second quarter and the six months ended June 30, 2020 compared to the same periods last year. Amortization is also impacted by persistency, surrenders, and new sales production and thus they may fluctuate from quarter to quarter.


Federal Income Tax. Tax expense increased as our effective tax rate was (536.3)%decreased for the six months ended June 30, 2019 as2020 compared to (64.6)% for the same period in 2018.2019 resulting in effective tax rates of (156.7)% and (536.3)%, respectively. For the six months ended June 30, 2019, the Company's federal income tax expense was impacted by the gain realized on the sale of our former corporate headquarters. The Company's tax rate was impacted by differences between our effective tax rate and the statutory tax rate resulting from income and expense items that are treated differently for financial reporting and tax purposes as well as impacts from our uncertain tax position.purposes. In addition, CICA Ltd., a wholly ownedwholly-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 Subpart F Income. As of June 30, 2019,Income, which is treated as a permanent tax difference and therefore included in the Subpart F income inclusion generated $1.6 million of federal incomeCompany's effective tax expense, which impacted the current tax rate.rate calculation. See Note 8. Income Taxes in the notes to our consolidated financial statements.





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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-supportcorporate-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 Company evaluates profit and loss performance of its segments based on income (loss) before federal income taxes. The following table shows income (loss) before federal income taxes by segments during the periods indicated.


Three Months EndedSix Months Ended
June 30,June 30,
(In thousands)2020201920202019
Segments:
  Life Insurance$2,119  (119) 4,205  4,518  
  Home Service Insurance(26) (335) (2,171) (669) 
Total segments2,093  (454) 2,034  3,849  
Other Non-Insurance enterprises(1,655) (2,869) (3,831) (5,164) 
Income (loss) before federal income tax expense$438  (3,323) (1,797) (1,315) 
 Three Months Ended Six Months Ended
 June 30, June 30,
(In thousands)2019 2018 2019 2018
Segments:       
  Life Insurance$(119) (1,327) 4,518
 4,621
  Home Service Insurance(335) (971) (669) (2,794)
Total segments(454) (2,298) 3,849
 1,827
Other Non-Insurance enterprises(2,869) (1,813) (5,164) (3,359)
Loss before federal income tax expense$(3,323) (4,111) (1,315) (1,532)



LIFE INSURANCE


Our Life Insurance segment issues ordinary whole life insurance in the U.S. and in U.S. Dollar-denominated amounts to foreignnon-U.S. residents.  These contracts are designed to provide a fixed amount of insurance coverage over the life of the insured and can utilizeinclude rider benefits to provide additional increasing or decreasing coverage and annuity benefits to enhance accumulations.  Additionally, the Company issues 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 reinsuringand reinsure the remainder of the risk.  Historically, we have operatedWe operate this segment internationally through CICA Ltd. and domestically through our CICA and CNLIC insurance subsidiaries. Since July 1, 2018, we have operated the international business in this segment through CICA Ltd.



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INTERNATIONAL SALES


We focus our sales of U.S. Dollar-denominated ordinary whole life insurance and endowment policies to residents in Latin America and the Pacific Rim.  We have participated in the foreign marketplace since 1975.  We believe positive attributes of our international insurance business typically include:


•larger face amount policies 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 at the beginning of each policy year rather than monthly or quarterly, which reduces our administrative expenses, accelerates cash flow and results in lower policy lapse rates than premiumspremium payment options with more frequently scheduled payments; and
•persistency experience and mortality rates that are comparable to U.S. policies.




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INTERNATIONAL PRODUCTS


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


•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 most foreign local companies;
•a hedge against policyowners' local currency inflation;
•protection against devaluation of foreignthe policyowners' local 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 both living and death benefit features. Most policies contain guaranteed cash values and are participating (i.e., providesprovide for cash dividends as apportioned by the board of directors)Board).  Once a policyholderpolicyowner 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 policyholderThe policyowner has several options with regard to the policy dividends and annual premium benefits. Any annual policybenefits, which include, among other things, electing to receive cash dividend may, atcrediting such amounts towards the option of the 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) leftpolicy, leaving such amounts on deposit 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;rate or (5) be assignedassigning them 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 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.third-party. Under the "assigned to a third party"third-party" provision, the Company has historically allowed policyholders,policyowners, after receiving a copy of the Citizens, Inc. Stock Investment Plan (the "CISIP") prospectus and acknowledging their understanding of the risks of investing in Citizens Class A common stock, the right to assign policy values outside of the policy to the CISIP, which is administered in the U.S.United States by Computershare Trust Company, N.A., our plan administrator and an affiliate of Computershare, Inc., our transfer agent. The CISIP is a direct stock purchase plan available to policyholders,policyowners, shareholders, our employees and directors, independent consultants, and other potential investors through the Computershare website. The Company has registered the shares of Class A common stock issuable to participants under the CISIP on a registration statement under the Securities Act of 1933, as amended (the "Securities Act") that is on file with the Securities and Exchange Commission.SEC. Computershare administers the CISIP in accordance with the terms and conditions of the CISIP, which is available on the Computershare website and as part of the Company’s registration statement on file with the Securities and Exchange Commission.


SEC.



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CITIZENS, INC.MANAGEMENT'S DISCUSSION & ANALYSIS
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 six months ended June 30, 20192020 and 20182019 as indicated below.
chart-b385eddb6a335635a79.jpg
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Three Months Ended Six Months EndedThree Months EndedSix Months Ended
June 30, June 30,June 30,June 30,
(In thousands)2019 2018 2019 2018(In thousands)2020201920202019
Country:       Country:    
Colombia$6,142
 6,973
 12,102
 13,026
Colombia$5,981  6,142  11,869  12,102  
Venezuela5,426
 6,113
 10,731
 12,154
Venezuela4,937  5,426  9,890  10,731  
Taiwan4,346
 4,087
 9,111
 8,879
Taiwan3,882  4,346  8,856  9,111  
Ecuador3,575
 3,798
 6,813
 7,462
Ecuador3,227  3,575  6,338  6,813  
Argentina2,679
 2,607
 4,660
 4,579
Argentina2,433  2,679  4,256  4,660  
Other Non-U.S.9,698
 8,330
 18,175
 19,020
Other Non-U.S.9,347  9,698  17,548  18,175  
Total$31,866
 31,908
 61,592
 65,120
Total$29,807  31,866  58,757  61,592  
 
We reported declines in premiums during the second quarter and the six months ended June 30, 20192020 compared to the same periods in 20182019 due primarily to a decrease in first year premiums in the second quarter as previously noted, and welower renewal premiums throughout the first half of 2020. We continue to monitor key indicators in these markets. This business is dependent on our clients having access to U.S. dollars. Our international business may also be affected by our ongoing strategic review of our business model and by economic or other events in foreign countries in which our policies are marketed. In April 2018, in connection with our review of our international business model, we discontinued accepting life insurance applications from Brazilian citizens or residents. Brazil had traditionally been onemarkets including COVID-19 pandemic impacts. All of our top five premium-producing countries listed above experienced a decline in our international life insurance businesspremium levels during the second quarter and six months ended June 30, 2020 compared to the same periods in 2019. Renewal premiums declined for the past several years. We recorded premiums from the Brazilian portion of our business of $3.9 million, or 6.3% of total international premiums, as of June 30, 2019 and $4.5 million, or 7.0% of total international premiums, as of June 30, 2018. We also terminated agreements with several independent consultantsreasons described above in Latin America who did not align with our vision, values, and culture."Current Financial Highlights".

Direct premiums from Venezuela have declined as Venezuela continues to experience widespread public demonstrations against crime, corruption, soaring inflation and poor utility infrastructure, and we expect that overall premiums from Venezuela will continue to decline if the deteriorating political and economic environment and infrastructure continue to adversely impact our ability to make sales and collect premiums. Our international business and premium collections also could be impacted by our inability to comply with current or future foreign laws or regulations applicable to the Company or our independent consultants in the countries from which we accept applications and by marketing or operational changes made by the Company to comply with those laws or regulations. See the risk factors disclosed in Part II, Item 1A. of this Form 10-Q and our Quarterly Report on Form 10-Q for the quarter ended March



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31, 2019, and in Part I. Item 1A. of our Annual Report on Form 10-K for the year ended December 31, 2018 for additional information.


DOMESTIC SALES


Most of our domestic inforce business results from blocks of business of insurance companies we have acquired over the past 20 years. We discontinued new sales of domestic ordinary whole life and endowment life insurance products within our non-home service domestic products beginning January 1, 2017.

The following table sets forthLife Insurance segment in 2017 while we evaluate our direct premiums by state for the top five premium producing U.S. states for the six months ended June 30, 2019 and 2018 as indicated below.
chart-862503d74705540cb13.jpg
 Three Months Ended Six Months Ended
 June 30, June 30,
(In thousands)2019 2018 2019 2018
State:       
Texas$489
 428
 929
 818
Indiana278
 309
 518
 587
Florida117
 172
 245
 318
Missouri86
 106
 189
 208
Louisiana56
 60
 115
 122
Other States498
 509
 850
 936
Total$1,524
 1,584
 2,846
 2,989

We report premiums based upon the current residence of our policyholders. A number of domestic life insurance companies we acquired had blocks of accident and health insurance policies, which we did not consider to be a core part of our business.  We have cededstrategy; therefore, the majority of our accident and health insurance businessthe premium recorded is related to an unaffiliated insurance company under a coinsurance agreement.renewal business.






