10-K 1 cia-20191231x10k.htm 10-K Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019

COMMISSION FILE NUMBER:  000-16509
citizenslogoa38.jpg
CITIZENS, INC.
(Exact name of registrant as specified in its charter)
Colorado
 
84-0755371
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. employer identification no.)
 
 
 
14231 Tandem Blvd, 2nd Floor; Austin, Texas
 
78728
(Address of principal executive offices)
 
(Zip code)
(512) 837-7100
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act
 
Class A Common Stock
CIA 
New York Stock Exchange
(Title of each class)
(Trading symbol(s))
(Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act
None
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. o Yes ý No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. o Yes ý No
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.  ý Yes   o No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  ý 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 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
ý
Non-accelerated
filer
o
Smaller reporting
company
o
Emerging growth
company
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period 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 Act).   o Yes   ý No
As of June 30, 2019, the aggregate market value of the Class A common stock held by non-affiliates of the registrant was approximately $357,975,962.
Number of shares of common stock outstanding as of March 4, 2020.
Class A:  49,341,062
Class B:    1,001,714

DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Report incorporates by reference certain portions of the definitive proxy materials to be delivered to stockholders in connection with the 2020 Annual Meeting of Shareholders (the "2020 Proxy Statement"). The 2020 Proxy Statement will be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year to which this report relates.































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TABLE OF CONTENTS
 
 
 
Page
PART I
 
 
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
 
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
 
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
 
 
Item 15.
 
 
 
 




FORWARD-LOOKING STATEMENTS
 
This Annual Report on Form 10-K (“Form 10-K”) contains forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties. Many of the forward-looking statements are located in Part II, Item 7 of this Form 10-K under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Forward-looking statements provide 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 I, Item 1A of this Form 10-K under the heading “Risk Factors,” which are incorporated herein by reference. The Company assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law.

The U.S. Securities and Exchange Commission ("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 SEC.  We are not including any of the information contained on our website as part of, or incorporating it by reference into, this Annual Report on Form 10-K.


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CITIZENS, INC.
 
 
 

PART I

Item 1.   BUSINESS

OVERVIEW

Citizens, Inc. ("Citizens" or the "Company") is an insurance holding company incorporated in Colorado serving the life insurance needs of individuals in the United States since 1969 and internationally since 1975. Through our insurance subsidiaries, we pursue a strategy of offering traditional insurance products in niche markets where we believe we are able to achieve competitive advantages.  We had approximately $1.7 billion of assets at December 31, 2019 and approximately $4.2 billion of insurance in force.  Our core insurance operations include:

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;
ordinary whole life insurance policies to middle income households concentrated in the Midwest, Mountain West and southern United States through independent marketing consultants; and
final expense and limited liability property policies to middle and lower income households in Louisiana, Mississippi and Arkansas through employee and independent agents in our home service distribution channel and funeral homes.

STRATEGIC INITIATIVES

We are implementing our enduring value customer-centric growth strategy, in cooperation with our Board of Directors.  In doing so, we are focused on our core strengths, as we strategically realign our Life and Home Service Insurance segments.  We anticipate significant transformation with an emphasis on people, processes and technology. In our current operational environment, change is seen as a positive and is now taking root in our culture, creating the best atmosphere for value creation and value capture for all our stakeholders.

As a result of the Company’s continued strategic review of its technology systems, we converted the ordinary whole life policies of Security Plan Life Insurance Company ("SPLIC") to a new actuarial valuation software solution that provides enhanced modeling capabilities as of July 1, 2019. This system conversion, which impacted the Home Service Insurance segment, resulted in changes in estimates due to refinements reflected as a decrease in policyholder benefit reserves of $2.3 million and a decrease in deferred acquisition costs of $1.4 million, before tax as of and for the year ended December 31, 2019.

The Company reviews its investment strategies routinely to monitor the portfolio's rate of return as compared to the product features in our insurance policies and strive to maximize returns on our investment portfolio within our conservative investment guidelines. The Company is looking for opportunities in other asset classes to increase our yields while maintaining a prudent risk profile.

The following pages describe the operations of our two business segments:  Life Insurance and Home Service Insurance. CICA Life Insurance Company of America ("CICA"), CICA Life Ltd. ("CICA Ltd.") and Citizens National Life Insurance Company ("CNLIC") constitute the Life Insurance segment, and Security Plan Life Insurance Company ("SPLIC"), Security Plan Fire Insurance Company ("SPFIC") and Magnolia Guaranty Life Insurance Company ("MGLIC") constitute the Home Service Insurance segment. In addition to the Life Insurance and Home Service Insurance segments, the Company also has other non-insurance operations ("Other Non-Insurance Enterprises") which primarily include the Company's IT and Corporate-support functions.

Citizens had over 400 employees as of December 31, 2019, over half of which worked in the Home Service Segment.

Revenues derived from any single customer did not exceed 10% of consolidated revenues in any of the last three years. For more information about the financial performance of our business segments, see Note 8. Segment and Other Operating Information of the notes to our consolidated financial statements.



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LIFE INSURANCE

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

INTERNATIONAL SALES

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

larger face amount policies issued when compared to our U.S. operations, which results in lower underwriting and administrative costs per unit of coverage;
premiums paid annually rather than monthly or quarterly, which reduces our administrative expenses, accelerates cash flow and results in lower policy lapse rates than premiums with more frequently scheduled payments; and
persistency experience and mortality rates that are comparable to U.S. policies.

As of December 31, 2019, we had insurance policies in force in almost 20 countries, including Colombia, Venezuela, Taiwan, Ecuador and Argentina as our top producing countries. International direct premiums comprised approximately 96% of total direct premiums in the Life Insurance segment and 71% of our total direct premiums in 2019.

Our independent marketing firms and consultants specialize in marketing life insurance products and generally have several years of insurance marketing experience.  We maintain contracts with the independent marketing firms pursuant to which they provide recruitment, training and supervision of their managers and associates in the service and placement of our products. However, all associates of these firms also contract directly with us as independent contractors and receive their compensation directly from us.  Accordingly, should an arrangement between any independent marketing firm and us be terminated for any reason, we expect we would seek to continue the existing marketing arrangements with the associates of these firms.  Our agreements with independent marketing firms and consultants typically provide that they are independent contractors responsible for their own operational expenses and are the representative of the prospective insured.  In addition, the marketing firms guarantee any debts of their associates to us.  The marketing firms receive commissions on all new and renewal policies serviced or placed by them or their associates.  All of these contracts provide that the independent marketing firms and consultants are aware of and responsible for compliance with local laws.

INTERNATIONAL PRODUCTS

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

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 local currency inflation;
protection against devaluation of foreign currency;
capital investment in a more secure economic environment (i.e., the U.S.); and
lifetime income guarantees for an insured or for surviving beneficiaries.

Our international products have living benefit features. Most policies contain guaranteed cash values and are participating (i.e., provide for cash dividends as apportioned by the Board).  Once a policyowner pays the annual premium and the policy is issued, the owner becomes entitled to policy cash dividends as well as annual premium


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benefits if the annual premium benefit was elected.  According to the policy language, the policyowner has several options with regard to the policy dividends and annual premium benefits, which include, among other things, electing to receive cash, crediting such amounts towards the payment of premiums on the policy, leaving such amounts on deposit with the Company to accumulate at a defined interest rate or assigning them to a third-party. Under the "assigned to a third-party" provision, the Company has historically allowed policyowners, after receiving a copy of the Citizens, Inc. Stock Investment Plan (the "CISIP") prospectus and acknowledging their understanding of the risks of investing in Citizens Class A common stock, the right to assign policy values outside of the policy to the CISIP, which is administered in the United States by Computershare Trust Company, N.A., our plan administrator and an affiliate of Computershare, Inc., our transfer agent. The CISIP is a direct stock purchase plan available to policyowners, shareholders, our employees and directors, independent consultants, and other potential investors through the Computershare website. The Company has registered the shares of Class A common stock issuable to participants under the CISIP on a registration statement under the Securities Act of 1933, as amended (the "Securities Act") that is on file with the SEC. Computershare administers the CISIP in accordance with the terms and conditions of the CISIP, which is available on the Computershare website and as part of the Company’s registration statement on file with the SEC.

In 2019, the Company repriced products sold internationally in response to the continued low interest rate environment in order to increase profits in our international markets. We also expect to expand distribution and will issue newly enhanced products in 2020.

INTERNATIONAL COMPETITION

The life insurance business is highly competitive.  We compete with a number of stock and mutual life insurance companies internationally and domestically, as well as with financial institutions that offer insurance products.  

We face competition primarily from companies formed and operated in the country in which the insureds reside, from companies that operate in the same manner as we do and from companies that are foreign to the countries in which policies are sold, but issue insurance policies denominated in the local currency of those countries.  Some companies may be deemed to have a competitive advantage over us due to their significantly greater financial resources, histories of successful operations and larger marketing forces. 

Because premiums on our international policies are paid in U.S. dollars, and we pay claims and benefits in U.S. dollars, we provide life insurance solutions that we believe are different from and superior to those offered by foreign-domiciled companies.  We believe our international policies are usually acquired by individuals in the upper middle class in their respective countries and those with significant net worth and earnings that place them in the upper income brackets of their respective countries.  The policies sold by our foreign competitors are generally offered broadly and are priced using the mortality of the entire population of the geographic region.  Our mortality charges are typically lower due to our customer demographics, which provides a competitive advantage.  Additionally, the assets backing the reserves for our foreign competitors' policies must be substantially invested in their respective countries and, therefore, are exposed to the inflationary risks and social or economic crises that have been more common in these foreign countries.

DOMESTIC SALES

In 2019, domestic direct premiums comprised approximately 4% of total direct premiums in the Life Insurance segment and 3% of our total direct premiums overall. The majority of our domestic inforce business results from blocks of business of insurance companies we have acquired over the years.  We discontinued new sales of our non-Home Service domestic ordinary whole life insurance and endowment products beginning January 1, 2017. Under the direction of our President and Chief Executive Officer and Chief Marketing Officer, we are evaluating our domestic strategy.



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CITIZENS, INC.
 
 
 

DOMESTIC LIFE INSURANCE PRODUCTS

Our domestic life insurance products have historically focused primarily on living needs and provided benefits focused toward accumulating financial benefits for the policyowner.  The features of our domestic life insurance products include:

cash accumulation/living benefits;
tax-deferred interest earnings;
guaranteed lifetime income options;
monthly income for surviving family members;
accidental death benefit coverage options; and
an option to waive premium payments in the event of disability.

Our life insurance products have historically been designed to address the insured's concern about outliving his or her monthly income, while at the same time providing death benefits.  The primary purpose of our current product portfolio is to help the insured create capital for needs such as retirement income, children's higher education, business opportunities, emergencies and health care needs. In addition, our insurance products offer financial benefits like savings protection and immediate funds in event of the insureds death.
 
HOME SERVICE INSURANCE

Our domestic Home Service Insurance segment operates through our subsidiaries SPLIC, MGLIC and SPFIC, and focuses on the life insurance needs of the middle and lower income markets, primarily in Louisiana, Mississippi and Arkansas.  Our policies are sold and serviced through a home service marketing distribution system of 223 employee-agents who work on a route system and through over 221 funeral homes and independent agents who sell policies, collect premiums and service policyholders.  To a lesser extent, our Home Service Insurance segment sells limited liability, named peril property policies covering dwelling and contents. In 2019, our Home Service Insurance segment comprised 25% of our total direct premiums.

