FINANCIAL STATEMENTS

BASIS OF PRESENTATION AND CONSOLIDATION

The consolidated financial statements include the accounts and operations of Citizens, Inc. ("Citizens"), a Colorado corporation, and its wholly-owned subsidiaries, CICA Life Insurance Company of America ("CICA"), Citizens National Life Insurance Company ("CNLIC"), CICA Life Ltd. ("CICA Ltd."), Security Plan Life Insurance Company ("SPLIC"), Security Plan Fire Insurance Company ("SPFIC"), 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 position as of September 30, 2019, the consolidated statements of comprehensive income and stockholders' equity for the three and nine months ended September 30, 2019 and September 30, 2018 and the consolidated statements of cash flows for the nine months ended September 30, 2019 and September 30, 2018 have been prepared by the Company without audit. In the opinion of management, all normal and recurring adjustments to present fairly the financial position, results of operations, and changes in cash flows at September 30, 2019 and for comparative periods have been made. The consolidated financial statements have been prepared in accordance with United States Generally Accepted Accounting Principles ("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q adopted by the Securities and Exchange Commission ("SEC"). 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. 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, CNLIC, CICA Ltd., SPLIC and MGLIC. CICA and CNLIC issued ordinary whole-life policies, credit life and disability, and accident and health related policies, throughout the Midwest and southern U.S. 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. SPFIC, a wholly-owned subsidiary of SPLIC, writes a limited amount of property insurance in Louisiana. MGLIC provides industrial life policies through independent funeral homes in Mississippi.

CTI provides data processing systems and services to the Company.

We converted to a new actuarial valuation software solution impacting both the Home Service Insurance and Life Insurance segments, providing enhanced modeling capabilities for the ordinary whole life policies of SPLIC as of July 1, 2019 and the ordinary whole life and endowment policies of CICA and CICA Ltd. as of July 1, 2018. The total impact of these system conversions reflected in the accompanying consolidated financial statements as of and for the three and nine months ended September 30, 2019 and 2018 are summarized in the table below.



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

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

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

RESTATEMENT

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

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



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



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



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



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

SIGNIFICANT ACCOUNTING POLICIES

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