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CITIZENS, INC.MANAGEMENT'S DISCUSSION & ANALYSIS

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

Three Months Ended Six Months EndedThree Months EndedSix Months Ended
June 30, June 30,June 30,June 30,
(In thousands)2019 2018 2019 2018(In thousands)2020201920202019
Revenue:       Revenue:    
Premiums$32,140
 34,393
 63,054
 66,753
Premiums$30,062  32,140  59,881  63,054  
Net investment income11,612
 10,139
 21,781
 20,269
Net investment income11,345  11,612  22,825  21,781  
Realized investment gains (losses), net68
 (24) 5,525
 (209)
Realized investment gains, netRealized investment gains, net391  68  1,126  5,525  
Other income614
 79
 797
 288
Other income482  614  1,006  797  
Total revenue44,434
 44,587
 91,157
 87,101
Total revenue42,280  44,434  84,838  91,157  
Benefits and expenses:       Benefits and expenses:
Insurance benefits paid or provided:       Insurance benefits paid or provided:
Claims and surrenders21,316
 15,019
 38,478
 30,310
Claims and surrenders20,888  21,316  41,048  38,478  
Increase in future policy benefit reserves8,519
 15,383
 19,832
 28,965
Increase in future policy benefit reserves7,384  8,519  15,530  19,832  
Policyholders' dividends1,413
 1,605
 2,585
 2,902
Policyholders' dividends1,319  1,413  2,544  2,585  
Total insurance benefits paid or provided31,248
 32,007
 60,895
 62,177
Total insurance benefits paid or provided29,591  31,248  59,122  60,895  
Commissions4,676
 4,777
 9,049
 10,005
Commissions3,294  4,676  7,772  9,049  
Other general expenses6,458
 6,908
 12,663
 6,024
Other general expenses4,446  6,458  9,394  12,663  
Capitalization of deferred policy acquisition costs(4,020) (4,150) (7,722) (8,790)Capitalization of deferred policy acquisition costs(2,716) (4,020) (6,637) (7,722) 
Amortization of deferred policy acquisition costs6,053
 6,240
 11,494
 12,780
Amortization of deferred policy acquisition costs5,419  6,053  10,737  11,494  
Amortization of cost of customer relationships acquired138
 132
 260
 284
Amortization of cost of insurance acquiredAmortization of cost of insurance acquired127  138  245  260  
Total benefits and expenses44,553
 45,914
 86,639
 82,480
Total benefits and expenses40,161  44,553  80,633  86,639  
Income (loss) before federal income tax expense$(119) (1,327) 4,518
 4,621
Income (loss) before federal income tax expense$2,119  (119) 4,205  4,518  


Premiums.  Premium revenues decreased 6.6%declined 6.5% and 5.0% for the second quarter of 2019and six months ended June 30, 2020 compared to the same periodperiods in 20182019 due primarily to a decrease in renewal international business. Firstbusiness throughout the first half of 2020 and a decline in first year premiums excluding Brazil, a country we exited in April 2018, increased slightly during the second quarter of 2019 comparedprimarily related to the same period in 2018. For the six months ended June 30, 2019, premium revenues declined 5.5% compared to the same period in 2018 due primarily to a decrease in both first year and renewal international business. First year premium revenues declined for the second quarter and the six months months ended June 30, 2019 as we experienced a decline in applications received from Venezuela and other countries to a lesser extent. We believe that the decline in new business is driven by several factors, including the political instability in Venezuela, ceasing sales in Brazil, and slower acceptanceimpact of the new product set that was repricedCOVID-19 pandemic. We have taken and submittedwill continue to take countermeasures to reduce the market beginning in 2017. Sales internationally have continuedimpact of the COVID-19 pandemic on our premiums, including emphasizing virtual selling and tailoring our sales efforts to be drivenproducts whose sales processes are less impacted by our endowment to age sixty-five and twenty-year endowment products which have been the top performers for the last several years.pandemic.




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Life insurance premium breakout is detailed below.

Three Months Ended Six Months EndedThree Months EndedSix Months Ended
June 30, June 30,June 30,June 30,
(In thousands)2019 2018 2019 2018(In thousands)2020201920202019
Premiums:       Premiums:    
First year$2,673
 2,700
 4,947
 5,774
First year$1,588  2,673  4,303  4,947  
Renewal29,467
 31,693
 58,107
 60,979
Renewal28,474  29,467  55,578  58,107  
Total premiums$32,140
 34,393
 63,054
 66,753
Total premiums$30,062  32,140  59,881  63,054  


Net Investment Income.  Net investment income declined in the second quarter of 2020 compared to the same period in 2019 primarily due to the impact of the COVID-19 pandemic and the resulting historically low market yields

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available to us for reinvestment, and the need to hold more cash than usual. Net investment income increased during the first half of 2020 compared to the same period in 2019 primarily due to the growth in average invested assets.assets and a strategic focus on increasing yields in a prudent manner.

Six Months Ended Year Ended Six Months Ended
June 30, December 31, June 30,June 30,December 31,June 30,
(In thousands, except for %)2019 2018 2018(In thousands, except for %)202020192019
Net investment income, annualized$43,562
 39,985
 40,538
Net investment income, annualized$45,714  44,779  43,562  
Average invested assets, at amortized cost1,008,256
 958,135
 939,754
Average invested assets, at amortized cost1,052,500  1,016,055  1,008,256  
Annualized yield on average invested assets4.32% 4.17% 4.31%Annualized yield on average invested assets4.34 %4.41 %4.32 %


The annualized yield in the second quarterfirst six months of 2019 has2020 increased slightly compared to the second quarter of 2018.same period in 2019. We are continually adjusting our investment management strategy to identify opportunities to improve our yields while maintaining a prudent risk discipline.profile. This continues to be a challenge in the current low interest rate environment. The annualized yield in the first six months of 2020 declined compared to the three months ended December 31, 2019 as we faced a particularly challenging investment environment this year.


Realized Investment Gains (Losses), Net. We recorded  The realized gains of $68,000 ingain for the second quarter of 2019 and $5.5 million for the first six months of 2019. The realized gains for the six month periodended June 30, 2020 were primarily due to the appreciation in the value of a preferred stock exchange traded fund purchase we made during the first quarter as we were able to take advantage of the market dislocation to identify an attractive risk-adjusted opportunity. We recorded a realized gain of $5.5 million realized gain fromduring the first quarter of 2019 related to the sale of our former corporate headquarters in Austin, Texas. In addition, we recognized gains of $22,000 due to equity securities fair value adjustments during the first six months of 2019. We also recorded realized investment losses for the six months ended June 30, 2018 that were primarily due to an additional impairment of one single issuer which totaled $150,000.
 
Claims and Surrenders.  These amounts fluctuate from period to period but were within anticipated ranges based upon management's expectations. Neither death claims nor surrenders were materially impacted by the COVID-19 pandemic. The decline in surrender benefits in the second quarter reflects changes in the relative maturities of our policies as previously noted.

The following table representsshows the amount of claims and surrenders incurred within the Life Insurance segment for the six months ended June 30, 20192020 compared to the same period in 2018.2019.
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CITIZENS, INC.MANAGEMENT'S DISCUSSION & ANALYSIS


Three Months EndedSix Months Ended
June 30,June 30,
(In thousands)2020201920202019
Claims and Surrenders:
Death claims$1,243  1,502  2,968  3,350  
Surrender benefits10,132  12,612  21,435  21,487  
Endowment benefits2,617  2,988  5,353  6,062  
Matured endowments5,969  3,529  9,569  6,087  
Accident and health benefits41  38  68  76  
Other policy benefits886  647  1,655  1,416  
Total claims and surrenders$20,888  21,316  41,048  38,478  


 Three Months Ended Six Months Ended
 June 30, June 30,
(In thousands)2019 2018 2019 2018
Claims and Surrenders:       
Death claims$1,502
 1,216
 3,350
 2,815
Surrender benefits12,612
 8,656
 21,487
 17,080
Endowment benefits2,988
 3,311
 6,062
 6,500
Matured endowments3,529
 1,065
 6,087
 2,367
Accident and health benefits38
 43
 76
 97
Other policy benefits647
 728
 1,416
 1,451
Total claims and surrenders$21,316
 15,019
 38,478
 30,310

•Death claims expense was unfavorablefavorable for the second quarter and the six months ended June 30, 20192020 compared with the same periods in 2018.2019. Mortality experience is closely monitored by the Company as a key performance indicator and these amounts were within expected levels. We are closely monitoring claim volumes to evaluate whether there is a delay in reporting or filing for benefits as a result of the COVID-19 pandemic.
•Surrenders increased 45.7%decreased 19.7% and 0.2% for the second quarter of 2019 and 25.8% for the six months ended June 30, 20192020 compared to the same periods in 2018. As we have a mature book of business, the majority of policy surrender benefits paid are for policies2019, reflecting changes in the later durationsrelative maturities of their terms, afterour policies as noted above and more policyholders selecting the surrender charges have been reduced or have ended.RPU option.
•Endowment benefit expensebenefits primarily resultsresult from the election by policyholders of a product feature providing an annual guaranteed benefit.  This is a fixed benefit over the life of the contract, thus this expense will vary with new sales and persistency of the business.
•Matured endowments increased 231.4%69.1% and 57.2% for the second quarter of 2019 and 157.2% for the six months ended June 30, 20192020 compared to the same periods in 2018,2019, as a large number of our endowment contracts reached maturity in the current period. We anticipate this trend will continue as endowmentsendowment products sold reach their stated maturities.
Other policy benefits resulted primarily from interest paid on premium deposits and policy benefit accumulations.

Increase in Future Policy Benefit Reserves.  The decreaselower increase in policy benefit reserves for the second quarter and six months ended June 30, 2019,2020 compared to the same periods in 2018,last year was due primarily to the declineincreases in new premium income and increase in surrender and maturity activity in the current period as described above.


Policyholders' Dividends. Policyholders' dividends were slightly lower for both the second quarter and the six months ended June 30, 20192020 compared to the same periods in 2018.2019. The decrease was due to changes in persistency and production.


Commissions.  Commission expense decreased slightly forsubstantially during the second quarter and decreased to a greater extent for the six months ended June 30, 20192020 as we experienced lower first year premiums compared to the same periods in 2018.  This2019. Commission expense fluctuates directly withis driven primarily, but not exclusively, by new premium revenuesbusiness as commission rates paid are higher on first year premium sales.


Other General Expenses.   Expenses increasedare allocated by segment based upon an annual expense study performed by the Company. Expenses decreased for the second quarter and the six months ended June 30, 20192020 due to lower audit, consulting and employee-related expenses compared to the same periods in 2018. The increase for the six months ending June 30, 2019 primarily relates to the reduction in the 7702 tax compliance estimated costs recorded in the first quarter of 2018. We also had additional costs related to salaries, bonuses and other compensation paid to executive officers in the second quarter and the six months ended June 30, 2019 compared to the same periods in 2018.  Audit and legal fees were lower during both periods compared to the prior year.2019.





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Capitalization of Deferred Policy Acquisition Costs.  Capitalized costs fluctuate in direct relation to commissions, decreasing for the second quarter and the six months ended June 30, 2019,2020, based upon first year and renewal premiums and commissions paid compared to the same periods in 2018.  2019.  



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Amortization of Deferred Policy Acquisition Costs.  Amortization costs fluctuate with changes in first year premium activity, surrenders, and persistency in general. As previously described,noted, persistency is monitored closely by the Company.


HOME SERVICE INSURANCE


We operate in the Home Service insuranceInsurance market through our subsidiaries Security Plan Life Insurance Company ("SPLIC"), Magnolia Guaranty Life Insurance Company ("MGLIC")SPLIC, MGLIC and Security Plan Fire Insurance Company ("SPFIC"),SPFIC, and focus on the life insurance needs of the middle and lower income markets, primarily in Louisiana, Mississippi and Arkansas.  Our policies are sold and serviced through a home service insurance marketing distribution system of employee-agentsagents who work full time on a debit route system and through funeral homes that sell policies, collect premiums and service policyholders.