HOME SERVICE PRODUCTS AND COMPETITION

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 funeral and burial costs.  The average life insurance policy face amount issued in 2019 was approximately $7,200. Due to the lower risk associated with small face amount polices, the underwriting performed on these applications is limited.  Our property coverages are limited to $30,000 maximum coverage on any one dwelling and contents, while content-only coverage and dwelling-only coverage is limited to $20,000. We face competition in Louisiana, Mississippi and Arkansas from other companies specializing in home service insurance.  We seek to compete based upon our emphasis on personal service to our customers.  We intend to continue premium growth within this segment via direct sales.

OTHER NON-INSURANCE ENTERPRISES

Other Non-Insurance Enterprises includes the results of the parent company, Citizens, Inc., and Computing Technology, Inc., which provides data processing services to the Company.  

OPERATIONS AND TECHNOLOGY

Our administrative operations principally serve our Life Insurance segment and are conducted primarily at our executive offices in Austin, Texas through 103 administrative, operating and underwriting personnel.  Our Home Service business is conducted, to a large degree, from our district offices in Louisiana, Arkansas and Mississippi, as well as our service center in Donaldsonville, Louisiana. At our executive offices, we also perform policy design, marketing oversight, underwriting, accounting and reporting, actuarial, customer service, claims processing, administrative and investing activities. At our Bermuda office, we have 3 personnel that perform underwriting, policy issuance and claims processing related to CICA Ltd.'s international policies.

We have a single integrated information technology system for our entire Company, which is a centrally-controlled, mainframe-based administrative system.  Functions of our policy administrative system include policy set-up, administration, billing and collections, commission calculation, valuation, automated data edits, storage backup, image


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management and other related functions.  Each company we acquire has been converted onto our administrative system.  This system has been in place for more than 30 years and has been updated on an ongoing basis as technology has evolved.

We are currently reviewing technology options to transition from our legacy administration system to an upgraded, modernized technology platform that will service our policy administration needs into the future. We have outsourced the operations and maintenance of our legacy system that manages the administration and accounting of our current block of insurance contracts to a third-party provider.

ENTERPRISE RISK MANAGEMENT

The Company has an enterprise risk management function ("ERM") that analyzes the Company’s risks on an individual and aggregated basis and is responsible for ensuring that the Company’s risks remain within its risk appetite and tolerances as determined by management with oversight from the Audit Committee. The Company's focus on ERM strengthens its risk management culture and discipline. The mission of ERM is to support the Company in achieving its strategic priorities by:

providing a comprehensive view of the risks facing the Company, including risk concentrations and correlations;
helping management define the Company’s overall capacity and appetite for risk by evaluating the risk return profile of the business relative to the Company’s strategic intent and financial underpinning;
assisting management in setting specific risk tolerances and limits that are measurable, actionable, and comply with the Company’s overall risk philosophy;
communicating and monitoring the Company’s risk exposures relative to set limits and recommending, or implementing as appropriate, mitigating strategies; and
providing insight to assist in growing the businesses and achieving optimal risk-adjusted returns within established guidelines.

ENTERPRISE RISK MANAGEMENT STRUCTURE AND GOVERNANCE

Effective risk oversight is an important priority for the Company’s Board and senior management team. While it is the job of the President and Chief Executive Officer and senior management to assess and manage the Company’s risk exposure through ERM, the Audit Committee of the Board is charged with discussing guidelines and policies to govern the process by which ERM is handled. The Audit Committee periodically discusses the Company’s major financial risk exposures and the steps management has taken to monitor and control such exposures.

The four broad categories of risk exposures assessed and managed by senior management include, but are not limited to:

Strategic risk, including international business risks;
Insurance risk, including those arising out of catastrophes and acts of terrorism;
Financial risk, including market, credit and liquidity risks; and
Operational risk, including cybersecurity risk and legal and regulatory compliance risks.

In addition, any other risk that poses a material threat to the operational and/or strategic viability of the Company is immediately reviewed and assessed.

In addition to the Audit Committee, the Compensation Committee considers the risks that may be presented by our executive compensation philosophy and programs, and the Nominating and Corporate Governance Committee oversees the Company’s governance practices, director succession and committee composition and leadership to manage risks associated with corporate governance. Although risk oversight is conducted primarily through committees of the Board, the full Board has retained responsibility for general oversight of risks. The Board satisfies this responsibility through full reports by each committee chair regarding the committees’ considerations and actions, as well as through regular reports directly from officers responsible for oversight of particular risks within the Company.



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REGULATION

Our insurance subsidiaries are subject to regulation and supervision by the U.S. states and Bermuda.

U.S. REGULATION

Our U.S. insurance operations are subject to a wide variety of laws and regulations.  State insurance laws establish supervisory agencies with broad regulatory authority to regulate most aspects of our U.S. insurance businesses, and our insurance subsidiaries are regulated by the insurance departments of each state in which they are licensed.  In addition, U.S. laws, such as the USA Patriot Act of 2001, the Foreign Corrupt Practices Act ("FCPA"), the Gramm-Leach-Bliley Act of 1999, the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001, the Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") and the Tax Cuts and Jobs Act, are examples of U.S. regulations that affect our business.  We are subject to comprehensive regulations under the USA Patriot Act and the U.S. Bank Secrecy Act ("BSA") with respect to money laundering, as well as federal regulations regarding privacy and confidentiality.  Our insurance products and thus our businesses also are affected by U.S. federal, state and local tax laws.
 
The purpose of the laws and regulations that affect our insurance business is primarily to protect our insureds and not our stockholders.  Many of the laws and regulations to which we are subject are regularly re-examined, and existing or future laws and regulations may become more restrictive or otherwise adversely affect our operations.  In addition, insurance regulatory authorities (including state law enforcement agencies and attorneys general) periodically make inquiries and regularly conduct examinations regarding compliance by us and our subsidiaries with insurance, and other laws and regulations regarding the conduct of our insurance businesses.  It is our practice to fully and consistently cooperate with such inquiries and examinations and take corrective action when warranted.
 
Our U.S. insurance subsidiaries are collectively licensed to transact business in 31 states and in the District of Columbia.  We have insurance subsidiaries domiciled in the states of Colorado, Louisiana, Mississippi and Texas.  Our U.S. insurance subsidiaries are licensed and regulated in all U.S. jurisdictions in which they conduct insurance business.  The extent of this regulation varies, but most jurisdictions have laws and regulations based upon the National Association of Insurance Commissioners ("NAIC") model rules governing the financial condition of insurers, including standards of solvency, types and concentration of investments, establishment and maintenance of reserves, credit for reinsurance and requirements of capital adequacy, and the business conduct of insurers, including marketing and sales practices and claims handling.  In addition, statutes and regulations usually require the licensing of insurers and their agents, the approval of policy forms and related materials and the approval of rates for certain types of insurance products.
 
All U.S. jurisdictions in which our U.S. insurance subsidiaries conduct insurance business have enacted legislation that requires each U.S. insurance company in a holding company system, except captive insurance companies, to register with the insurance regulatory authority of its jurisdiction of domicile and to furnish that regulatory authority with financial and other information concerning the operations of, and the interrelationships and transactions among, companies within its holding company system that may materially affect the operations, management or financial condition of the insurers within the system.  These laws and regulations also regulate transactions between insurance companies and their parents and affiliates.  Generally, these laws and regulations require that all transactions within a holding company system between an insurer and its affiliates be fair and reasonable and that the insurer's statutory capital and surplus following any transaction with an affiliate be both reasonable in relation to its outstanding liabilities and adequate to its financial needs.  For certain types of agreements and transactions between an insurer and its affiliates, these laws and regulations require prior notification to, and non-disapproval or approval by, the insurance regulatory authority of the insurer's jurisdiction of domicile.

The payment of dividends or other distributions to us by our insurance subsidiaries is regulated by the insurance laws and regulations of their respective state or jurisdiction of domicile.  The laws and regulations of some of these jurisdictions also prohibit an insurer from declaring or paying a dividend except out of its earned surplus or require the insurer to obtain regulatory approval before it may do so.  In addition, insurance regulators may prohibit the payment of ordinary dividends or other payments by our insurance subsidiaries to us (such as a payment under a tax sharing agreement or for employee or other services) if they determine such payment could be adverse to policyholders or insurance contract holders of the subsidiary.
 


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The laws and regulations of the jurisdictions in which our U.S. insurance subsidiaries are domiciled require that a controlling party obtain the approval of the insurance commissioner of the insurance company's jurisdiction of domicile prior to acquiring control of the insurer and may delay, deter or prevent a transaction our shareholders might consider desirable.
 
Risk-based capital ("RBC") requirements are imposed on life and property and casualty insurance companies.  The NAIC has established minimum capital requirements in the form of RBC.  RBC requirements weight the type of business underwritten 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-based capital" and compares this level to adjusted statutory capital that includes capital and surplus as reported under statutory accounting principles, plus certain investment reserves.  Should the ratio of adjusted statutory capital to control level risk-based capital fall below 200%, a series of actions would be required by the affected company, including submitting a capital plan to the Department of Insurance in the insurance company's state of domicile.

INTERNATIONAL REGULATION

CICA Ltd., our Bermuda domiciled subsidiary, is subject to regulation and supervision by the Bermuda Monetary Authority (the "BMA") and compliance with all applicable Bermuda law and Bermuda insurance statutes and regulations, including but not limited to Bermuda’s Insurance Act 1978 (the "Insurance Act").

CICA Ltd., which is incorporated to conduct long-term business, is registered as a Class E insurer, which is the license class for long-term insurers and reinsurers with total assets of more than $500 million that are not registrable as a single-parent or multi-owner long-term captive insurer or reinsurer. CICA Ltd. is not licensed to conduct any business other than an insurance business. The Insurance Act regulates the insurance business of CICA Ltd. and provides that no person may conduct any insurance business in or within Bermuda unless registered as an insurer under the Insurance Act by the BMA.

The Insurance Act imposes solvency and liquidity standards as well as auditing and reporting requirements and confers on the BMA powers to supervise, investigate and intervene in the affairs of insurance companies. Certain requirements of the Insurance Act include: the filing of annual statutory financial returns; the filing of annual U.S. GAAP financial statements; the filing of an annual capital and solvency return; the delivery of a declaration of compliance; compliance with minimum enhanced capital requirements; compliance with the BMA’s Insurance Code of Conduct; compliance with minimum solvency margins; limitations on dividends and distributions that CICA Ltd. may make to Citizens, Inc., its parent company; preparation of an annual Financial Condition Report providing details of measures governing the business operations, corporate governance framework, solvency and financial performance; preparation of an assessment of an insurer's own risk and solvency requirements, referred to as a Commercial Insurer’s Solvency Self-Assessment; the establishment and maintenance of a head and principal office in Bermuda (with certain officers, a principal representative and a director to reside in Bermuda); appointment of an independent auditor; appointment of an actuary approved by the BMA; and compliance with restrictions on certain changes in control of regulated insurers.

Bermuda’s regulatory regime provides a risk-based capital model, termed the Bermuda Solvency Capital Requirement (“BSCR”), as a tool to assist the BMA both in measuring risk and in determining appropriate levels of capitalization. The BSCR employs a standard mathematical model that correlates the risk underwritten by Bermuda insurers to their capital. The BSCR framework applies a standard measurement format to the risk associated with an insurer's assets, liabilities and premiums, including a formula to take into account catastrophe risk exposure.  The BMA established risk-based regulatory capital adequacy and solvency margin requirements for Bermuda insurers mandate that a Bermuda domiciled subsidiary’s Enhanced Capital Requirement ("ECR") be calculated by either (a) BSCR, or (b) an internal capital model which the BMA has approved for use for this purpose. CICA Ltd. uses the BSCR in calculating its solvency requirements. The Economic Balance Sheet (“EBS") framework is embedded as part of the BSCR and forms the basis of our ECR.
 
In order to minimize the risk of a shortfall in capital arising from an unexpected adverse deviation, and to facilitate the implementation of a risk-based capital approach, the BMA has established a threshold capital level (termed the Target Capital Level ("TCL")), set at 120% of ECR, that serves as an early warning tool for the BMA. Failure to maintain statutory capital at least equal to the TCL would likely result in increased BMA regulatory oversight.



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Bermuda law distinguishes between those companies that are at least 60% owned and controlled by Bermudians, which are "local companies", and those which are owned and controlled by non-Bermudians, which are "exempted companies". Exempted companies may be resident in Bermuda and conduct business from Bermuda in connection with transactions and activities which are external to Bermuda or with other exempted companies, and exempted companies must obtain a license to conduct business activities within Bermuda from the Minister of Finance of Bermuda. Generally, it is not permitted without a special license granted by the Minister of Finance of Bermuda to insure Bermuda domestic risks or risks of persons of, in or based in Bermuda.

In December 2018, the Economic Substance Act (the "ES Act") came into force. The ES Act, as amended, and the regulations promulgated thereunder (collectively, "ES Law"), apply to any "relevant entity" that conducts any "relevant activity" in a "relevant financial period". Under the provisions of the ES Law, a relevant entity that conducts a relevant activity must satisfy the economic substance requirements under the ES Law (the "ES Requirements") in relation to the relevant activity and where a relevant entity is conducting more than one relevant activity, it must meet the ES Requirements with respect to each relevant activity that it conducts. A relevant entity complies with the ES Requirements if: (a) the relevant entity is managed and directed from Bermuda; (b) the core income-generating activities are undertaken in Bermuda with respect to each relevant activity; (c) the relevant entity maintains adequate physical presence in Bermuda; (d) there are adequate full-time employees in Bermuda with suitable qualifications; and (e) there is adequate operating expenditure incurred in Bermuda in relation to each relevant activity.

Under the ES Law, insurance and holding entities are each defined as a "relevant activity". CICA Ltd. will be required to demonstrate compliance with the ES Requirements by filing an annual economic substance declaration with the Registrar of Companies in Bermuda no later than six months after the last day of the relevant financial period. Companies that conduct insurance as a relevant activity are deemed to comply with the ES Requirements, with respect to their insurance business, if they comply with the existing regulatory requirements under the Insurance Act 1978 and the corporate governance provisions of the Companies Act 1981. CICA Ltd. is in compliance with these requirements.

Generally, all foreign countries in which we offer insurance products require a license or other authority to conduct insurance business in that country. Some of these countries also require that local regulatory authorities approve the terms of any insurance product sold to residents of that country. We have never qualified to do business in any foreign country or jurisdiction, except with respect to Bermuda, where CICA Ltd. is domiciled, and have never submitted our insurance policies issued to residents of foreign countries for approval by any foreign or domestic insurance regulatory agency. We sell our policies to residents of foreign countries using foreign independent marketing firms and independent consultants, and we rely on our independent consultants to comply with laws applicable to them in marketing our insurance products in their respective countries. We have undertaken a comprehensive compliance review of risks associated with the potential application of foreign laws to our sales of insurance policies in foreign countries. The application of foreign laws to our sales of insurance policies in foreign countries varies by country. There is a lack of uniform regulation, lack of clarity in certain regulations and lack of legal precedent in addressing circumstances similar to ours. Our compliance review has confirmed the previously disclosed risks related to foreign insurance laws associated with our current business model, at least in certain jurisdictions, as described in detail in Item 1A. Risk Factors - "Risks Relating to our Business". We are exploring alternatives to our current business model in one or more jurisdictions.

Item 1A.   RISK FACTORS

The following discussion of risk factors contains forward-looking statements. These risk factors may be important to understanding other statements in this report. The following information should be read in conjunction with Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, the Consolidated Financial Statements and accompanying notes in Part II, Item 8. Financial Statements and Supplementary Data of this report.

The business, financial condition and operating results of the Company can be affected by a number of factors, whether currently known or unknown, including but not limited to those described below, any one or more of which could, directly or indirectly, cause the Company’s actual financial condition and operating results to vary materially from past, or from anticipated future, financial condition and operating results. Any of these factors, in whole or in part, could materially and adversely affect the Company’s business, financial condition, operating results and stock price.

Because of the following factors, as well as other factors affecting the Company’s financial condition and operating results, past financial performance should not be considered to be a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods.


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Our sales to residents of foreign countries expose us to additional risks. A significant loss of sales in these foreign markets could have a material adverse effect on our results of operations and financial condition.

A substantial majority of our direct premiums, approximately 71% at December 31, 2019, are from foreign countries, primarily those in Latin America and the Pacific Rim.  These sales are made through independent consultants who are located in these foreign countries.

Our Company’s sales and financial results depend upon avoiding significant regulatory restraints on receiving insurance policy applications and premiums from, and issuing insurance policies to, policyholders outside of the United States. Currency control laws, other currency exchange restrictions or tax laws in foreign countries could materially adversely affect our revenues by imposing restrictions or additional fees, costs or taxes on asset transfers outside of a country where our policyowners reside. Difficulties in transferring funds from or converting currencies to U.S. dollars in certain countries or any increase in fees, costs or taxes associated therewith could prevent our policyowners in those countries from purchasing or paying premiums on our policies and/or make our products less attractive to such policyowners. As such, existing or future laws and regulations, and the manner in which they are interpreted or applied, may become more restrictive or otherwise adversely affect our operations.

Importantly we also face risks associated with the application of foreign laws to our sales of insurance policies to residents in foreign countries. Generally, all foreign countries in which we offer insurance products, through our network of independent consultants, require a license or other authority to conduct insurance business in that country. Some of these countries also require that local regulatory authorities approve the terms of any insurance product sold to residents of that country. We have never sought to qualify to do business in any foreign country or jurisdiction, except Bermuda, in which CICA Ltd. is domiciled, and have never submitted the insurance policies that we issue to residents of foreign countries for approval by any foreign or domestic insurance regulatory agency. Traditionally, we have sought to mitigate risks associated with the potential application of foreign laws to our sales of insurance policies in our foreign markets by, among other things, not locating any of our offices or assets in foreign countries or jurisdictions, selling policies only through independent consultants rather than our own employees, requiring that all applications for insurance be submitted to and accepted only in our offices in the U.S. or, following the novation of our international policies to CICA Ltd. in Bermuda effective July 1, 2018, in our offices in Bermuda, and requiring that policy premiums be paid to us only in U.S. dollars.  We rely on our independent consultants to comply with laws applicable to them in marketing our insurance products in their respective countries. There is no assurance that the precautionary measures, practices and policies mentioned above will partially or entirely mitigate the risk associated with the potential application of foreign laws to our sales of insurance policies in our foreign markets. From time to time, insurance regulators in the foreign countries in which we operate have sought to exercise regulatory authority over the Company, including through the imposition of fines. Although the Company believes that these foreign regulators do not have jurisdiction over the Company and that any actions, including fines, would be unenforceable against the Company, the threat of regulatory action could otherwise absorb Company time and resources away from its business operations. The Company may determine that the risks associated with a particular market and its regulatory environment outweigh the benefits of conducting further business in that market.

We have undertaken a comprehensive compliance review of risks associated with the potential application of foreign laws to our sales of insurance policies in foreign countries. The application of foreign laws to our sales of insurance policies in foreign countries varies by country. There is a lack of uniform regulation and lack of clarity in certain regulations. Our compliance review has confirmed the previously disclosed risks related to foreign insurance laws associated with our current business model, at least in certain foreign countries.

There are risks that a foreign government could determine under its existing laws that its residents may not purchase life insurance from us unless we become qualified to do business in that country or unless our policies purchased by its residents receive prior approval from its insurance regulators. There also is a risk that a foreign government will enact additional legislation that may render our existing insurance products either illegal or less attractive to potential customers. There is the further risk that regulators may become more aggressive in enforcing any perceived violations of their laws and seek to impose monetary fines, criminal penalties, and/or order us to cease our sales in that jurisdiction. There is no assurance that, if a foreign country were to deem our sales of policies in that country to require that we qualify to do business in that country or submit our policies for approval by that country’s regulatory authorities, we would be able to, or would conclude that it is advisable to, comply with those requirements.  Any determination by a foreign country that we or our policy sales are subject to regulation under their laws, or any actions by a foreign country


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to enforce such laws more aggressively, could therefore have a material adverse effect on our ability to sell policies in that country and, in turn, on our results of operations and financial condition. We are exploring alternatives to our current business model in one or more jurisdictions.

Any disruption to the marketing and sale of our policies to residents of foreign countries, resulting from the actions of foreign regulatory authorities, the withdrawal from Brazil or other markets, the implementation of new Bermuda regulatory obligations or otherwise, could have a material adverse effect on our business, results of operations and financial condition.

Many of the countries that we operate in have a history of political instability, including regime changes, political uprisings, currency fluctuations and anti-democratic or anti-U.S. policies. The ability of people living in these countries to purchase and continue to make premium payments on our insurance policies and our ability to sell our policies in those countries through our independent consultants or otherwise may be adversely affected by political instability. Given the nature of our products, in an economic environment characterized by higher unemployment, lower personal income and reduced consumer spending, new product sales may be adversely affected. During such periods, we may also experience higher claims incidence, longer claims duration, increase in policy lapses and/or increase in surrenders, any of which could have a material adverse effect on our results of operations or financial condition. In addition, the imposition of U.S. sanctions against foreign countries where our policyholders reside could make it difficult for us to continue to issue new policies and receive premiums from policyholders in those countries.

Catastrophes may adversely impact liabilities for policyholder claims and reinsurance availability and disrupt our operations.

Our insurance operations are exposed to the risk of catastrophic events. The extent of losses from a catastrophe is a function of both the total amount of insured exposure in the area affected by the event and the severity of the event. Most catastrophes are restricted to small geographic areas; however, hurricanes, earthquakes, tsunamis and man-made catastrophes may produce significant damage or loss of life in larger areas, especially those that are heavily populated. Claims resulting from catastrophic events could cause substantial volatility in our financial results for any fiscal quarter or year and could materially reduce our profitability or harm our financial condition. In addition, catastrophic events could harm the financial condition of issuers of obligations we hold in our investment portfolio, resulting in impairments to these investments, and the financial condition of our reinsurers, thereby increasing the probability of default on reinsurance recoveries. Large-scale catastrophes may also reduce the overall level of economic activity in affected countries, which could hurt our business and the value of our investments or our ability to sell new policies.

Our life insurance operations are exposed to the risk of catastrophic mortality, such as a pandemic or other event that causes a large number of deaths, especially if concentrated in our top foreign markets. A significant pandemic or public health crisis could have a major impact on the global economy or the economies of particular countries or regions, including travel, trade, tourism, the health system, food supply, consumer consumption and behavior, overall economic output and, eventually, on the financial markets. In addition, a pandemic or public health crisis, including the occurrence of a contagious disease or illness, that affected our employees, our policyholders, our independent consultants or other companies with which we do business could disrupt our business operations. For example, the recent outbreak of the novel coronavirus COVID-19 in China could adversely affect our operations and our ability to sell new policies in the Pacific Rim, and if the virus continues to spread, could adversely affect our operations and sales in other geographic regions. At this point, the extent to which the novel coronavirus COVID-19 may impact our results is uncertain. The effectiveness of external parties, including governmental and non-governmental organizations, in combating the spread and severity of such a pandemic could have a material impact on the losses experienced by us. These events could cause a material adverse effect on our results of operations in any period and, depending on their severity, could also materially and adversely affect our financial condition.

Our financial condition and results of operations may be affected if the liabilities actually incurred differ, or if our estimates of those liabilities change, from the amounts we have reserved for in connection with missed tax reporting or noncompliance of some of our products with the Internal Revenue Code.