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


Three Months EndedSix Months Ended
June 30,June 30,
(In thousands)2020201920202019
State:    
Louisiana$10,482  10,666  20,988  21,309  
Mississippi513  532  1,009  1,038  
Arkansas403  437  866  824  
Other States238  232  484  459  
Total$11,636  11,867  23,347  23,630  
 Three Months Ended Six Months Ended
 June 30, June 30,
(In thousands)2019 2018 2019 2018
State:       
Louisiana$10,666
 10,749
 21,309
 21,419
Mississippi532
 524
 1,038
 1,091
Arkansas437
 443
 824
 859
Other States232
 223
 459
 454
Total$11,867
 11,939
 23,630
 23,823


HOME SERVICE INSURANCE PRODUCTS


Our Home Service Insurance products consist primarily of small face amount ordinary whole life and pre-need policies, which are designed to fund final expenses for the insured, primarily consisting of funeral and burial costs.  To a much lesser extent, our Home Service Insurance segment sells limited-liability, named-peril property policies covering dwellings and contents.  We provide $30,000 maximum coverage on any one dwelling and contents, while content only coverage and dwelling only coverage is limited to $20,000, respectively.


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






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CITIZENS, INC.MANAGEMENT'S DISCUSSION & ANALYSIS

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

Three Months Ended Six Months EndedThree Months EndedSix Months Ended
June 30, June 30,June 30,June 30,
(In thousands)2019 2018 2019 2018(In thousands)2020201920202019
Revenue:       Revenue:    
Premiums$11,664
 11,737
 23,214
 23,406
Premiums$11,434  11,664  22,932  23,214  
Net investment income3,325
 3,316
 6,411
 6,618
Net investment income3,256  3,325  6,588  6,411  
Realized investment gains (losses), net152
 (151) 636
 (503)Realized investment gains (losses), net924  152  (793) 636  
Other income (loss)1
 —
 2
 (1)
Other incomeOther income—  1  18  2  
Total revenue15,142
 14,902
 30,263
 29,520
Total revenue15,614  15,142  28,745  30,263  
Benefits and expenses:       Benefits and expenses:
Insurance benefits paid or provided:       Insurance benefits paid or provided:
Claims and surrenders5,708
 5,598
 11,579
 11,458
Claims and surrenders6,866  5,708  13,155  11,579  
Increase in future policy benefit reserves953
 1,172
 1,939
 2,198
Increase in future policy benefit reserves853  953  2,178  1,939  
Policyholders' dividends10
 9
 20
 19
Policyholders' dividends9  10  17  20  
Total insurance benefits paid or provided6,671
 6,779
 13,538
 13,675
Total insurance benefits paid or provided7,728  6,671  15,350  13,538  
Commissions3,708
 3,892
 7,219
 7,623
Commissions3,420  3,708  6,795  7,219  
Other general expenses5,332
 5,392
 10,402
 10,936
Other general expenses4,591  5,332  8,907  10,402  
Capitalization of deferred policy acquisition costs(1,392) (1,490) (2,518) (2,813)Capitalization of deferred policy acquisition costs(1,015) (1,392) (2,103) (2,518) 
Amortization of deferred policy acquisition costs878
 960
 1,714
 2,026
Amortization of deferred policy acquisition costs642  878  1,443  1,714  
Amortization of cost of customer relationships acquired280
 340
 577
 867
Amortization of cost of insurance acquiredAmortization of cost of insurance acquired274  280  524  577  
Total benefits and expenses15,477
 15,873
 30,932
 32,314
Total benefits and expenses15,640  15,477  30,916  30,932  
Loss before federal income tax expense$(335) (971) (669) (2,794)Loss before federal income tax expense$(26) (335) (2,171) (669) 


Premiums.  Premiums were down slightlydeclined for the second quarter and six months ended June 30, 2020 compared to the same periods in 2019 as sales of new policies and in-person premium collections were negatively impacted by COVID-19-related temporary office closures and social distancing requirements, as noted in our “Current Financial Highlights” above and in our Risk Factors discussed in Part II, Item 1A herein.

Net Investment Income.  Net investment income for the six months ended June 30, 20192020 increased compared to the same periodsperiod in 2018.

Net Investment Income.  Net investment income for our Home Service Insurance segment2019 as average invested assets rose from the previous period. Annualized yield on invested assets declined slightly during the second quarter and the six months endingended June 30, 20192020 compared to the same periodsperiod in 20182019 as a fallwe faced challenges in yields and an increase in investment expenses offset a slight increase in average invested assets. As previously described, it has been challenging to findlocating attractive yieldsrisk-adjusted opportunities in the current low interest rate environment. Net investment income yield for our Home Service Insurance segment is summarized below.


Six Months Ended Year Ended Six Months EndedSix Months EndedYear EndedSix Months Ended
June 30, December 31, June 30,June 30,December 31,June 30,
(In thousands, except for %)2019 2018 2018(In thousands, except for %)202020192019
     
Net investment income, annualized$13,027
 13,125
 13,236
Net investment income, annualized$13,113  13,058  13,027  
Average invested assets, at amortized cost292,042
 290,443
 287,119
Average invested assets, at amortized cost297,979  293,497  292,042  
Annualized yield on average invested assets4.46% 4.52% 4.61%Annualized yield on average invested assets4.40 %4.45 %4.46 %
 

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Realized Investment Gains (Losses), Net.  Realized net gainslosses for the six months ended June 30, 20192020 were primarily related to equity securities fair value adjustments of $656,000, as financial markets performed well$0.8 million during the period, as we faced an historically challenging equities market in the first sixquarter of 2020.




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months of 2019. We recorded losses of $339,000 due to fair value changes related to equity securitiesClaims and an additional impairment on one fixed maturity security issuer totaling $75,000 forSurrenders.  As discussed above, the overall increase in claims and surrenders during the three and six months ended June 30, 2018.

2020 compared to the same periods in 2019 was due primarily to the increase in death claims due to the COVID-19 pandemic. Claims and Surrenders.  These amounts fluctuate from period to period but were within anticipated ranges based upon management's expectations.surrenders expense is summarized as follows:


Three Months EndedSix Months Ended
June 30,June 30,
(In thousands)2020201920202019
Claims and Surrenders:
Death claims$5,803  4,441  10,667  9,080  
Surrender benefits543  814  1,295  1,678  
Endowment benefits2  2  5  4  
Matured endowments179  155  332  278  
Property claims316  272  803  490  
Accident and health benefits20  20  46  40  
Other policy benefits3  4  7  9  
Total claims and surrenders$6,866  5,708  13,155  11,579  
 Three Months Ended Six Months Ended
 June 30, June 30,
(In thousands)2019 2018 2019 2018
Claims and Surrenders:       
Death claims$4,441
 4,312
 9,080
 8,896
Surrender benefits814
 719
 1,678
 1,454
Endowment benefits2
 3
 4
 6
Matured endowments155
 141
 278
 263
Property claims272
 429
 490
 814
Accident and health benefits20
 (10) 40
 17
Other policy benefits4
 4
 9
 8
Total claims and surrenders$5,708
 5,598
 11,579
 11,458


•Death claims expense fluctuates based upon reported claims. We experienced a smallan increase in reported claims and the average dollar amount of claims in the second quarter and the six months ended June 30, 20192020 compared to the same periods in 2018.2019, due in part to the COVID-19 pandemic as indicated above. Mortality experience is closely monitored by the Company as a key performance indicator and amounts were within the range of expected levels.
•Surrender benefits increaseddecreased for the second quarter and the six months ended June 30, 2019,2020 but were within anticipated ranges based on management expectations.
•Property claims decreased forincreased in the second quarter and the six months ended June 30, 2019,2020 as we experienced favorable weather-relatedhigher average claim activity in 2019 compared to the same periods in 2018.

Increase in Future Policy Benefit Reserves.  The change in future policy benefit reserves for the second quarterpayouts and the six months ended June 30, 2019 was consistent with sales and surrendermore claim activity compared to the same periods in 2018.last year.


Commissions.  Commission expense decreased for the second quarter and the six months ended June 30, 20192020 compared to the same periodsperiod in 2018,2019, consistent with premium collection levels. In addition, management initiated a change in commission policy in 2018 that has resulted in generally lower commission payouts.


Other General Expenses.  Expenses are allocated by segment based upon an annual expense study performed by the Company. Expenses declineddecreased for the second quarter and the six months ended June 30, 2019,2020 compared to the same periods in 2018,2019 due primarily to lower audit fees related to the 2018 audit incurred in the first quarter of 2019, compared to 2017 audit fees incurred in the first quarter of 2018.and employee-related expenses.


Capitalization of Deferred Policy Acquisition Costs ("DAC").  Capitalized costs decreased for the second quarter and the six months ended June 30, 20192020 compared to the same periods in 2018.2019.  DAC capitalization is directly correlated to fluctuations in new business and commissions.

Amortization of Deferred Policy Acquisition Costs.  Amortization for the second quarter and the six months ended June 30, 2019 declined compared to the same periods in 2018 due to lower first year production and commissions in the current quarter.




June 30, 2019 Form 10-Q 46
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CITIZENS, INC.MANAGEMENT'S DISCUSSION & ANALYSIS

Amortization of Cost of Customer Relationships Acquired. Amortization decreased for the second quarter and the six months ended June 30, 2019 compared to the same periods in 2018, mainly due to an annual review and true up performed in the first quarter of 2019.


OTHER NON-INSURANCE ENTERPRISES


This represents the administrative support entities to the insurance operations whose revenues are primarily intercompany and have been eliminated in consolidation under GAAP. The lossesGAAP, which typically results in a loss. Losses reported for the second quarter and the six months ended June 30, 2020 and 2019, respectively, are the primary sourcealso impacted by general expenses.

June 30, 2020 | 10-Q 47

Table of revenue.ContentsDRAFT 6


CITIZENS, INC.MANAGEMENT'S DISCUSSION & ANALYSIS

INVESTMENTS


The administration of our investment portfolios is handled by our management and a third-party investment manager pursuant to board-approved investment guidelines, with all trading activity approved by a committeeeach board of each entity's respective boards of directors.Citizens and its insurance subsidiaries.  The guidelines used require that fixed maturities, both government and corporate, are investment grade and comprise a majority of the investment portfolio.  State insurance statutes prescribe the quality and percentage of the various types of investments that may be made by insurance companies and generally permit investmentinvestments in qualified state, municipal, federal and foreign government obligations, high quality corporate bonds, preferred and common stock, mortgage loans and real estate within certain specified percentages.  The invested assets are intended to mature in accordance with the average maturity of theour insurance products and provide the cash flow for our insurance company subsidiaries to meet their respective policyholder obligations.


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

Carrying ValueJune 30, 2019 December 31, 2018Carrying ValueJune 30, 2020December 31, 2019
(In thousands, except for %)Amount % Amount %(In thousands, except for %)Amount%Amount%
Cash and Invested AssetsCash and Invested Assets
Fixed maturity securities:       Fixed maturity securities:    
U.S. Treasury and U.S. Government-sponsored enterprises$16,025
 1.1% $15,554
 1.1%U.S. Treasury and U.S. Government-sponsored enterprises$16,521  1.0 %$15,878  1.0 %
States and political subdivisions(1)676,440
 45.7% 720,115
 52.0%455,819  28.7 %536,284  35.1 %
Corporate509,768
 34.5% 381,796
 27.5%Corporate755,884  47.6 %650,088  42.6 %
Mortgage-backed (1)(2)
128,753
 8.7% 108,698
 7.8%141,988  8.9 %131,387  8.6 %
Asset-backed10,233
 0.7% 4,757
 0.3%Asset-backed46,984  3.0 %44,203  2.9 %
Foreign governments120
 —% 119
 —%Foreign governments121  — %119  — %
Total fixed maturity securities1,341,339
 90.7% 1,231,039
 88.7%Total fixed maturity securities1,417,317  89.2 %1,377,959  90.2 %
Short-term investments2,455
 0.2% 7,865
 0.6%Short-term investments—  — %1,301  0.1 %
Cash and cash equivalents34,568
 2.3% 45,492
 3.3%Cash and cash equivalents52,375  3.4 %46,205  3.0 %
Other investments: 
  
  
  
Other investments:    
Policy loans81,545
 5.5% 80,825
 5.8%Policy loans84,171  5.3 %82,005  5.4 %
Equity securities15,827
 1.1% 15,068
 1.1%Equity securities20,698  1.3 %16,033  1.1 %
Mortgage loans182
 —% 186
 —%
Real estate and other long-term investments2,593
 0.2% 7,223
 0.5%Real estate and other long-term investments12,023  0.8 %2,956  0.2 %
Total cash, cash equivalents and investments$1,478,509
 100.0% $1,387,698
 100.0%
Total cash and invested assetsTotal cash and invested assets$1,586,584  100.0 %$1,526,459  100.0 %
(1)Includes $127.5$168.7 million and $108.5$188.1 million of securities guaranteed by third parties at June 30, 2020 and December 31, 2019, respectively.
(2) Includes $141.6 million and $130.1 million of U.S. Government-sponsored enterprises at June 30, 20192020 and December 31, 2018,2019, respectively.





June 30, 2019 Form 10-Q 47
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Cash and cash equivalents decreasedincreased as of June 30, 2020 compared to December 31, 2019due to timing of cash inflows and investments of cash into marketable securities.


At June 30, 2020, investments in fixed maturity and equity securities were 90.6% of our total invested assets. All of our fixed maturities were classified as available-for-sale securities at June 30, 2020 and December 31, 2019. We had no fixed maturity or equity securities that were classified as trading securities at June 30, 2020 or December 31, 2019.


June 30, 2020 | 10-Q 48

Table of ContentsDRAFT 6

CITIZENS, INC.MANAGEMENT'S DISCUSSION & ANALYSIS
The following table sets forthshows the distribution of the credit ratings of our portfolio of fixed maturity securities by carrying value as of June 30, 20192020 and December 31, 2018.2019.

Carrying ValueJune 30, 2019 December 31, 2018Carrying ValueJune 30, 2020December 31, 2019
(In thousands, except for %)Amount % Amount %(In thousands, except for %)Amount%Amount%
AAA$95,449
 7.1% $96,333
 7.8%AAA$47,496  3.4 %$56,977  4.1 %
AA544,444
 40.6% 551,978
 44.8%AA480,005  33.9 %513,190  37.2 %
A328,407
 24.5% 281,553
 22.9%A403,774  28.5 %385,345  28.0 %
BBB352,955
 26.3% 277,584
 22.6%BBB459,370  32.4 %406,515  29.5 %
BB and other20,084
 1.5% 23,591
 1.9%BB and other26,672  1.8 %15,932  1.2 %
Totals$1,341,339
 100.0% $1,231,039
 100.0%Totals$1,417,317  100.0 %$1,377,959  100.0 %


Credit ratings reported for the periods indicated are assigned by a Nationally Recognized Statistical Rating Organization ("NRSRO") such as Moody’s Investors Service, Standard & Poor’s or Fitch Ratings.  A credit rating assigned by an NRSRO is a quality basedquality-based rating, with AAA representing the highest quality and D the lowest, with BBB and above being considered investment grade.  In addition, the Company may use credit ratings of the National Association of Insurance Commissioners ("NAIC") Securities Valuation Office ("SVO") as assigned, if there is no NRSRO rating.  Securities rated by the SVO are grouped in the equivalent NRSRO category as stated by the SVO and securities that are not rated by an NRSRO are included in the "other" category.


Non-investment grade securities are the result of downgrades of issuers or securities acquired during acquisitions of companies, as the Company does not purchase below investment grade securities. We are closely monitoring credit ratings for potential downgrades due to the COVID-19 pandemic.

The Company has no direct sovereign European debt exposure as of June 30, 2019.2020.  



June 30, 2020 | 10-Q 49

Table of ContentsDRAFT 6

CITIZENS, INC.MANAGEMENT'S DISCUSSION & ANALYSIS
As of June 30, 2019,2020, the Company held municipal fixed maturity securities that include third partythird-party guarantees.  Detailed below is a presentation by NRSRO rating of our municipal holdings by funding type.
June 30, 2019General Obligation Special Revenue Other Total % Based on Amortized
Cost
(In thousands, except for %)Fair
Value		 Amortized
Cost		 Fair
Value		 Amortized
Cost		 Fair
Value		 Amortized
Cost		 Fair
Value		 Amortized
Cost		 
Municipal securities including third party guarantees          
AAA$55,743
 54,713
 31,206
 30,795
 —
 —
 86,949
 85,508
 13.1%
AA141,574
 137,217
 217,130
 210,868
 23,292
 21,992
 381,996
 370,077
 56.8%
A24,026
 23,162
 137,215
 128,024
 10,793
 10,192
 172,034
 161,378
 24.8%
BBB5,965
 5,899
 18,741
 18,118
 1,488
 1,450
 26,194
 25,467
 3.9%
BB and other5,744
 5,707
 3,523
 3,461
 —
 —
 9,267
 9,168
 1.4%
Total$233,052
 226,698
 407,815
 391,266
 35,573
 33,634
 676,440
 651,598
 100.0%
                  
Municipal securities excluding third party guarantees          
AAA$21,645
 21,487
 10,232
 10,231
 —
 —
 31,877
 31,718
 4.9%
AA116,397
 114,044
 151,366
 148,047
 16,320
 15,263
 284,083
 277,354
 42.5%
A50,620
 49,177
 168,703
 158,109
 13,644
 12,918
 232,967
 220,204
 33.8%
BBB11,178
 10,751
 33,927
 32,829
 —
 —
 45,105
 43,580
 6.7%
BB and other33,212
 31,239
 43,587
 42,050
 5,609
 5,453
 82,408
 78,742
 12.1%
Total$233,052
 226,698
 407,815
 391,266
 35,573
 33,634
 676,440
 651,598
 100.0%




type as of June 30, 2019 Form 10-Q 48
Table of Contents2020.


CITIZENS, INC.MANAGEMENT'S DISCUSSION & ANALYSIS
General ObligationSpecial RevenueOtherTotal% Based on Amortized
Cost
(In thousands, except for %)Fair
Value		Amortized
Cost		Fair
Value		Amortized
Cost		Fair
Value		Amortized
Cost		Fair
Value		Amortized
Cost
Municipal fixed maturity securities shown including third-party guarantees
AAA$26,335  25,498  12,210  11,916  —  —  38,545  37,414  8.8 %
AA93,699  89,182  137,279  130,136  12,282  10,795  243,260  230,113  53.7 %
A18,248  16,780  122,259  110,815  7,664  7,039  148,171  134,634  31.5 %
BBB4,711  4,789  9,833  9,393  1,548  1,450  16,092  15,632  3.7 %
BB and other4,676  4,738  5,075  4,998  —  —  9,751  9,736  2.3 %
Total$147,669  140,987  286,656  267,258  21,494  19,284  455,819  427,529  100.0 %
Municipal fixed maturity securities shown excluding third-party guarantees
AAA$5,021  4,872  512  507  —  —  5,533  5,379  1.3 %
AA71,840  70,115  76,517  73,494  7,719  6,550  156,076  150,159  35.1 %
A32,898  30,873  148,155  134,988  10,604  9,766  191,657  175,627  41.1 %
BBB10,038  9,631  27,786  26,437  —  —  37,824  36,068  8.4 %
BB and other27,872  25,496  33,686  31,832  3,171  2,968  64,729  60,296  14.1 %
Total$147,669  140,987  286,656  267,258  21,494  19,284  455,819  427,529  100.0 %


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

(In thousands)
Fair
Value
 Amortized
Cost		 % of Total
Fair Value		(In thousands)Fair
Value		Amortized
Cost		% of Total
Fair Value
       
Utilities$145,065
 138,189
 21.5%Utilities$95,914  87,695  21.0 %
Education98,874
 94,102
 14.6%Education68,861  63,619  15.1 %
General Obligations72,137
 69,827
 10.7%


The Company's exposure to municipal holdings isare spread across many states, withhowever, municipal fixed maturity securities from Texas and Florida ascomprise the two states withmost significant concentration of the largesttotal municipal holdings portfolio as of June 30, 2019.2020. The Company holds 21.6%17.1% of its municipal security holdings in Texas issuers and 13.0% in Florida issuers based on fair value.as of June 30, 2020. There were no other states or individual issuer holdings that represented or exceeded 10% of the total municipal portfolio as of June 30, 2019.2020.

The tables below represent the exposure the Company holds in these two states.


June 30, 2019General Obligation Special Revenue Other Total
(In thousands)Fair
Value		 Amortized
Cost		 Fair
Value		 Amortized
Cost		 Fair
Value		 Amortized
Cost		 Fair
Value		 Amortized
Cost
Texas securities including third party guarantees  
  
  
  
AAA$53,738
 52,777
 16,014
 15,615
 —
 —
 69,752
 68,392
AA35,473
 34,955
 26,163
 25,338
 —
 —
 61,636
 60,293
A—
 —
 7,139
 6,545
 —
 —
 7,139
 6,545
BBB—
 —
 6,482
 6,353
 —
 —
 6,482
 6,353
BB and other724
 722
 496
 518
 —
 —
 1,220
 1,240
Total$89,935
 88,454
 56,294
 54,369
 —
 —
 146,229
 142,823
Texas securities excluding third party guarantees  
  
  
  
AAA$20,213
 20,062
 930
 930
 —
 —
 21,143
 20,992
AA53,092
 52,097
 27,732
 27,179
 —
 —
 80,824
 79,276
A13,637
 13,413
 14,802
 13,803
 —
 —
 28,439
 27,216
BBB1,229
 1,157
 7,041
 6,889
 —
 —
 8,270
 8,046
BB and other1,764
 1,725
 5,789
 5,568
 —
 —
 7,553
 7,293
Total$89,935
 88,454
 56,294
 54,369
 —
 —
 146,229
 142,823





June 30, 2019 Form2020 | 10-Q 4950

Table of ContentsDRAFT 6


CITIZENS, INC.MANAGEMENT'S DISCUSSION & ANALYSIS
The table below represents the Company's detailed exposure to municipal holdings in Texas at June 30, 2020.