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 Sections 7702/72(s) of the Internal Revenue Code ("IRC") of 1986. We have determined the structure of our policies sold to non-U.S. persons, which were novated to CICA Ltd. effective July 1, 2018, may have inadvertently generated U.S. source income over time,


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which caused tax withholding and information reporting requirements for the Company under Chapters 3 and 4 of the IRC.

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 for probable liabilities and expenses related to these tax issues was a complex undertaking including insight from external consultants and involved management’s judgment based upon a variety of factors known at the time. The amount of our liabilities and expenses depends on a number of uncertainties, including the number of prior tax years for which we may be liable to the IRS and the methodology applicable to the calculation of the tax liabilities for policies. Given the range of potential outcomes and the significant variables assumed in establishing our estimates, actual amounts incurred may exceed our reserve and could exceed the high end of our estimated range of liabilities and expenses. To the extent the amount reserved by the Company is insufficient to meet the actual amount of our liabilities and expenses, or if our estimates of those liabilities and expenses change in the future, our financial condition and results of operations may be materially adversely affected. See Note 7. Commitment and Contingencies in the notes to our consolidated financial statements for further discussion of such tax issues.

CICA Ltd. is subject to extensive supervision and regulation by the Bermuda Monetary Authority and the Ministry of Finance of Bermuda (“MOF”). Failure to comply with regulation by the BMA and the MOF may increase our costs of doing business, restrict the conduct of our business and negatively impact our financial position or results of operations.

CICA Ltd. was registered in Bermuda under the Insurance Act 1978 as a Class E insurer in February 2018 and is now subject to the provisions of the Insurance Act and the rules and regulations promulgated thereunder. We have limited experience with regulation by the BMA and the MOF, including compliance with common reporting standard regulations imposed by the Organization for Economic Co-Operation and Development, administered by the MOF, the jurisdiction's competent authority. Failure 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, harm to our reputation and interruption of our operations, which may have a material adverse impact on our financial position or results of operations.

Sustained periods of low interest rates in the long-term investment market may adversely affect our reported net investment income and the discount rates used in reserving for our insurance products, which may adversely affect our results of operations or financial condition.

Declines in interest rates and/or the continuance of the current level of low interest rates and yields on fixed maturity investments may cause the rates of return on our investment portfolio to decrease more than expected, leading to lower net investment income than assumed in the pricing and reserving for our insurance products. An interest or discount rate is used in calculating reserves for our insurance products. We set our reserve discount rate assumptions based on our current and expected future investment yield for assets supporting the reserves, considering current and expected future market conditions. If the discount rate assumed in our reserve calculations is higher than our future investment returns, our invested assets will not earn enough investment income to support our future benefit payments. In that case, the reserves may eventually be insufficient, resulting in the need to increase our reserves and/or increase our capital contributions to our insurance subsidiaries, either of which could have a material adverse effect on our results of operations or financial condition.

Changes in market interest rates may significantly affect our profitability.

We are exposed to significant capital market risk related to changes in interest rates. Our investment performance, including yields and realization of gains and losses, may vary depending on economic and market conditions. Substantial and sustained changes, up or down, in market interest rate levels can materially affect the profitability of our products.

If interest rates decrease or remain at low levels, we may be forced to reinvest proceeds from investments that have matured, prepaid, been sold, or called at lower yields, reducing our investment margin.  We have experienced significant call activity on our fixed maturity portfolio over the years due to the low interest rate environment. Our fixed maturity bond portfolio is exposed to interest rate risk as approximately 51% of the portfolio is callable as of December 31, 2019, with 17% that could be called within the next year. If subject to increased call activity, the Company would have to reinvest the resulting investment portfolio cash proceeds from calls as well as from maturities in lower yielding


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instruments, further reducing our investment income. Some of our products, principally traditional whole life insurance with annuity riders, expose us to the risk that changes in interest rates will reduce our "spread," or the difference between the amounts we are required to pay under our contracts to policyholders and the rate of return we are able to earn on our investments intended to support obligations under the contracts.  As a key component of profitability, a narrowing of our “spread” may have a material adverse effect on our results of operations or financial condition.  Lowering our interest crediting rates can help offset decreases in investment margins on some of our products.  However, our ability to lower these rates could be limited by competition or contractually guaranteed minimum rates and may not match the timing or magnitude of changes in asset yields.

An increase in interest rates will decrease the net unrealized gain position of our investment portfolio and may subject us to disintermediation risk. Disintermediation risk is the risk that in a change from a low interest rate period to a significantly higher and increasing interest rate period, policyholders may surrender their policies or make early withdrawals to increase their returns, requiring us to liquidate investments in an unrealized loss position (i.e. the market value less the carrying value of the investments).

Our investment portfolio is subject to various risks that may result in realized investment losses. In particular, decreases in the fair value of fixed maturities may significantly reduce the value of our investments, and as a result, our financial condition may suffer.

We are subject to credit risk in our investment portfolio. Defaults by third parties in the payment or performance of their obligations under these securities could reduce our investment income and realized investment gains or result in the recognition of investment losses. The value of our investments may be materially adversely affected by increases in interest rates, downgrades in the bonds included in our portfolio and by other factors that may result in the recognition of other-than-temporary impairments. Each of these events may cause us to reduce the carrying value of our investment portfolio.

In particular, at December 31, 2019, fixed maturities represented $1.4 billion or 93.1% of our total investments of $1.5 billion. The fair value of fixed maturities and the related investment income fluctuates depending on general economic and market conditions. The fair value of these investments generally increases or decreases in an inverse relationship with fluctuations in interest rates, while net investment income realized by us will generally increase or decrease in line with changes in market interest rates. In addition, actual net investment income and/or cash flows from investments that carry prepayment risk, such as mortgage-backed and other asset-backed securities, may differ from those anticipated at the time of investment as a result of interest rate fluctuations. An investment has prepayment risk when there is a risk that the timing of cash flows resulting from the repayment of principal might occur earlier than anticipated because of declining interest rates or later than anticipated because of rising interest rates. The impact of value fluctuations affects our consolidated financial statements, as all of our fixed maturities are classified as available-for-sale, with changes in fair value reflected in our stockholders' equity (accumulated other comprehensive income or loss). No similar adjustment is made for liabilities to reflect a change in interest rates. Therefore, interest rate fluctuations and economic conditions could adversely affect our stockholders' equity, total comprehensive income and/or cash flows. Although at December 31, 2019, approximately 98.8% of our fixed maturities were investment grade with 69.3% rated A or above, all of our fixed maturities are subject to credit risk. If any of the issuers of our fixed maturities suffer financial setbacks, the ratings on the fixed maturities could be downgraded (with a concurrent decrease in fair value) and, in a worst-case scenario, the issuer could default on its financial obligations. If the issuer defaults, we could have realized losses associated with the impairment of the securities.

The determination of valuation and impairments of our investments include estimations and assumptions that are subjective and prone to differing interpretations and could materially impact our results of operations or financial condition.

The Company makes assumptions regarding the fair value and expected performance of its fixed maturity securities and other investments. Valuations may include inputs and assumptions that are less observable or require greater estimation, particularly during periods of market disruption, resulting in values which may be less than the value at which the investments may ultimately be sold. Further, rapidly changing and/or unprecedented credit and equity market conditions could materially impact the valuation of investments as reported in our consolidated financial statements, and the period to period changes in value could vary significantly. Decreases in value may have a material adverse effect on our results of operations or financial condition.



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The decision of whether to record an other-than-temporary impairment is determined by our assessment of the financial condition and prospects of a particular issuer, projections of future cash flows and recoverability as well as our ability and intent to hold the securities to recovery or maturity. We evaluate our investment portfolio for impairments. There can be no assurance that we have accurately assessed the level of impairments taken. Additional impairments may need to be taken in the future, and historical trends may not be indicative of future impairments. Any event reducing the value of our securities other than on a temporary basis may have a material adverse effect on our business, results of operations, or financial condition.

Our actual claims losses may exceed our reserves for claims, and we may be required to establish additional reserves, which in turn may adversely impact our results of operations and financial condition.

We maintain reserves to cover our estimated exposure for claims relating to our issued insurance policies.  Reserves do not represent an exact calculation of exposure, but instead represent our best estimates using actuarial and statistical procedures.  Reserve estimates are refined as experience develops, and adjustments to reserves are reflected in our statements of operations for the period in which such estimates are updated.  Because establishing reserves is an inherently uncertain process involving estimates of future losses, future developments may require us to increase policy benefit reserves, which may have a material adverse effect on our results of operations and financial condition in the periods in which such increases occur.

Unanticipated increases in early policyholder withdrawals or surrenders or elections by policyholders to receive lump sum payouts at maturity could negatively impact liquidity.

A primary liquidity concern is the risk of unanticipated or extraordinary early policyholder withdrawals or surrenders. Our insurance policies include provisions, such as surrender charges, that help limit and discourage early withdrawals, and we track and manage liabilities and align our investment portfolio to maintain sufficient liquidity to support anticipated withdrawal demands. However, early withdrawal and surrender levels may differ from anticipated levels for a variety of reasons, including changes in economic conditions, changes in policyholder behavior or financial needs, changes in relationships with our independent consultants, changes in our claims-paying ability, or increases in surrenders among policies that have been inforce for more than fifteen years and are no longer subject to surrender charges.

In addition, we face potential liquidity risks if policyholders with mature policies elect to receive lump sum distributions at greater levels than anticipated. 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 amount of endowment products, with older contracts sold historically that will begin reaching their maturities over the next several years and policyholder election behavior is not known. It is uncertain how policyholders will react in response to these maturities. If a large number of policyholders elect lump sum distributions, the Company could be exposed to liquidity risk in years of high maturities. Any of these occurrences could adversely affect our liquidity, profitability and financial condition.

While we own a significant amount of liquid assets, a certain portion of investment assets are relatively illiquid. If we experience unanticipated early withdrawal or surrender activity, we could exhaust all other sources of liquidity and be forced to obtain additional financing or liquidate assets, perhaps on unfavorable terms. The availability of additional financing will depend on a variety of factors, such as market conditions, the availability of credit in general or more specifically in the insurance industry, the strength or weakness of the capital markets, the volume of trading activities, our credit capacity, and the perception of our long- or short-term financial prospects if we incur large realized or unrealized investment losses or if the level of business activity declines due to a market downturn. If we are forced to dispose of assets on unfavorable terms, it could have an adverse effect on our liquidity, results of operations and financial condition.

We may be required to accelerate the amortization of deferred acquisition costs and the costs of insurance acquired, which would increase our expenses and adversely affect our results of operations and financial condition.

At December 31, 2019, we had $149.2 million of deferred policy acquisition costs, or DAC.  DAC represents costs that vary with and are directly related to the successful sale and issuance of our insurance policies and are deferred and amortized over the estimated life of the related insurance policies.  These costs include commissions in excess of ultimate renewal commissions, solicitation and printing costs, sales material costs and some support costs, such as


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underwriting and contract and policy issuance expenses.  Under U.S. GAAP for our type of insurance products, DAC is amortized over the premium-paying period of the policies.

In addition, when we acquire a block of insurance policies, we assign a portion of the purchase price to the right to receive future net cash flows from existing insurance and investment contracts and policies.  This intangible asset, called the cost of insurance acquired, or COIA, represents the actuarially estimated present value of future cash flows from the acquired policies.  At December 31, 2019, we had $13.5 million of COIA.  We amortize the value of this intangible asset in a manner similar to the amortization of DAC.