June 30, 2020General ObligationSpecial RevenueOtherTotal
(In thousands)Fair
Value		Amortized
Cost		Fair
Value		Amortized
Cost		Fair
Value		Amortized
Cost		Fair
Value		Amortized
Cost
Texas municipal fixed maturity securities shown including third-party guarantees 
AAA$25,333  24,577  9,350  9,062  —  —  34,683  33,639  
AA23,795  23,299  12,290  11,480  —  —  36,085  34,779  
A—  —  6,485  5,951  —  —  6,485  5,951  
BBB—  —  —  —  —  —  —  —  
BB and other—  —  825  775  —  —  825  775  
Total$49,128  47,876  28,950  27,268  —  —  78,078  75,144  
Texas municipal fixed maturity securities shown excluding third-party guarantees 
AAA$4,610  4,461  —  —  —  —  4,610  4,461  
AA36,194  35,407  12,084  11,760  —  —  48,278  47,167  
A6,084  5,854  12,662  11,606  —  —  18,746  17,460  
BBB1,235  1,154  558  528  —  —  1,793  1,682  
BB and other1,005  1,000  3,646  3,374  —  —  4,651  4,374  
Total$49,128  47,876  28,950  27,268  —  —  78,078  75,144  

CITIZENS, INC.MANAGEMENT'S DISCUSSION & ANALYSIS
IMPAIRMENT CONSIDERATIONS RELATED TO INVESTMENTS IN FIXED MATURITY AND EQUITY SECURITIES


June 30, 2019General Obligation Special Revenue Other Total
(In thousands)Fair
Value		 Amortized
Cost		 Fair
Value		 Amortized
Cost		 Fair
Value		 Amortized
Cost		 Fair
Value		 Amortized
Cost
Florida securities including third party guarantees        
AAA$501
 500
 3,460
 3,460
 —
 —
 3,961
 3,960
AA—
 —
 56,892
 56,113
 5,126
 5,046
 62,018
 61,159
A—
 —
 11,636
 11,469
 10,555
 9,966
 22,191
 21,435
Total$501
 500
 71,988
 71,042
 15,681
 15,012
 88,170
 86,554
Florida securities excluding third party guarantees        
AAA$501
 500
 —
 —
 —
 —
 501
 500
AA—
 —
 44,447
 43,995
 3,525
 3,525
 47,972
 47,520
A—
 —
 23,275
 23,006
 10,556
 9,967
 33,831
 32,973
BB and other—
 —
 4,266
 4,041
 1,600
 1,520
 5,866
 5,561
Total$501
 500
 71,988
 71,042
 15,681
 15,012
 88,170
 86,554

VALUATION OF INVESTMENTS

We evaluateFor the carrying value of ourthree and six months ended June 30, 2020, the Company recorded no credit valuation losses on fixed maturity securities and equity securities at least quarterly.  The Company monitors all debt and equity securities on an on-going basis relative to changes in credit ratings, market prices, earnings trends and financial performance, in addition to specific region or industry reviews.  The assessment of whether other-than-temporaryrecognized no fixed maturity investment impairments have occurred is based on a case-by-case evaluation of underlying reasons for the decline in fair value.  The Company determines other-than-temporary impairment by reviewing all relevant evidence related to the specific security issuer as well as the Company's intent to sell the security, or if it is more likely than not that the Company would be required to sell a security before recovery of its amortized cost.

When an other-than-temporary impairment has occurred, the amount of the other-than-temporary impairment recognized in earnings depends on whether the Company intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis.  If the Company intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis, the other-than-temporary impairment is recognized in earnings equal to the entire difference between the investment's cost and its fair value at the balance sheet date.  If the Company does not intend to sell the security and it is not more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis, the other-than-temporary impairment is separated into the following: (a) the amount representing the credit loss; and (b) the amount related to all other factors.  The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings.  The amount of the total other-than-temporary impairment related to other factors is recognized in other comprehensive income, net of applicable taxes.  The previous amortized cost basis less the other-than-temporary impairment recognized in earnings becomes the new amortized cost basis of the investment.  The new amortized cost basis is not adjusted for subsequent recoveries in fair value.

There were no other-than-temporary impairments recorded for the three and six months ended June 30, 2019 or2019.

Information on both unrealized and realized gains and losses by category is set forth in Note 5. Investments of the three months ended June 30, 2018. The Company recognized other-than-temporary impairments of $225,000 during the six months ended June 30, 2018.notes to our consolidated financial statements.


LIQUIDITY AND CAPITAL RESOURCES


Liquidity refers to a company's ability to generate sufficient cash flows to meet the needs of its operations. Liquidity is managed onWe manage our insurance operations as described herein in order to ensure that we have stable and reliable sources of cash flows to meet obligationsour obligations.  We expect to meet our cash needs for the next 12 months with cash generated by our insurance operations and from our invested assets.

PARENT COMPANY LIQUIDITY AND CAPITAL RESOURCES

Citizens is provided by a varietyholding company and has had minimal operations of sources.




June 30, 2019 Form 10-Q 50
Tableits own.  Our assets consist of Contents

CITIZENS, INC.MANAGEMENT'S DISCUSSION & ANALYSIS

the capital stock of our subsidiaries, cash and investments.  Our liquidity requirements are met primarily from two sources: cash generated from our operating subsidiaries and our invested assets. Our ability to obtain cash from our insurance subsidiaries depends primarily upon the availability of statutorily permissible payments, including payments Citizens receives from service agreements with our life insurance subsidiaries and dividends from the subsidiaries. The ability to make payments to the holding company is limited by funds providedapplicable laws and regulations of Bermuda and U.S. states of domicile which subject insurance operations to significant regulatory restrictions. These laws and regulations require, among other things, that our insurance subsidiaries maintain minimum solvency requirements,

June 30, 2020 | 10-Q 51

Table of ContentsDRAFT 6

CITIZENS, INC.MANAGEMENT'S DISCUSSION & ANALYSIS
which limit the amount of dividends that can be paid to the holding company. The regulations also require approval of our service agreements with the applicable regulatory authority in order to prevent insurance subsidiaries from operations.  Premiummoving large amounts of cash to the unregulated holding company.

As we discussed in Note 11. Subsequent Events, upon the regulatory approval of the transfer of the Citizens, Inc. Class B common stock from the Harold E. Riley Trust to the Harold E. Riley Foundation, the "Change in Control" clause in the Employment Agreement by and between the Company and Geoffrey M. Kolander, our Chief Executive Officer and President, was triggered. Following the change in control, Mr. Kolander announced his intention to resign as Chief Executive Officer and President and a member of the Board of Directors, effective no later than August 10, 2020. Pursuant to the terms of the Employment Agreement, Mr. Kolander is entitled to the cash severance amount totaling $8.8 million. Additionally, Citizens entered into a new lease for its headquarters space in Austin, Texas, and expects to spend cash for build-out costs primarily during the third quarter of 2020. We believe we have the appropriate liquidity to meet such cash commitments.

We are closely monitoring the impact that the COVID-19 pandemic may have on our liquidity and capital resources. To the extent that we continue to experience significant decreases in sales and collections of premiums, decreases in our investment income and/or increases in claim payments as a result of the COVID-19 pandemic, our liquidity would be negatively impacted and would likely result in the sale of our investments to meet operational cash flow requirements.

INSURANCE COMPANY SUBSIDIARY LIQUIDITY AND CAPITAL RESOURCES

The liquidity requirements of our insurance operations are primarily met by premium deposits and revenues, investment income and investment maturitiesmaturities. Primary uses of these funds are the primary sources of funds, while investment purchases, payments of policy benefits to policyholders, and operating expenses are the primary uses of funds.  We historicallyexpenses.  Historically, we have not had to liquidate investments to provide cash flow, and there were no liquidity issues during the six months ended June 30, 2019.  2020.  Cash flows from operating activities were $28.6 million and $31.4 million for the six months ended June 30, 2020 and 2019, respectively.  

We have traditionally also had significant cash flows from both scheduled and unscheduled investment security maturities, redemptions, and prepayments.  These cash flows, for the most part, are reinvested in fixed income securities.  Net cash outflows from investing activities totaled $22.8 million and $41.4 million for the six months ended June 30, 2020 and 2019, respectively. The investing activities fluctuate from period to period due to timing of securities activities such as calls and maturities and reinvestment of those funds.  The Company's net cash inflow and outflow from financing activities were $0.4 million and $1.0 million for the six months ended June 30, 2020 and 2019, respectively.

Our investments consist of 92.9%92.4% of marketable debtfixed maturity securities classified as available-for-sale and 1.1%1.3% of equity securities that could be readily converted to cash for liquidity needs. A large portion of our fixed maturity security investment portfolio will mature in the next several years and could be called sooner. Over the years, we have been subject to significant call activity due to the declining interest rate environment, which required us to reinvest in fixed maturity securities with shorter durations that are now approaching maturity. We will need to reinvest these maturing funds in the current low interest rate environment. Our profitability could be negatively impacted depending on the market rates at the time of reinvestment. This could result in a decrease in our spread between our policy liability crediting rates and our investment earned rates which could also negatively impact our liquidity. Our investment portfolio (and, specifically, the valuations of investment assets we hold) has also been, and may continue to be, adversely affected as a result of market developments from the COVID-19 pandemic and uncertainty regarding its outcome. Moreover, changes in interest rates, reduced liquidity or a continued slowdown in the U.S. or in global economic conditions may also adversely affect the values and cash flows of these assets.


A primary liquidity concern is the risk of an extraordinary level of early policyholder withdrawals.  We include provisions in our insurance policies, such as surrender charges, that help limit and discourage early withdrawals.  Since these contractual withdrawals, as well as the level of surrenders experienced, have been largely consistent with our assumptions in asset liability management, our associated cash outflows historically have not

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had an adverse impact on our overall liquidity.  We have not experienced any measurable increases in surrenders due to the COVID-19 pandemic, however we continue to monitor surrenders and early withdrawals. Individual life insurance policies are less susceptible to withdrawal than annuity reserves and deposit liabilities because policyholders may incur surrender charges and undergo a new underwriting process in order to obtain a new insurance policy. 

For reasons described above, we have experienced increased claims in our Home Service Insurance segment in the second quarter of 2020. Additionally, we are closely monitoring claim volumes to evaluate whether there is a delay in reporting or filing for benefits as a result of the COVID-19 pandemic in our Home Service Insurance segment and Life Insurance segment. To the extent we continue to experience increased claims and the associated death benefit payouts in our Home Service Insurance segment and, possibly our Life Insurance segment, as a result of the COVID-19 pandemic, our liquidity could be negatively impacted. Some of our policies include pandemic exclusions and we carry reinsurance to offset some of these risks. While our mortality experience is closely monitored by the Company and the activity has historically been within expected levels, we cannot predict whether we will see increased death benefit payouts above expected levels due to the COVID-19 pandemic. We have had to place a moratorium on policy cancellations or non-renewals for nonpayments of premium and forbearance on premium collections in our Home Service Insurance segment due to state mandates which could negatively affect our liquidity due to lower premium collections and increased death claims due to policies being kept in force that would have otherwise lapsed. Cash flow projections and cash flow tests under various market interest rate scenarios are also performed annually to assist in evaluating liquidity needs and adequacy.  


Our whole life and endowment products provide the policyholder with alternatives once the policy matures. The policyholder can choose to take a lump sum payout or leave the money on deposit at interest with the Company. The Company has a significant amountAs of endowment products representing over 40%June 30, 2020, 41% of the Company's total insurance in force with older contracts sold historically thatwas in endowment products. Approximately 12% of the endowments in force will begin reaching their maturities overmature in the next several years and policyholderfive years. Policyholder election behavior is not known. If a large number ofunknown, but if policyholders elect lump sum distributions, the Company could be exposed to liquidity risk in years of high maturities. Meeting these distributions could require the Company to sell securities at inopportune times to pay policyholder withdrawals. Alternatively, if the policyholders were to leave the money on deposit with the Company at interest, our profitability could be negatively impacted if the product guaranteed rate is higher than the current market rate we can earnare earning on our investments. We currently anticipate that available liquidity sources and future cash flows will be adequate to meet our needs for funds, but we will monitor closely our policyholder behavior patterns.


A large portion of our debt security investment portfolio will mature in the next several years and could be called sooner. We were subject to significant call activity beginning in 2009 due to the declining interest rate environment, which required us to reinvest in debt securities with shorter durations that are now approaching maturity. We will need to reinvest these maturing funds in the current interest rate environment. Our profitability could be negatively impacted depending on the market rates at the time of reinvestment. This could result in a decrease in our spread between our policy liability crediting rates and our investment earned rates which could also negatively impact our liquidity.

Cash flows from our insurance operations historically have been sufficient to meet current needs.  Cash flows from operating activities were $31.4 million and $42.0 million for the six months ended June 30, 2019 and 2018, respectively.  We have traditionally also had significant cash flows from both scheduled and unscheduled investment security maturities, redemptions, and prepayments.  These cash flows, for the most part, are reinvested in fixed income securities.  Net cash outflows from investing activities totaled $41.4 million and $24.9 million for the six months ended June 30, 2019 and 2018, respectively. The investing activities fluctuate from period to period due to timing of securities activities such as calls and maturities and reinvestment of those funds. 

We have established an estimateda liability of $10.0 million, net of tax, as of June 30, 20192020 for probable liabilities and expenses associated with a tax compliance matter related to the qualification of certain of our policies as described in Note 7. Commitments and Contingencies, in the notes to our consolidated financial statements, which represents management’s estimate. We have disclosed an estimatedestimate of this contingent liability. This estimate and range related to probable liabilities and expenses of $6.0 million to $52.5 million, net of tax. This estimated range includesinclude projected taxes, interest and penaltiessettlement amounts payable to the IRS, as well as estimated increased payout obligations to current and former holders of non-compliant domestic life insurance policies expected to result from remediation of those policies. The amount of our liabilities and expenses depends on a number of uncertainties, including the number of prior tax years for which we may be liable to the IRS, the number of domestic life insurance policies we will be required to remediate, and the methodology applicable to the calculation of the tax liabilities for policies. Given the range of potential outcomes and the significant variables assumed in establishing our estimates,



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actual amounts incurred may exceed our reserve and exceed the high end of our estimated range of liabilities and expenses.


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

Our domestic companies are subject to minimum capital requirements set by the NAIC in the form of risk-based capital ("RBC").  RBC considers the type of business written by an insurance company, the quality of its assets, and various other aspects of an insurance company's business to develop a minimum level of capital called "Authorized Control Level Risk-basedRisk-Based Capital" and compares this. This level of capital is then compared to an adjusted statutory capital that includes capital and surplus as reported under statutory accounting principles, plus certain investment

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reserves.  Should the ratio of adjusted statutory capital to control level RBC fall below 200%, for our domestic companies, a series of remedial actions by the affected company would be required. WeAdditionally, we have a parental guarantee between Citizens and CICA, Citizens' wholly-owned subsidiary domiciled in Colorado, to maintain a RBC level above 350%. At June 30, 2020, our domestic insurance subsidiaries were above the required minimum RBC levels.


CICA Ltd. is a Bermuda domiciled company. The Bermuda Monetary Authority ("BMA") established risk-based regulatory capital adequacy and solvency margin requirements forrequires Bermuda insurers that mandate thatto maintain available statutory economic capital and surplus at a Bermuda-domiciled subsidiary’s Enhanced Capital Requirement ("ECR"level equal to or in excess of its enhanced capital requirement (“ECR”) be calculated by either (a) Bermuda Solvency Capital Requirement ("BSCR"). As described in Note 4. Stockholders' Equity and Restrictions, or (b) an internal capital modelbecause of the disruption that the BMA has approved for use for this purpose.COVID-19 pandemic had on the worldwide economy in March 2020, the fair value of our assets had decreased and interest rates also had decreased which increased the fair value of our statutory economic insurance liabilities. As a result, CICA Ltd., Citizens' wholly-owned subsidiary domiciled in Bermuda, uses the BSCR in calculating its solvency requirements. The Economic Balance Sheet ("EBS") framework is embedded as part of the BSCR’s statutory economic capital and forms the basis of its ECR.

In order to minimize the risk of a shortfall in capital arising from an unexpected adverse deviation and in moving towards the implementation of a RBC approach, the BMA has established a threshold capital level (termedsurplus at March 31, 2020 was below the Target Capital Level ("TCL")), set at 120 percent of ECR, which serves as an early warning tool for the BMA. Failure to maintain statutory capital at least equal by $8.9 million. Pursuant to the TCL would likely resultinsurance laws in Bermuda, CICA Ltd. notified the BMA of this shortfall and filed a written report containing details of the circumstances leading to the shortfall. The fair value of our assets has increased BMA regulatory oversight.

All U.S. insurance subsidiaries exceededsignificantly since March 31, 2020 and CICA Ltd. has rectified the RBC minimums atfailure as of June 30, 2019.  CICA Ltd. held2020. Although we continue to hold discussions with the BMA, there have been no capital in excess of the BSCR requirements at June 30, 2019.or management actions required.

PARENT COMPANY LIQUIDITY AND CAPITAL RESOURCES

Citizens is a holding company and has had minimal operations of its own.  Our assets consist of the capital stock of our subsidiaries, cash, fixed income securities, mutual funds and real estate held-for-sale.  Our cash flows depend primarily upon the availability of statutorily permissible payments, primarily payments under management agreements from our life insurance subsidiaries.  The ability to make payments is limited by applicable laws and regulations of Bermuda and U.S. states of domicile, which subject insurance operations to significant regulatory restrictions.  These laws and regulations require, among other things, that these insurance subsidiaries maintain minimum solvency requirements and limit the amount of dividends these subsidiaries can pay to the holding company.  We historically have not relied upon dividends from subsidiaries for our cash flow needs.  However, our subsidiaries have made dividend payments of available funds from time to time in relation to business strategies.  

CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS


There have been no material changes in contractual obligations from those reported in the Company's Annual Report on Form 10-K for the year ended December 31, 2018.2019.  The Company does not have off-balance sheet arrangements at June 30, 2019.2020.  We do not utilize special purpose entities as investment vehicles, nor are there any such entities in which we have an investment that engage in speculative activities of any nature, and we do not use such investments to hedge our investment positions.


CRITICAL ACCOUNTING POLICIES


We have prepared a current assessment of our critical accounting policies and estimates in connection with preparing our interim unaudited consolidated financial statements as of and for the three and six months ended June 30, 2019 and 2018. We believe that the accounting policies set forth in the notes toNote 1. Financial Statements of our consolidated financial statements and "Critical Accounting Policies and Estimates"Policies" in the Management’s Discussion and Analysis of Consolidated Financial



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Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 20182019 continue to describe the significant judgments and estimates used in the preparation of our consolidated financial statements.


Item 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


GENERAL


The nature of our business exposes us to market risk relative to our invested assets and policy liabilities.  Market risk is the risk of loss that may occur when changes in interest rates and public equity prices adversely affect the value of our invested assets.  Interest rate risk is our primary market risk exposure.  Substantial and sustained increases and decreases in market interest rates can affect the fair value of our investments.  The fair value of our fixed maturity securities portfolio generally increases when interest rates decrease and decreases when interest rates increase. For additional information regarding market risks to which we are subject, see Item 1. Financial Statements - Note 5. Investments - Valuation of Investments in the notes to our consolidated financial statements for further discussion.



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The following table summarizes net unrealized gains and losses as of the dates indicated.


 June 30, 2020December 31, 2019
(In thousands)Amortized
Cost		Fair
Value		Net Unrealized GainsAmortized
Cost		Fair
Value		Net Unrealized Gains
Total fixed maturity securities$1,295,628  1,417,317  121,689  1,293,853  1,377,959  84,106  
Total equity securities$19,529  20,698  1,169  15,055  16,033  978  
 June 30, 2019 December 31, 2018
(In thousands)Amortized
Cost		 Fair
Value		 Net
Unrealized
Gains		 Amortized
Cost		 Fair
Value		 Net
Unrealized
Gains
Total fixed maturities$1,274,085
 1,341,339
 67,254
 1,223,747

1,231,039
 7,292
Total equity securities$15,055
 15,827
 772
 15,055
 15,068
 13


MARKET RISK RELATED TO INTEREST RATES


Our exposure to interest rate changes results from our significant holdings of fixed maturity investments, which comprised 92.9%92.4% of our investment portfolio based on carrying value as of June 30, 2019.2020.  These investments are mainly exposed to changes in U.S. Treasury rates.  Our fixed maturity investments include U.S. Government-sponsored enterprises, U.S. Government bonds, securities issued by government agencies municipal bondsand state and political subdivisions, and corporate bonds.  


To manage interest rate risk, we perform periodic projections of asset and liability cash flows to evaluate the potential sensitivity of our investments and liabilities.  We assess interest rate sensitivity annually with respect to our available-for-sale fixed maturities investments using hypothetical test scenarios that assume either upward or downward shifts in the prevailing interest rates.  The changes in fair values of our debtfixed maturity and equity securities as of June 30, 20192020 were within the expected range of this analysis.


Changes in interest rates typically have a sizable effect on the fair values of our debtfixed maturity and equity securities.  The interest rate of the ten-year U.S. Treasury bond decreased to 2.00%0.66% at June 30, 2019,2020 from 2.69%1.92% at December 31, 2018.2019.  Net unrealized gains on fixed maturity securities totaled $67.3$121.7 million at June 30, 2019,2020, compared to $7.3$84.1 million at December 31, 2018.2019. Generally, fair values of our securities increase in a declining interest rate environment, however, economic and other credit events can have a significant impact on the fair values of our securities.