The amortization of DAC and COIA is subject to acceleration and generally depends upon anticipated profits from investments, surrender and other policy charges, mortality, morbidity, persistency and maintenance expense margins.  For example, if our insurance policies lapse and surrender rates were to exceed the assumptions upon which we priced our insurance policies, or if actual persistency proves to be less than our persistency assumptions, especially in the early years of a policy, we might be required to accelerate the amortization of expenses we deferred in connection with the acquisition of the policy.  We regularly review the quality of our DAC and COIA to determine if they are recoverable from future income.  If these costs are not recoverable, the amount that is not recoverable is charged to expenses in the financial period in which we make this determination.

Unfavorable experience with regard to expected expenses, investment returns, surrender and other policy charges, mortality, morbidity, lapses or persistency may cause us to increase the amortization of DAC or COIA, or both, or to record a current period expense to increase benefit reserves, any of which could have a material adverse effect on our results of operations and financial condition.

We may be required to recognize an impairment on the value of our goodwill, which would increase our expenses and materially adversely affect our results of operations and financial condition.

Goodwill represents the excess of the amount paid by us to acquire various life insurance companies over the fair value of their net assets at the date of the acquisition.  Under U.S. GAAP, we test the carrying value of goodwill for impairment at least annually at the "reporting unit" level, which is either an operating segment or a business that is one level below the operating segment.  Goodwill is impaired if its carrying value exceeds its implied fair value.  This may occur for various reasons, including changes in actual or expected earnings or cash flows of a reporting unit, generation of earnings by a reporting unit at a lower rate than similar businesses or declines in market prices for publicly traded businesses similar to our reporting units.  If any portion of our goodwill becomes impaired, we would be required to recognize the amount of the impairment as a current-period expense, which could have a material adverse effect on our results of operations and financial condition.  Goodwill in our consolidated financial statements related to our Life Insurance segment was $12.6 million as of December 31, 2019.

Management’s determination of the fair value of each reporting unit incorporates multiple inputs including qualitative and quantitative factors such as discounted cash flow calculations based on assumptions that market participants would make in valuing the reporting unit. Other assumptions can include levels of economic capital, future business growth, and earnings projections and trends.

Litigation and regulatory actions and investigations are common in our businesses and may result in financial losses and/or harm to our reputation.

From time to time we are, and have been, subject to a variety of legal and regulatory actions and investigations relating to our business operations. We are, and in the future may be, parties in various litigation matters.  An adverse outcome in one or more of these actions, investigations or litigation matters may, depending on the nature, scope and amount of the ruling, materially and adversely affect our results of operations or financial condition, encourage other litigation, and limit our ability to write new business, particularly if the adverse outcomes negatively impact our reputation.

In the absence of countervailing considerations, we would expect to defend any such actions, investigations or litigation matters vigorously.  However, in doing so, we could incur significant defense costs, including attorneys' fees, other direct litigation costs and the expenditure of substantial amounts of management time that otherwise would be devoted to our business.  Further, if we suffer an adverse judgment as a result of any claim, it could have a material adverse effect on our business, results of operations and financial condition.



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Reinsurance may not be available or affordable, or reinsurers may be unwilling or unable to meet their obligations under our reinsurance contracts, which may adversely affect our results of operations or financial condition.

As part of our overall risk management and capital management strategies, we purchase reinsurance for certain risks underwritten by our various insurance subsidiaries. Market conditions beyond our control determine the availability and cost of reinsurance. Any decrease in the amount of reinsurance will increase our risk of loss and may impact the level of capital requirements for our insurance subsidiaries, and any increase in the cost of reinsurance will, absent a decrease in the amount of reinsurance, reduce our results of operations. Accordingly, we may be forced to incur additional expenses for reinsurance or may be unable to obtain sufficient reinsurance on acceptable terms, which may adversely affect our ability to write future business, result in the assumption of more risk with respect to the policies we issue, and increase our capital requirements. The collectability of our reinsurance recoverable is primarily a function of the solvency of the individual reinsurers. We cannot provide assurance that our reinsurers will pay the reinsurance recoverable owed to us or that they will pay these recoverables on a timely basis. The insolvency of a reinsurer or the inability or unwillingness of a reinsurer to comply with the terms of a reinsurance contract may have an adverse effect on our results of operations or financial condition.

Our international markets face significant competition. If we are unable to compete effectively in our markets, our business, results of operations and profitability may be adversely affected.

Our international marketing plan focuses on offering U.S. dollar-denominated life insurance products to individuals residing in foreign countries.  We experience considerable competition primarily from the following sources, many of which have substantially greater financial, marketing and other resources than we have:

Foreign operated companies with U.S. dollar-denominated policies.  We face direct competition from companies that operate in the same manner as we operate in our international markets, including from a company recently formed by some of our former employees and independent consultants.
Foreign operated companies with locally operated subsidiaries that offer both local jurisdiction-regulated products in local currency and off-shore U.S. dollar-denominated policies.  This arrangement creates competition in that the U.S. dollar-denominated policies are offered in conjunction with high-need local insurance policies such as health insurance.
Locally operated companies with local currency policies.  We compete with companies formed and operated in the country in which our foreign insureds reside.

In addition, from time to time, companies enter and exit the markets in which we operate, thereby increasing competition at times when there are new entrants.  We may lose business to competitors offering competitive products at lower prices, or for other reasons.

There can be no assurance that we will be able to compete effectively in any of our markets.  If we do not, our business, results of operations and financial condition will be materially adversely affected.

Sales of our insurance products could decline if we are unable to (i) establish and maintain commercial relationships with independent marketing firms and independent consultants, (ii) attract and retain employee agents or (iii) develop and maintain our distribution sources.

We distribute our insurance products through several distribution channels, including independent marketing firms, independent consultants and our employee agents.  In our Life Insurance segment, we depend almost exclusively on the services of independent marketing firms and independent consultants.  In our Home Service Insurance segment, we depend on employee 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 employee agents primarily on the basis of our compensation, products and support services.  Any reduction in our ability to attract 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


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certain markets that may have an adverse impact on our ability to attract and retain effective sales representatives.

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

Our international sales representatives are independent contractors who operate their own businesses. Although we believe that we have properly classified our representatives as independent contractors, there is nevertheless a risk that the IRS, a foreign agency, a court or other authority will take the different view that our sales representatives should be treated like employees. Furthermore, the tests governing the determination of whether an individual is considered to be an independent contractor or an employee are typically fact-sensitive and vary from jurisdiction to jurisdiction. Laws and regulations that govern the status and misclassification of independent sales representatives are subject to change 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, or we may be required to modify our business model, any of which could have a material adverse effect on our business, financial condition and results of operations. 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 and our domestic insurance subsidiaries are subject to extensive governmental regulation in the U.S., which is subject to change and may increase our costs of doing business, restrict the conduct of our business, increase capital requirements for our insurance subsidiaries and negatively impact our results of operations, liquidity and financial condition.
 
We and our domestic insurance subsidiaries are subject to extensive regulation and supervision in U.S. jurisdictions where we do business, including state insurance regulations and U.S. federal securities, tax, financial services, privacy, anti-money laundering, bank secrecy, anti-corruption and foreign asset control laws.  Insurance company regulation is generally designed to protect the interests of policyholders, with substantially lesser protections to shareholders of the regulated insurance companies.  To that end, all the U.S. states in which we do business have insurance regulatory agencies with broad legal powers with respect to licensing companies to transact business; mandating capital and surplus requirements; regulating trade and claims practices; approving policy forms; restricting companies' ability to enter and exit markets; and restricting or prohibiting the payment of dividends by our subsidiaries to us.
 
The capacity for an insurance company's growth in premiums is partially a function of its required statutory surplus.  Maintaining appropriate levels of statutory surplus, as measured by statutory accounting practices prescribed or permitted by a company's state of domicile, is considered important by all U.S. state insurance regulatory authorities.  Failure to maintain required levels of statutory surplus could result in increased regulatory scrutiny and enforcement action by regulatory authorities.
 
Most U.S. insurance regulatory authorities have broad discretion to grant, renew, suspend and revoke licenses and approvals, and could preclude or temporarily suspend us from carrying on some or all of our activities, including acquisitions of other insurance companies, require us to add capital to our insurance company subsidiaries, or fine us.  If we are unable to maintain all required licenses and approvals, or if our insurance business is determined not to comply fully with the wide variety of applicable laws and regulations and their interpretations, including the USA Patriot Act, our revenues, results of operations and financial condition could be materially adversely affected.

Our failure to maintain effective information systems could adversely affect our business.

We must maintain and enhance our existing information systems and develop and integrate new information systems to keep pace with continuing changes in information processing technology, evolving industry and regulatory standards and changing customer preferences in a cost-effective manner.  If we do not maintain adequate systems, we could experience adverse consequences, including products acquired through acquisition, inadequate information on which to base pricing, underwriting and reserve decisions, regulatory problems, failure to meet prompt payment obligations, increases in administrative expenses and loss of customers. We must also effectively consolidate our information systems to eliminate redundant or obsolete applications. Our failure to maintain effective and efficient information


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CITIZENS, INC.
 
 
 

systems, or our failure to consolidate our existing systems could have a material adverse effect on our results of operations and financial condition.

Some of our information technology systems and software are mainframe-based, legacy-type systems that require an ongoing commitment of resources to maintain current standards.  Our systems utilize proprietary code requiring highly skilled personnel.  Due to the unique nature of our proprietary operating environment, we could have difficulty finding personnel with the skills required to provide ongoing system maintenance and development as we seek to keep pace with changes in our products and business models, information processing technology, evolving industry and regulatory standards and policyholder needs.  

We are continuously evaluating and enhancing systems and creating new systems and processes as our business depends on our ability to maintain and improve our technology. Due to the complexity and interconnectedness of our systems and processes, these changes, as well as changes designed to update and enhance our protective measures to address new threats, increase the risk of a system or process failure or the creation of a gap in our security measures. Any such failure or gap could adversely affect our business operations and results of operations.

A cyber attack or other security breach could disrupt our operations, result in the unauthorized disclosure or loss of confidential data, damage our reputation or relationships, and expose us to significant financial and legal liability, which may adversely affect our business, results of operations, or financial condition.

We store confidential information about our business and our policyholders, independent marketing firms, independent consultants and employee-agents and others on our information technology systems, including proprietary and personally identifiable information. As part of our normal business operations, we use this information and engage third-party providers, including outsourcing, cloud computing, and other business partners, that store, access, process, and transmit such information on our behalf. We devote significant resources and employ security measures to help protect our information technology systems and confidential information, and we have programs in place to detect, contain, and respond to information security incidents. However, because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and may be difficult to detect for long periods of time, we and our third-party providers may be unable to anticipate these techniques or implement adequate preventative measures. In addition, hardware, software, or applications we develop or procure from third parties or through open source solutions may contain defects in design or manufacture or other problems that could unexpectedly compromise our information security. Unauthorized parties, whether within or outside our company, may disrupt or gain access to our systems, or those of third parties with whom we do business, through human error, misfeasance, fraud, trickery, or other forms of deceit, including break-ins, use of stolen credentials, social engineering, phishing, or other cyber attacks, computer viruses, malicious codes, and similar means of unauthorized and destructive tampering.

We and our third-party providers experience information security incidents from time to time. There is no assurance that our security systems and measures will be able to prevent, mitigate, or remediate future incidents. A successful penetration or circumvention of the security of our information technology systems, or those of third parties with whom we do business, could cause serious negative consequences for us, including significant disruption of our operations, unauthorized disclosure or loss of confidential information, harm to our brand or reputation, loss of customers and revenues, violations of privacy and other laws, and exposure to litigation, monetary damages, regulatory enforcement proceedings, fines, and potentially criminal proceedings and penalties. If we are unaware of the incident for some time after it occurs, our exposure could increase. In addition, the costs to address or remediate systems disruptions or security threats or vulnerabilities, whether before or after an incident, could be significant. As we continue to build our digital capabilities and focus on enhancing the customer experience, the amount of information that we retain and share with third parties is likely to grow, increasing the cost to prevent data security breaches and the cost and potential consequences of such breaches. An information technology systems failure could also interfere with our ability to comply with financial reporting and other regulatory requirements, exposing us to potential disciplinary action by regulators.  

Although we have insurance against some cyber risks and attacks, we may be subject to litigation and financial losses that exceed our policy limits, are subject to deductibles or are not covered under any of our current insurance policies.



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CITIZENS, INC.
 
 
 

Changes in accounting standards may adversely affect our reported results of operations and financial condition.

Our consolidated 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, including the FASB’s accounting standard update related to long-duration insurance contracts, will change current accounting and disclosure requirements applicable to our consolidated 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. See Note 1. Summary of Significant Accounting Policies in the notes to our consolidated financial statements contained herein for additional information regarding accounting updates.

Our risk management program may leave us exposed to unidentified or unanticipated risk, which could negatively affect our business.

We have devoted significant resources to develop our enterprise risk management program, which has the objective of managing risks to which the Company is exposed. There are, however, inherent limitations to risk management strategies because there may exist, or develop in the future, risks that we have not appropriately anticipated or identified. For instance, as our business changes and the markets in which we operate evolve, our risk management framework may not advance at the same pace as those changes. As a result, there is a risk that new products or new business strategies may present risks that are not appropriately identified, monitored or managed. If our risk management framework is ineffective, the Company may suffer unexpected losses and could be materially adversely affected.

The failure of our business recovery and incident management processes to resume our business operations in the event of a catastrophe, cyber attack, or other event could adversely affect our profitability, results of operations, or financial condition.

In the event of a disaster such as a catastrophe, an epidemic, a cyber attack, cyber security breach or other information technology systems failure, a terrorist attack, or war, unanticipated problems with our disaster recovery systems could have a material adverse impact on our ability to conduct business and on our results of operations and financial condition, particularly if those problems affect our information technology systems and destroy valuable data or result in a significant failure of our internal control environment. In addition, in the event that a significant number of our employees were unavailable in the event of a disaster, our ability to effectively conduct business could be severely compromised.

The failure of our information technology and/or disaster recovery systems for any reason could cause significant interruptions or malfunctions in our or our customers’ operations and result in the loss, theft, or failure to maintain the security, confidentiality or privacy of sensitive data, including personal information relating to our customers. Such a failure could harm our reputation, subject us to regulatory sanctions, legal claims, and increased expenses, and lead to a loss of customers and revenues.

We depend on the ability of our insurance subsidiaries to make payments to us in sufficient amounts for us to conduct our operations. Our insurance subsidiaries are restricted by applicable laws and regulations in the amounts of payments they may make to us and their ability to transfer funds to us may be impaired by adverse financial results or a change in capital requirements. Accordingly, internal sources of capital and liquidity may not always be sufficient. If we need to seek external capital, adverse market conditions may affect our access to capital or our cost of capital.

As a holding company, our principal asset is the stock of our subsidiaries.  We rely primarily on statutorily permissible payments from our insurance company subsidiaries, principally through service agreements we have with our subsidiaries, to meet our working capital and other corporate expenses.  The ability of our insurance company subsidiaries to make payments to us is subject to regulation by the states and jurisdictions in which they are domiciled, and these payments depend primarily on approved service agreements between us and these subsidiaries and, to a lesser extent, the statutory surplus (which is the excess of assets over liabilities as determined under statutory accounting practices prescribed by an insurance company's state of domicile), future statutory earnings (which are earnings as determined in accordance with statutory accounting practices) and regulatory restrictions.


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Except to the extent that we are a creditor with recognized claims against our subsidiaries, claims of our subsidiaries' creditors, including policyholders, have priority with respect to the assets and earnings of the subsidiaries over the claims of our creditors and shareholders.  If any of our subsidiaries becomes insolvent, liquidates or otherwise reorganizes, our creditors and shareholders will have no right to proceed in their own right against the assets of that subsidiary or to cause the liquidation, bankruptcy or winding-up of the subsidiary under applicable liquidation, bankruptcy or winding-up laws.

Additionally, any change in demand for our insurance subsidiaries’ products or an increase in the incidence of new claims or the duration of existing claims could negatively impact their cash flows from operations. Deterioration in the credit market, which could delay our and our insurance subsidiaries’ ability to sell positions in certain fixed maturity securities in a timely manner, could also negatively impact our and our insurance subsidiaries’ cash flows. Regulatory changes such as those discussed herein in this Item 1A may impose higher capital or reserve requirements on our insurance subsidiaries and/or implement other requirements which could unfavorably affect our liquidity. Without sufficient liquidity, our ability to maintain and grow our operations would be limited. If our internal sources of liquidity prove to be insufficient, we may be unable to successfully obtain additional financing and capital on favorable terms, or at all, which may adversely affect us.

If our financial results are unfavorable, we may need to increase our capital in order to satisfy regulatory requirements. Maintaining appropriate levels of statutory surplus is considered important not only by us but by insurance regulatory authorities in the U.S. and Bermuda. Failure to maintain certain levels of statutory surplus could result in increased regulatory scrutiny or action by regulatory authorities. Need for additional capital may limit a subsidiary's ability to distribute funds to our holding companies.

Obtaining financing for even a small amount of capital could be challenging in unfavorable market conditions and during periods of economic uncertainty. The markets may exert downward pressure on availability of liquidity and credit capacity for certain issuers. The availability of financing will depend on a variety of factors such as market conditions, the general availability of credit, the overall availability of credit to the financial services industry, and the possibility that customers or lenders could develop a negative perception of our financial prospects. Similarly, our access to funds may be impaired if regulatory authorities take negative actions against us. Raising capital in unfavorable market conditions could increase our interest expense or negatively impact our shareholders through increased dilution of their common stock in the Company.

Unexpected losses in future reporting periods may require us to record a valuation allowance against our deferred tax assets.

We evaluate our deferred tax asset ("DTA") quarterly for recoverability based on available evidence.  This process involves management's judgment about assumptions, which are subject to change from period to period due to tax rate changes or variances between our projected operating performance and our actual results.  Ultimately, future adjustments to the DTA valuation allowance, if any, will be determined based upon changes in the expected realization of the net deferred tax assets.  The realization of the deferred tax assets depends on the existence of sufficient taxable income in either the carry back or carry forward periods under applicable tax law.  Due to significant estimates utilized in establishing the valuation allowance and the potential for changes in facts and circumstances, it is reasonably possible that we may be required to record a valuation allowance in future reporting periods.  Such an adjustment could have a material adverse effect on our results of operation, financial condition and capital position.

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 regulations, the Bermuda Proceeds of Crime Act 1997 and the Proceeds of Crime (Anti-Money Laundering and Anti-Terrorist Financing) Regulations 2008 applicable 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, independent testing, 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 beyond sanctions screening


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CITIZENS, INC.
 
 
 

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.
 
Events that damage our reputation may adversely affect our business, results of operations, or financial condition.

There are many events which may harm our reputation, including, but not limited to, those discussed in this Item 1A regarding regulatory investigations, legal proceedings, cyber or other information security incidents and disputes with our independent consultants.

In addition, as an insurance company, we are paid to accept certain risks. Those who conduct our business, including executive officers and members of management, and to some extent, independent consultants, do so in part by making decisions that involve exposing us to risk. These include decisions such as maintaining effective underwriting and pricing discipline, maintaining effective claim management and customer service performance, managing our investment portfolio, delivering effective technology solutions, complying with established sales practices, executing our capital management strategy, exiting a line of business and/or pursuing strategic growth initiatives, and other decisions. Although we have a risk management framework and employ controls and procedures designed to monitor business decisions and prevent us from taking excessive risks or unintentionally failing to comply with internal policies and practices such that errors occur, there can be no assurance that these controls and procedures will be effective. If our employees and independent consultants take excessive risks and/or fail to comply with internal policies and practices, the impact of those events may damage our market position and reputation.

Depending on the severity of the damage to our reputation, we may be unable to effectively compete for new products or retain our existing business, which could adversely affect our results of operations or financial condition. Damage to our reputation may also hinder our ability to raise new capital and/or increase our cost of capital.

If our foreign policyholders reduced or ceased participation in our Citizens, Inc. Stock Investment Plan (the "CISIP") or if a securities regulatory authority were to deem the CISIP's operation contrary to securities laws, the volume of Class A common stock purchased on the open market through the CISIP, and the price of our Class A common stock, could fall.

At December 31, 2019, more than 97% of the shares of our Class A common stock purchased under the CISIP in 2019 were purchased by foreign holders of life insurance policies (or related brokers), with the remaining 3% of the shares of Class A common stock purchased by participants residing in the United States. The CISIP is registered with the SEC pursuant to a registration statement under the Securities Act of 1933, but is not registered under the laws of any foreign jurisdiction.  If a foreign securities regulatory authority were to determine the offer and sale of our Class A common stock under the CISIP were contrary to applicable laws and regulations of its jurisdiction, such authority may issue or assert a fine, penalty or cease and desist order against us in that foreign jurisdiction. There is a risk our Class A common stock price could be negatively impacted by a decrease in participation in the CISIP.  If fewer policyholders elect to participate in the Plan, or our international premium collections were to decrease as a result of regulatory, economic, or marketing impediments, the trading volume of our Class A common stock may decline from its present levels, the demand for our Class A common stock could be negatively impacted and the price of our Class A common stock could fall.

Due to required regulatory approval for acquisition of control of a regulated U.S. domestic insurance company, control of our Company, through the ownership of our Class B common stock, has not yet transferred from our founder's trust to a 501(c)(3) charitable foundation established by our founder, and we cannot determine whether or when any change in our management, operations, or operating strategies will occur.

Harold E. Riley, our founder, was the beneficial owner of 100% of our Class B common stock, which was held in the name of the Harold E. Riley Trust ("Trust"), of which he had served as Trustee until his death in September 2017.  Our Class A and Class B common stock are identical in all respects, except the Class B common stock elects a simple majority of the Board and receives one-half of any cash dividends paid, on a per share basis, to the Class A common stock.  The Class A common stock elects the remainder of the Board.  The Trust documents provided that upon Mr. Riley's death, the Class B common stock would transfer from the Trust to the Harold E. Riley Foundation, a charitable organization established under 501(c)(3) of the Internal Revenue Code (the "Foundation"). 


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CITIZENS, INC.
 
 
 


To date, we understand that the estate process related to the Class B common stock is not complete, and the required state insurance regulatory approvals for change of control to occur have not been received. Therefore, the Trust, of which Mr. Riley's estate is the trustee, currently remains the holder of record of the Class B common stock. The Foundation and the Estate of Harold E. Riley are proceeding independent of the Company to obtain regulatory approval from the Colorado Division of Insurance, the Texas Department of Insurance, the Louisiana Department of Insurance and the Mississippi Department of Insurance through the requisite Form A approval process. The Company does not know if or when regulatory approvals of the transfer ultimately will be granted. If such approvals are obtained from the departments of insurance of the aforementioned states above, the Company will record the transfer of the controlling Class B common stock from the Trust to the Foundation in the Company's shareholder records.

The Foundation is organized as a public support charity for the benefit of its charitable beneficiaries, Baylor University and Southwestern Baptist Theological Seminary, and is governed by a board of trustees. It is unclear what, if any, change may occur to our Board, management, or corporate operating strategies as a result of ownership of our Class B common stock by the Foundation.