The fixed maturity securitiessecurity portfolio is exposed to call risk, as a significant portion of the current bond holdings are callable. A decreasing interest rate environment can result in increased call activity, and an increasing rate environment will likely result in securities being paid at their stated maturity.


There are no fixed maturities or other investments classified as trading instruments.  All of the Company's fixed maturitiesmaturity securities were held inclassified as available-for-sale at June 30, 2019.2020.  At June 30, 20192020 and December 31, 2018,2019, we had no investments in derivative instruments, nor did we have any subprime or collateralized debt obligation risk.




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MARKET RISK RELATED TO EQUITY PRICES


Changes in the level or volatility of equity prices affect the value of equity securities we hold as investments.  Our equity investments portfolio represented 1.1%1.3% of our total investments based upon carrying value at June 30, 2019,2020, with 97.3%70.6% invested in diversified equity and bond mutual funds. In light of our minimal ownership of equity investments, we believe that significant decreasesSee further discussion in Note 5. Investments in the equity markets would not have a material adverse impact onnotes to our total investment portfolio.consolidated financial statements.



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Item 4.CONTROLS AND PROCEDURES


EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES


We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosures.


Our management, including our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Exchange Act as of June 30, 2019.2020.  Based on such evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective at a reasonable assurance level due to the material weakness in internal control over financial reporting that was reported in the Company's Annual Report on Form 10-K for the year ended December 31, 2018 ("2018 Annual Report"), which remains unremediated as of June 30, 2019.the end of the period covered by this quarterly report.


CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING


During the three months ended June 30, 2019,2020, there were no changes in the Company's internal control over financial reporting (as defined in rules 13a-15(f) and 15d-15(f) under the Exchange Act) that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


REMEDIATION OF MATERIAL WEAKNESS


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Table of our Contents2018 Annual Report, we began implementing a remediation plan to address the material weakness in our internal control over financial reporting related to ineffectively designing and maintaining controls to analyze and account for significant and unusual transactions. The material weakness will not be considered remediated until management has designed and implemented internal controls to establish policies and procedures that clearly communicate expectations of personnel regarding significant and unusual transactions. We expect the newly designed and implemented controls to include, among other controls, the preparation and review of sufficiently detailed analysis to evaluate the accounting treatment for all potentially significant impacts of significant and unusual transactions on a timely basis, the engagement of relevant subject matter experts as necessary and the review to ensure advice is appropriately considered in the analysis and conclusions regarding the accounting treatment of significant and unusual transactions. We expect that the remediation of this material weakness will be completed by December 31, 2019. DRAFT 6


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PART II.  OTHER INFORMATION


Item 1.LEGAL PROCEEDINGS


“Item 3. Legal Proceedings” of our Annual Report on Form 10-K for the year ended December 31, 2019 (the “Form 10-K”) includes a discussion of our legal proceedings. There arehave been no material pendingchanges from the legal proceedings described in which we or any of our subsidiaries is a party or in which any of our or their property isForm 10-K, except that the subject.




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On November 7, 2018, Citizens, CICA Ltd. and CICA filed aexisting lawsuit in the District Court of Travis County, Texas (the “District Court”) against (i) Randall Riley, (“Riley”), a former Citizens executive and son of Citizens’ founder Harold E. Riley, (ii) Citizens American Life, LLC, and Citizens American Life, Inc. (collectively, “CALI”), copycat companies formed by Riley and (iii) Alexis Enrique Delgado, Carlos Nalsen Landa, Enrique Pinzon Ruiz, Johan Emilio Mikuski Silva and Esperanza Peralta de Delgado (collectively, the “Los Raudales Defendants,” and together with Riley and CALI, collectively the “Defendants”), former independent consultants of Citizens, for unfair competition, misappropriation of Citizens’ trade secrets, tortious interference with Citizens’ existing contracts with its independent consultants and, with respect to the Los Raudales Defendants, breach of their independent consultant contracts with Citizens. The lawsuit sought (i) a declaration that Citizens had grounds to terminate the Los Raudales Defendants for cause under the independent consultant contracts and the Los Raudales Defendants are not entitled to future commissions under such contracts, (ii) injunctive relief, (iii) damages and (iv) attorneys’ fees and costs. Among other things, the suit alleges that Riley formed CALI and misappropriated trade secrets during the time he was employed by Citizens, in violation of his contractual and other duties to Citizens, and that the Los Raudales defendants, breached their independent consultant contracts with Citizens by inducing or attemptingMichael P. Buchweitz, Jonathan M. Pollio, Jeffrey J. Wood, Steven A. Rekedal, First Trinity Financial Corporation, Trinity American, Inc. and Gregg E. Zahn is expected to induce other independent consultantsproceed to terminate or reduce service to Citizens and disclosing confidential information.

On January 25, 2019, the Defendants filed a motion to dismiss certain claims allegedtrial in the suit, and on April 11, 2019, the District Court denied the Defendants’ motion in its entirety. On May 29, 2019, Citizens, CICA Ltd. and CICA filed a motion for a preliminary injunction to bar the Defendants from continuing to engage in unfair competition and misappropriationsecond quarter of Citizens’ trade secrets and tortious interference with Citizens’ existing contracts with its independent consultants. A hearing for the preliminary injunction has been set for August 12, 2019. While it is not possible at this time to predict with any degree of certainty the ultimate outcome of this hearing or this litigation, Citizens believes it has a basis for an injunctive relief and intends to vigorously pursue its action against the Defendants and seek appropriate compensation and any other remedies to which it may be entitled.2021.


From time to time, we may be subject to other legal and regulatory actions relating to our business. We may incur defense costs, including attorneys' fees, and other direct litigation costs associated with defending any claims. If we suffer an adverse judgment as a result of litigation claims, it could have a material adverse effect on our business, results of operations and financial condition.

Item 1A. RISK FACTORS


Part I, Item 1A. Risk Factors of our Form 10-K includes a discussion of our risk factors. There have been no material changes tofrom the risk factors included in our Annual Report on Form 10-K for the year ended December 31, 2018 and in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2019, except as discussed below.


CICA Ltd.The COVID-19 pandemic is subjectnegatively impacting certain aspects of our business and, depending on severity and duration, could have a material adverse effect on our financial condition, results of operations and overall business operations.

The COVID-19 pandemic has caused significant disruption to extensive government regulation by the Bermuda Monetary Authority ("BMA")global economy and has resulted in unfavorable impacts to our company as well as the overall insurance industry. Due to the unprecedented nature of these events and the Ministrycurrent pace of Financechange in this environment, while we describe several areas where the COVID-19 pandemic impacted our business during the first six months of Bermuda (“MOF”)2020, we cannot fully estimate the duration or full impact of the COVID-19 pandemic at this time. Further events that we are unable to control, such as the further spread or spikes in the number of cases of COVID-19 or the emergence of new strains of coronavirus, and the related responses by government authorities and businesses, may heighten the impacts of the COVID-19 pandemic and present additional risks. We are closely monitoring developments related to the COVID-19 pandemic to assess its impacts on our business.

As discussed in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources, our liquidity requirements are met primarily by funds generated by our insurance subsidiaries and invested assets. We have experienced declines in premium income resulting from lower sales. Increased economic uncertainty and increased unemployment resulting from the economic impacts of the spread of COVID-19 virus could continue to affect our premium deposits as policyholders may not be able to pay premiums on existing policies and potential customers may not take out new policies in order to conserve cash. We have offered relief to policyholders (e.g. extending grace periods), which ismay also impact our operating cash flow. Many of our policies are sold via in-person meetings. Due to shelter-in-place orders and limitations on interpersonal interactions, the lack of face-to-face meetings has negatively impacted sales and may continue to do so if the measures that we have put in place to encourage virtual selling prove to be ineffective. Additionally, due to these limitations as well as disruptions to international mail delivery to and from the United States, customers that pay premiums in cash may continue to have difficulty in delivering premium payments. Unfavorable developments in any of these factors may adversely affect our liquidity and capital position.

The COVID-19 pandemic has increased death claims in our Home Service Insurance segment. We may experience increased claims and our resulting costs if there continues to be an unusually large number of illnesses or deaths. The economic impacts of the spread of COVID-19 may also result in policyholders seeking sources of liquidity and they may withdraw funds at rates greater than we previously expected.

The COVID-19 pandemic, and its effect on financial markets, have adversely affected our investment portfolio (and, specifically, increased the risk of defaults, downgrades and volatility in the value of the investments we hold and lowered investment income) and may continue to do so. Extreme market volatility may continue to leave us unable to react to market events in a new regulatory regime forprudent manner consistent with our historical practices in dealing with more orderly

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markets. To the Company. Failureextent that we need to comply with regulation bysell our investments to fund liquidity needs in the BMAcurrent financial markets, we may not receive the prices we seek, and may sell at a price lower than our carrying value.

Our risk management, contingency, and business continuity plans may not adequately protect our operations. Extended periods of remote work arrangements and other unusual business conditions and circumstances as a result of the MOFCOVID-19 pandemic could strain our business continuity plans, introduce operational risk, increase our cybersecurity risks, and impair our ability to manage our business. The frequency and sophistication of attempts at unauthorized access to our technology systems and fraud may increase, and COVID-19 conditions may impair our cybersecurity efforts and risk management. Our efforts to prevent money-laundering or other fraud, whether due to limited abilities to "know our customers" or otherwise, may increase our compliance costs and risk of doing business, restrictviolations.

While governmental and non-governmental organizations are continuing to engage in efforts to combat the spread and severity of the COVID-19 pandemic and related public health issues, these measures may not be effective. We also cannot predict how legal and regulatory responses to concerns about the COVID-19 pandemic and related public health issues will impact our business. Such events or conditions could result in additional regulation or restrictions affecting the conduct of our business and negatively impact our financial position or results of operations.

For over 40 years, the Company’s life insurance subsidiaries have been regulated in the U.S. byfuture.

We have undergone a change in control of the state insurance departmentsCompany and are currently undergoing a leadership change. We cannot determine if the change in control will result in any additional changes to our Board of their statesDirectors, management, operations, or strategies. Additionally, our business may be adversely impacted if we are not able to successfully manage our leadership change.