If and when the Foundation becomes the record holder of the Class B common stock, the first of two prongs of certain "change in control" provisions in the employment agreement of our President and Chief Executive Officer, Geoffrey Kolander, will be triggered. Under Mr. Kolander's employment agreement effective January 1, 2019, a "change in control" includes, among other things (1) the regulatory approval of the transfer of the Class B common stock from the Trust to any individual, entity or group, other than regulatory approval of a transaction wherein the Company is the first to repurchase the Class B common stock directly from the Trust or the Foundation and (2) the exercise of a power of attorney granted by Harold E. Riley over the Company's Class B common stock by the Trust or the Foundation. If Mr. Kolander terminates his employment for any reason, or his employment is terminated by the Company without cause, in each case, within eighteen (18) months of a change in control, Mr. Kolander would be entitled to receive certain cash payments and benefits.

Our articles of incorporation and bylaws, as well as applicable U.S. state insurance laws, may discourage takeovers and business combinations that our shareholders might consider to be in their best interests.

Our articles of incorporation and bylaws, as well as various state insurance laws, may delay, deter, render more difficult or prevent a takeover attempt our shareholders might consider in their best interests.  As a result, our shareholders will be prevented from receiving the benefit from any premium to the market price of our Class A common stock that may be offered by a bidder in a takeover context.  Even in the absence of a takeover attempt, the existence of these provisions may adversely affect the prevailing market price of our Class A common stock if they are viewed as discouraging takeover attempts in the future.

The following provisions in our articles of incorporation and bylaws make it difficult for our Class A shareholders to replace or remove our directors and have other anti-takeover effects that may delay, deter or prevent a takeover attempt:

holders of shares of our Class B common stock elect a simple majority of our Board, and all of these shares are held by the Trust until such time that the Foundation receives regulatory approval for acquisition of the Class B common stock and becomes holder of record; and
our Board may issue one or more series of preferred stock without the approval of our shareholders.

U.S. state insurance laws generally require prior approval of a change in control of an insurance company.  Generally, such laws provide that control over an insurer is presumed to exist if any person, directly or indirectly, owns, controls, holds with the power to vote, or holds proxies representing 10% or more of the voting securities of the insurer.  In considering an application to acquire control of an insurer, an insurance commissioner generally will consider such factors as the experience, competence and financial strength of the proposed acquirer, the integrity of the proposed acquirer's board of directors and executive officers, the proposed acquirer's plans for the management and operation of the insurer, and any anti-competitive results that may arise from the acquisition.  In addition, a person seeking to acquire control of an insurance company is required in some states to make filings prior to completing an acquisition if the acquirer and the target insurance company and their affiliates have sufficiently large market shares in particular lines of insurance in those states.  These state insurance requirements may delay, deter or prevent our ability to complete an acquisition.



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CITIZENS, INC.
 
 
 

Competition for employees is intense and the Company may not be able to attract and retain highly skilled people needed to support its business.

The Company’s operational success depends upon its ability to attract and retain qualified personnel. The market for qualified personnel is extremely competitive and loss of services of one or more of the Company’s key personnel could have a material adverse effect on the Company’s operations due to their skills, unique knowledge of our business, industry experience and the potential difficulty of finding qualified replacements. The Company's employees, other than the Chief Executive Officer, are not subject to employee contracts. Sales in our lines of business and our results of operations and financial condition could be materially adversely affected if the Company is unsuccessful in attracting and retaining qualified individuals or its recruiting and retention costs increase significantly.

Item 1B.    UNRESOLVED STAFF COMMENTS

None.

Item 2.    PROPERTIES

We lease our principal office in Austin, Texas to service all business entities and operations. We lease space for our office in Bermuda related to CICA Ltd. and in Louisiana, Arkansas and Mississippi related to our Home Service Insurance operations. We also own properties in Louisiana related to our Home Service Insurance operations and in Buchanan Dam, Texas used for our general business operations. On February 15, 2019, we sold an owned building located at 400 East Anderson Lane and a nearby property in Austin, Texas to a third-party. Following the sales, we no longer own any property in Austin. We have listed our property in Buchanan Dam for sale.

Item 3.   LEGAL PROCEEDINGS

There are no material pending legal proceedings in which we or any of our subsidiaries is a party or in which any of our or their property is the subject, except as set forth below.

On November 7, 2018, Citizens, CICA Ltd. and CICA filed a 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 attempting to induce other independent consultants to terminate or reduce service to Citizens and disclosing confidential information.

On January 25, 2019, the Defendants filed a motion to dismiss certain claims alleged 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 misappropriation of Citizens’ trade secrets and tortious interference with Citizens’ existing contracts with its independent consultants. A hearing for the preliminary injunction was held on August 12, 2019. On August 13, 2019, the District Court denied the application for a temporary injunction, and on August 19, 2019, Citizens, CICA Ltd. and CICA filed a notice of appeal in the Third Court of Appeals in Austin, Texas with respect to the District Court’s August 13, 2019 decision. That interlocutory appeal remains pending.

On September 10, 2019, Citizens, CICA Ltd. and CICA filed an amended complaint and added additional defendants to the lawsuit, including (i) Michael P. Buchweitz, Jonathan M. Pollio, Jeffrey J. Wood and Steven A. Rekedal, former


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CITIZENS, INC.
 
 
 

Citizens executives and employees and, in the case of Steven A. Rekedal, a former Citizens independent consultant, (ii) First Trinity Financial Corporation, and Trinity American, Inc. (collectively, “First Trinity”) and International Marketing Group S.A., LLC, entities that have founded a business on the exploitation of Citizens’ trade secrets and goodwill, and (iii) Gregg E. Zahn, a First Trinity executive. The amended complaint asserted additional claims for breach of contract, conspiracy and unjust enrichment. The lawsuit is currently in discovery and is expected to proceed to trial in the fourth quarter of 2020.

While it is not possible at this time to predict with any degree of certainty the ultimate outcome of the appeal of the District Court’s denial of the preliminary injunction 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.

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 4.   MINE SAFETY DISCLOSURES
 
Not applicable.




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CITIZENS, INC.
 
 
 

PART II

Item 5.
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our Class A common stock is traded on the New York Stock Exchange ("NYSE") under the symbol CIA. All of our Class B common stock is owned by the Trust; therefore, there is no public trading market for our Class B common stock.

The number of stockholders of record as of March 4, 2020 was as follows:

Class A Common Stock - 92,019
Class B Common Stock - 1

We have never paid cash dividends on our Class A or B common stock and do not expect to pay cash dividends in the foreseeable future, as it is our policy to retain earnings for use in the operation and expansion of our business.  

We did not purchase any of our equity securities during 2017, 2018 or 2019.

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

The following table sets forth information regarding securities authorized for issuance under our equity compensation plan, the Citizens, Inc. Omnibus Incentive Plan as of December 31, 2019. See Note 11. Stock Compensation in the notes to our consolidated financial statements for additional information regarding our Omnibus Incentive Plan.

Plan Category
 
Number of securities to be issued upon exercise of outstanding options, warrants and rights
 
Weighted-average exercise price of outstanding options, warrants and rights
 
Number of securities remaining for future issuance under equity compensation plans
Equity compensation plans approved by security holders
 
274,652

 
$
7.09

 
2,850,859

 
 
 
 
 
 
 
Equity compensation plans not approved by security holders
 

 

 

Total
 
274,652

 
$
7.09

 
2,850,859




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CITIZENS, INC.
 
 
 

PERFORMANCE COMPARISON

The following graph compares the change in the Company’s cumulative total stockholder return on its Class A common stock over a five-year period.  The following graph assumes a $100 investment on December 31, 2014, and reinvestment of all dividends in each of the Company’s common stock, the NYSE Composite, the NASDAQ Insurance Index and major U.S.-based insurance companies within the industry. Note that historical stock price performance is not necessarily indicative of future stock price performance.

chart-1123a84a6bc55568a7d.jpg
 
2014
 
2015
 
2016
 
2017
 
2018
 
2019
Citizens, Inc.
$
100.00

 
97.76

 
129.21

 
96.71

 
98.95

 
88.82

NYSE Composite
$
100.00

 
95.91

 
107.36

 
127.46

 
116.06

 
145.66

NASDAQ Insurance
$
100.00

 
103.67

 
131.44

 
142.11

 
124.42

 
159.41

Peer Group
$
100.00

 
93.20

 
100.17

 
118.80

 
91.15

 
114.47

 
The peer group index weights individual company returns for stock market capitalization. The companies included in the peer group index are shown in the following table.
American Equity Investment Life Holding Co.
Atlantic American Corp.
Aviva Plc.
China Life Insurance Company Ltd.
Citizens, Inc.
Genworth Financial, Inc
Globe Life, Inc.
Independence Holding Co.
Kansas City Life Insurance Co.
Lincoln National Corp.
MetLife, Inc.
National Western Life Group, Inc.
Primerica, Inc.
Prudential Financial, Inc.
Prudential Plc
Reinsurance Group of America, Inc.
UTG, Inc.



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Item 6.    SELECTED FINANCIAL DATA

The following table presents selected financial data of the Company.  The information presented below is not necessarily indicative of results of future operations and should be read in conjunction with Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and Item 8. Financial Statements and Supplementary Data of this Form 10-K to fully understand the factors that may affect the comparability of the information presented below.

Years ended December 31,
(In thousands, except per share data)
2019
 
2018
 
2017
 
2016
 
2015
 
 
 
 
 
 
 
 
 
 
Operating items
 
 
 
 
 
 
 
 
 
Insurance premiums
$
184,347

 
187,860

 
197,720

 
197,876

 
194,480

Net investment income
59,531

 
54,205

 
53,146

 
48,560

 
45,782

Realized investment gains (losses)
5,249

 
108

 
518

 
(1,985
)
 
(5,459
)
Total revenues
250,545

 
244,006

 
252,627

 
245,406

 
236,268

Net income (loss) before federal income taxes
5,745

 
2,002

 
(2,986
)
 
5,483

 
(1,943
)
Net income (loss)
(1,370
)
 
(11,062
)
 
(38,127
)
 
1,969

 
(3,143
)
Balance sheet data
 
 
 
 
 
 
 
 
 
Total assets
1,744,936

 
1,615,561

 
1,644,453

 
1,583,668

 
1,480,751

Total liabilities
1,485,100

 
1,427,828

 
1,420,940

 
1,334,568

 
1,233,825

Total stockholders' equity
259,836

 
187,733

 
223,513

 
249,100

 
246,926

Life insurance in force
4,246,781

 
4,350,538

 
4,469,735

 
4,497,735

 
4,478,202

Per share data
 

 
 

 
 

 
 

 
 

Book value per share
5.17

 
3.75

 
4.46

 
4.97

 
4.93

Basic and diluted income (loss) per Class A share
(0.03
)
 
(0.22
)
 
(0.77
)
 
0.04

 
(0.06
)
 



December 31, 2019 | 10-K 27


CITIZENS, INC.
 
 
 

Item 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This section and other parts of this Annual Report on Form 10-K (“Form 10-K”) contain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties. Forward-looking statements provide 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 I, Item 1A of this Form 10-K under the heading “Risk Factors,” which are incorporated herein by reference. The following discussion should be read in conjunction with the consolidated financial statements and accompanying notes included in Part II, Item 8 of this Annual Report on Form 10-K. The Company assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law.

This section of this Annual Report on Form 10-K generally discusses 2019 and 2018 items and year-to-year comparisons between 2019 and 2018. Discussions of 2017 items and year-to-year comparisons between 2018 and 2017 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

OVERVIEW

We conduct operations as an insurance holding company emphasizing ordinary life insurance and endowment products in niche markets where we believe we can achieve competitive advantages.  As an insurance provider, we collect premiums on an ongoing basis to pay future benefits to our policy and contract holders.  Our core operations include issuing:
 
whole life insurance;
endowments;
final expense; and
limited liability property policies.