As previously announced and discussed in Part I, Item 1. Financial Information – Note 11.Subsequent Events, a change in control of domicile. CICA Ltd. was registered in Bermudathe Company occurred on July 29, 2020, and the Harold E. Riley Foundation (the “Foundation”), a charitable organization established under 501(c)(3) of the Bermuda Insurance Act 1978 (the "Insurance Act") as a Class E insurer in February 2018 andInternal Revenue Code, is now subjectthe owner of 100% of our Class B common stock. Because our Class B common stock elects a simple majority of our Board of Directors, the Foundation controls the Company. If the Foundation were to the provisionsexercise its rights to elect a simple majority of the Insurance Act andBoard of Citizens, the rules and regulations promulgated thereunder. We have no prior experience operating in Bermuda and have limited experience with regulation by the BMA and the MOF, including complying with common reporting standard regulations imposed by the Organization for Economic Co-Operation and Development, administered by the MOF, the jurisdiction's competent authority. FailureFoundation would then be able to comply with laws and regulations in Bermuda could subject us to monetary penalties imposed by the BMA and the MOF, increased regulatory supervision, unanticipated costs associated with remedying such failure or other claims, harmmake subsequent changes to our reputation and interruptionmanagement, operations or strategies, any of our operations, which maycould have a materialan adverse impact on our financial position or resultsbusiness.

Additionally, on July 29, 2020, following the change in control, Geoffrey M. Kolander, our Chief Executive Officer and President, announced his intention to resign as our Chief Executive Officer and President effective no later than August 10, 2020. Gerald W. Shields, Vice Chairman of operations.




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Directors, will assume the role of Interim Chief Executive Officer following Mr. Kolander’s resignation and separation from employment. Although Mr. Kolander has agreed to stay on to provide consulting services through the end of 2020, any significant change in leadership involves inherent risks. We face a greater risk of money laundering activity associated with sales derived from residents of certain foreign countries.

Some of our top international markets are in countries identified by the U.S. Department of State as jurisdictions of high risk for money laundering. As required by the U.S. Bank Secrecy Act ("BSA") regulations and the Bermuda Proceeds of Crime Act 1997 and the Proceeds of Crime Regulations 2008 applicablemay be unable to insurance companies, we have developed and implemented an anti-money laundering, anti-terrorist financing and sanctions program (“AML/ATF and Sanctions Program”) that includes policies, procedures, controls, auditing, reporting and recordkeeping requirements for deterring, preventing and detecting potential money laundering, terrorist financing, fraud and other criminal activity in order to comply with U.S. and Bermuda laws. We have an enhanced AML/ATF and Sanctions Program with additional controls, such as watch-list screening software beyond sanctions screening required by the U.S. Office of Foreign Assets Control ("OFAC") and the Financial Sanctions Implementation Unit of Bermuda, enhanced payment due diligence and transaction controls. However, there can be no assurance that these enhanced controls will entirely mitigate money laundering risk associated with these jurisdictions.

Failures of disclosure controls and procedures and internal control over financial reportingmanage this change smoothly, which could materially and adversely affectimpact our business, financial condition and results of operations.

Sales of our insurance products could decline if we are unable to establish and maintain commercialrelationships with independent marketing firms, independent consultants and independent agents and maintain our distribution sources.

We distribute our insurance products through several distribution channels. In our Life Insurance segment, we depend almost exclusively on the services of independent marketing firms and independent consultants. As part of the continued strategic review of our operations, impaireffective August 2020, we began to operate our Home Service Insurance segment through independent agents, rather than employee agents, which involved converting employee agents to independent agents. In our Home Service Insurance segment, we depend on such independent agents whose role in our distribution process is integral to developing and maintaining relationships with policyholders.

Significant competition exists among insurers in attracting and maintaining marketers of demonstrated ability. Some of our competitors may offer better compensation packages for marketing firms, independent consultants and agents and broader arrays of products and have a greater diversity of distribution resources, better brand recognition, more competitive pricing, lower cost structures and greater financial strength or claims paying ratings than we do. We compete with other insurers for marketing firms, independent consultants and agents primarily on

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the basis of our compensation, products and support services. Any reduction in our ability to timely file reports withattract and retain effective sales representatives could materially adversely affect our revenues, results of operations and financial condition. Modifications in our international business model could include withdrawal from certain markets that may have an adverse impact on our ability to attract and retain effective sales representatives. Additionally, the SECconversion from employee agents to independent agents in our Home Service Insurance segment may have an adverse impact on our ability to attract and subject usretain effective sales agents in such segment, which could adversely affect our revenues, results of operations and financial condition.

There may be adverse tax, legal or financial consequences if our sales representatives are determined not to litigation and/or regulatory scrutinybe independent contractors.

Our international sales representatives and, penalties.

We maintain disclosure controls and procedures designed to ensurebeginning in August 2020, our Home Service Insurance sales representatives are classified as independent contractors who operate their own businesses. Although we believe that we timely report informationhave properly classified our sales representatives as specified in SEC rulesindependent contractors, there is nevertheless a risk that the IRS, a governmental agency, a court or other authority will take the different view that our sales representatives should be classified as employees. The tests governing the determination of whether an individual is considered to be an independent contractor or an employee are typically fact-sensitive and regulations. We also maintain a systemvary from jurisdiction to jurisdiction. Laws and regulations that govern the status and misclassification of internal control over financial reporting. However, these controls may not achieve, and in some cases have not achieved, their intended objectives. Control processes that involve human diligence and oversight, such as our disclosure controls and procedures and internal control over financial reporting,independent sales representatives are subject to human error. Controls that rely on modelschange or interpretation.

If there is a change in the manner in which our independent contractors are classified or an adverse determination with respect to some or all of our independent contractors by a court or governmental agency, we could incur significant costs in complying with such laws and regulations, including in respect of tax withholding, social security payments, government and private pension plan contributions and recordkeeping and workers' compensation insurance, or we may be subjectrequired to inadequate design or inaccurate assumptions or estimates. Controls also can be circumvented by improper management overridemodify our business model, any of such controls. Because of such limitations, there are risks that material misstatements due to error or fraud may not be prevented or detected, and that information may not be reported on a timely basis. The failure of our controls to be effectivewhich could have a material adverse effect on our business, financial condition results of operations and the market for our common stock, and could subject us to litigation, regulatory scrutiny and/or penalties.

As disclosed in Part II, Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2018, we have identified a deficiency in our internal control over financial reporting that constitutes a material weakness and for which remediation is still in process as of June 30, 2019. If we fail to design effective controls, remediate control deficiencies or otherwise maintain effective internal control over financial reporting in the future, such failures could result in a material misstatement of our annual or quarterly financial statements that would not be prevented or detected on a timely basis and which could cause investors to lose confidence in our financial statements, have a negative effect on the trading price of our common stock, limit our ability to obtain financing if needed or increase the cost of any financing we may obtain. In addition, these failures may negatively impact our business, financial condition and results of operations, impairoperations. In addition, there is the risk that we may be subject to significant monetary liabilities arising from fines or judgments as a result of any such actual or alleged non-compliance with applicable federal, state, local or foreign laws.

We may suffer losses as a result of foreign currency fluctuations

All of our ability to timely file our periodic reports with the SEC, subject us to litigationinternational policies are U.S. Dollar denominated and regulatory scrutiny and cause us to incur substantial additional costs in future periods relatingprior to the implementationsecond quarter of remedial measures.

Changes2020, we required all premiums on these policies to be paid to us directly in accounting standards mayU.S. dollars. As part of our strategic initiatives to improve our sales processes and allow more avenues for our international clients to pay their premiums, beginning in May 2020, we allow our international policyholders to pay in their local currencies through an online payment portal. Because the premiums received by us must still be in U.S. dollars, in order to minimize currency fluctuations and exchange rate risks to us, we charge a transaction fee on foreign currency payments. The currency exchange is carried out through a third party processor. While we currently do not have many policyholders paying premiums in their local currencies, since most of our Life Insurance business is international, if a large number of policyholders were to elect to pay in local currencies and we are unable to charge sufficient fees, any increase in the value of U.S. dollar in relation to the value of applicable foreign currencies before the date that we receive the U.S. dollar premiums could adversely affect our reported results of operations and financial condition.operating results.


Our financial statements are subject to the application of GAAP in the U.S. and in Bermuda which are periodically revised and/or expanded. Accordingly, we are required to adopt new or revised accounting standards issued by recognized authoritative bodies, including the FASB, the BMA and the NAIC.  Future accounting standards we adopt will change current accounting and disclosure requirements applicable to our financial statements. Such changes may have a material effect on our reported results of operations or financial condition.  In addition, the required adoption of new accounting standards may result in significant incremental costs associated with initial implementation and ongoing compliance. We are still evaluating new accounting guidance (that is not yet effective for us) related to long-duration insurance contracts and the impact this guidance will have on our consolidated financial statements. Such guidance could result in increased earnings volatility and have a material impact on our reported results of operations



June 30, 2019 Form 10-Q 56
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CITIZENS, INC.


or financial condition. See Note 1 of the notes to our consolidated financial statements contained herein for additional information regarding accounting updates.

Item 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS


None.


Item 3. DEFAULTS UPON SENIOR SECURITIES


Not applicable.



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CITIZENS, INC.
Item 4.MINE SAFETY DISCLOSURES


Not applicable.


Item 5.OTHER INFORMATION


None.





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CITIZENS, INC.


Item 6.EXHIBITS


Exhibit
Number
The following exhibits are filed herewith:
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)
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)
31.110.1†
Form of Executive Change in Leadership Agreement entered into by and between the Company and each of the following: Jeffery P. Conklin, James A. Eliasberg, Robert M. Mauldin III, Chad M. Mellon and Harvey J. L. Waite (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed on April 16, 2020)†
10.2†
Chief Executive Officer Separation of Service and Consulting Agreement dated July 29, 2020 by and between the Company and Geoffrey M. Kolander (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed on July 30, 2020)†
31.1*
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act*
31.231.2*
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act*
32.132.1*
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act*
32.232.2*
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act*
101.INS101*Inline XBRL Instance Document*Document Set for the condensed consolidated financial statements and accompanying notes in Part I, Item 1, "Financial Statements" of this Quarterly Report on Form 10-Q*
101.SCH104*Inline XBRL Taxonomy Extension Schema*
101.CALfor the cover page of this Quarterly Report on Form 10-Q, included in the Exhibit 101 Inline XBRL Taxonomy Extension Calculation Linkbase*
101.DEFXBRL Taxonomy Extension Definition Linkbase*
101.LABXBRL Taxonomy Extension Label Linkbase*
101.PREXBRL Taxonomy Extension Presentation Linkbase*Document Set*

* Filed herewith.

† Indicates management contract or compensatory plan or arrangement.





June 30, 2019 Form2020 | 10-Q 5860

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SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
CITIZENS, INC.
By:/s/ Geoffrey M. Kolander
Geoffrey M. Kolander
President, Chief Executive Officer and Director
CITIZENS, INC.
By:
By:/s/ Geoffrey M. Kolander
Geoffrey M. Kolander
President and Chief Executive Officer
By:/s/ Jeffery P. Conklin
Jeffery P. Conklin
Vice President, Interim Chief Financial Officer and Treasurer
Interim Chief Investment Officer, Chief Accounting
Officer and Treasurer
Date:August 7, 20195, 2020





June 30, 2019 Form2020 | 10-Q 5961