The Company derives its revenues principally from: (1) premiums earned for insurance coverages provided to insureds; (2) net investment income; and (3) net realized capital gains and losses.

Profitability of our insurance operations depends heavily upon the Company’s underwriting discipline, as we seek to manage exposure to loss through:

favorable risk selection and diversification;
management of claims;
use of reinsurance;
sizing of our in force block;
careful monitoring of our mortality and morbidity experience; and
management of our expense ratio, which we accomplish through economies of scale and management of acquisition costs and other underwriting expenses.

Pricing adequacy depends on a number of factors, including the ability to obtain regulatory approval for rate changes if applicable, proper evaluation of underwriting risks, the ability to project future losses based on historical loss experience adjusted for known trends, the Company’s response to competitors, and expectations about regulatory and legal developments and expense levels. The Company seeks to price our insurance policies such that insurance premiums and future net investment income earned on premiums received will cover underwriting expenses and the ultimate cost of paying claims reported on the policies and provide for a profit margin. The Company has the ability to adjust dividend scales and interest crediting rates at its discretion based on economic and other factors. The profitability


December 31, 2019 | 10-K 28


CITIZENS, INC.
 
 
 

of fixed annuities, riders and other "spread-based" product features depends largely on the Company’s ability to earn target spreads between earned investment rates on assets and interest credited to policyholders.

The investment return, or yield, on invested assets is an important element of the Company’s earnings since insurance products are priced with the assumption that premiums received can be invested for a period of time before benefits are paid.  Most of the Company’s invested assets have been held in fixed maturity available-for-sale securities, primarily in asset classes of corporate bonds, municipal bonds, and government obligation bonds. The interest rate environment has a significant impact on the determination of insurance contract liabilities, our investment rates and yields, and our asset/liability management.
 
The primary investment objective for the Company is to maximize economic value, consistent with acceptable risk parameters, including the management of credit risk and interest rate sensitivity of invested assets, while generating sufficient after-tax income to meet policyholder and corporate obligations. The Company maintains a prudent investment strategy that may vary based on a variety of factors including business needs, regulatory requirements and tax considerations.

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 Sections 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. persons, which were novated to CICA Ltd. effective July 1, 2018, may have inadvertently generated U.S. source income over time, which caused tax withholding and information reporting requirements for the Company under Chapters 3 and 4 of the IRC.   We have incurred significant costs in the evaluation process of this issue as we have engaged legal, tax and actuarial consultants to assist us in this review and remediation. In December 2019, the Company submitted corrected withholding tax returns to the IRS in order to establish the tax liability amount for failing to withhold tax and report the U.S. source income generated by the novated policies. 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 as of December 31, 2019 was approximately $10.0 million, after tax, related to projected agreement with the IRS. The probability weighted range of financial estimates relative to this issue is $7.4 million to $52.5 million, net of tax. 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, the methodology applicable to the calculation of taxable benefits under non-compliant policies and the amount of time and resources we will require from external advisors who are assisting us with resolving these issues. Given the range of potential outcomes and the significant variables assumed in establishing our estimates, actual amounts incurred may exceed our reserve and also could exceed the high end of our estimated range of liabilities and expenses.

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.

See Note 7. Commitments and Contingencies in the notes to our consolidated financial statements for more information.

CURRENT FINANCIAL HIGHLIGHTS

Our total assets grew 8.0%, or $129 million, from 2018 to 2019 and totaled $1.7 billion as of December 31, 2019.  
Total stockholders' equity increased 38.4% from $187.7 million at December 31, 2018, to $259.8 million at December 31, 2019 primarily due to a change in net unrealized gains on available-for-sale securities after taxes of $71.8 million in 2019 as market interest rates decreased from 2018 levels.
Insurance premiums declined 1.9% in 2019 compared to 2018, totaling $184.3 million and $187.9 million, respectively. The decline was driven by fewer renewal premiums in our Life Insurance segment, partially offset by an increase in first year premiums in that segment as we realized growth in 2019 following investment in our sales and marketing activities and increased sales of higher average premium policies. First year premiums in our Life Insurance segment increased 2.1% in 2019 compared


December 31, 2019 | 10-K 29


CITIZENS, INC.
 
 
 

to 2018. Insurance premiums declined 6.3% in 2018 compared to 2017, driven by fewer renewal and first year premiums in our Life Insurance segment.
Net investment income increased 9.8% in 2019 compared to 2018, totaling $59.5 million and $54.2 million, respectively. The increase was driven by a growing asset base derived from cash flows from 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.  The average yield on the consolidated investment portfolio was an annualized rate of 4.36% for 2019 compared to 4.17% for 2018.
A realized gain of $2.0 million was recorded during 2019 related to the redemption of two fixed maturity securities by the issuers at a price above par. An impairment loss of $3.1 million was recorded during the second quarter of 2019 in our Other Non-Insurance Enterprises segment related to our Citizens Academy training facility located near Austin, Texas. This investment was reclassified from real estate held for investment to held for sale. Additionally, a realized gain of $5.5 million was recorded in the first quarter of 2019 related to the sale of our former corporate headquarters in Austin, Texas.
Claims and surrenders expense increased 17.3% for 2019 compared to 2018 and increased 9.9% for 2018 compared to 2017. For both periods, these increases were primarily due to an increase in surrender benefits and matured endowments in the Life Insurance segment, which were within expected levels.
The change in future policy benefit reserves decreased 13.0% in 2019 compared to 2018 and 36.9% in 2018 compared to 2017. The conversion to a new actuarial valuation system impacted the change in reserves in both years. The conversion resulted in a decrease in future policy benefit reserves of $11.9 million in 2018 and $2.4 million in 2019. Changes in surrender and maturity activity also impacted this line item in both periods.
General expenses increased 1.7% in 2019 compared to 2018, driven primarily by increased costs relating to higher long-term incentive compensation offsetting reduced audit fees. In addition, general expenses decreased by $2.2 million in 2018 compared to 2017, primarily due to a change in our tax compliance best estimate liability from the estimate at year end 2017.
Capitalization of deferred policy acquisition costs decreased 1.9% in 2019 compared to 2018 and 22.1% in 2018 compared to 2017. These capitalized costs are directly related to first year premium production and we experienced declines in first year premiums of 0.7% in 2019 and 25.7% in 2018. Amortization of deferred policy acquisition costs decreased 17.4% in 2019 compared to 2018 and increased 15.3% in 2018 compared to 2017. The conversion to a new actuarial valuation system increased amortization costs in 2018 by $3.7 million.

Life Insurance.  For almost forty years, CICA and its predecessors had accepted policy applications from foreign nationals for U.S. dollar-denominated ordinary whole life insurance and endowment policies.  We completed a novation of all of the international policies issued by CICA to CICA Ltd., effective July 1, 2018. We make our insurance products available using third-party marketing organizations and independent marketing consultants.

Endowment product sales have been the primary driver of sales in this segment. The Company has noted that the twenty year endowment is our top selling product, followed by an endowment product that matures at age sixty-five.  The Company repriced its top six selling international products as of the beginning of 2017 and introduced minimum guaranteed rates and current crediting rates in these products to allow for adjustments relative to market interest rates as needed.

Through the domestic market of our Life Insurance segment, we collect renewal premiums on ordinary whole life, credit life insurance, and final expense policies issued to middle and lower income families and individuals in certain markets in the mountain west, midwest and southern U.S.  We stopped issuing new domestic ordinary whole life and endowment life insurance policies in 2017. The majority of our domestic revenues are generated by the policies of domestic life insurance companies we have acquired since 1987.

Home Service Insurance.  We provide final expense ordinary and industrial life insurance to middle and lower income individuals in Louisiana, Mississippi and Arkansas.  Our policies in this segment are sold and serviced through a home service marketing distribution system utilizing employee-agents who work on a route system to collect premiums and service policyholders, and through networks of funeral homes that collect premiums and provide personal policyholder service.



December 31, 2019 | 10-K 30


CITIZENS, INC.
 
 
 

ECONOMIC AND INSURANCE INDUSTRY DEVELOPMENTS

Significant economic issues impacting our business and industry currently and into the future are discussed below.

The low interest rate environment continues to limit increases in profit margins for insurers.  We have been impacted by the historically low interest rate environment over the past several years as our fixed maturity investment portfolio, primarily invested in callable securities, has generally been reinvested at lower yields.  Although the Company’s prudent investment strategy has not changed, the Company has made new investments in securities of state, municipalities, essential services and corporate issuers as well as focused on identifying investment opportunities in other asset classes such as private equity to increase our yields while maintaining a prudent risk profile for our overall portfolio. Our investment earnings also impact the reserve and deferred policy acquisition costs ("DAC") balances, as assumptions are used in the development of the balances.
As an increasing percentage of the world population reaches retirement age, we believe we will benefit from increased demand for living benefit products rather than death benefit products, as customers will require cash accumulation to pay expenses to meet their lifetime income needs.  Our ordinary life products are designed to accumulate cash values to provide for living expenses in a policy owner's later years, while continuously providing a death benefit.
Many of the events and trends affecting the life insurance industry have had an impact on the life reinsurance industry.  These events have led to a decline in the availability of reinsurance.  While we currently cede a limited amount of our primary insurance business to reinsurers, we may find it difficult to obtain reinsurance in the future, forcing us to seek reinsurers who are more expensive to us.  If we cannot obtain affordable reinsurance coverage, either our net exposures will increase or we will have to reduce our underwriting commitments.
Innovation and digital development strategies will be implemented in various industries including the insurance industry in the coming years which could significantly impact our business. It will be critical that we embrace these changes for the benefit of our policyholders, agents and stockholders.
While our management has extensive experience in writing life insurance policies for foreign residents, changes to foreign laws and regulations and their related application and enforcement, along with currency controls affecting our foreign resident insureds, could adversely impact our revenues, results of operations and financial condition.

CONSOLIDATED RESULTS OF OPERATIONS

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



December 31, 2019 | 10-K 31


CITIZENS, INC.
 
 
 

REVENUES

Insurance revenues are primarily generated from premium revenues and investment income.  In addition, realized gains and losses on investment holdings can significantly impact revenues from year to year.

Years ended December 31,
(In thousands)
2019
 
2018
 
2017
Revenues:
 
 
 
 
 
Premiums:
 
 
 
 
 
Life insurance
$
178,351

 
181,825

 
191,342

Accident and health insurance
1,383

 
1,218

 
1,392

Property insurance
4,613

 
4,817

 
4,986

Net investment income
59,531

 
54,205

 
53,146

Realized investment gains
5,249

 
108

 
518

Other income
1,418

 
1,833

 
1,243

Total revenues
$
250,545

 
244,006

 
252,627

 
Premium Income.  Premium income derived from life, accident and health, and property insurance sales decreased 1.9% during 2019 compared to 2018 and decreased 5.0% during 2018 compared to 2017.  The decrease in 2019 was driven primarily by a decline in renewal premiums in our Life insurance segment and was partially offset by an increase in first year premiums in that segment. The decrease in 2018 was primarily due to a decline in first year and renewal premiums in our Life insurance segment. See details on the distribution of premiums below and further discussion within Segment Operations.

Years ended December 31,
(In thousands)
2019
 
2018
 
2017
Premiums:
 
 
 
 
 
First year
$
17,508

 
17,639

 
23,726

Renewal
166,839

 
170,221

 
173,994

Total premiums
$
184,347

 
187,860

 
197,720


Endowment sales represent a significant portion of new business sales internationally with the 20-year endowment and endowment to age 65 representing our top products.  In addition, most of our life insurance policies contain a policy loan provision, which allows the policyholder to use cash value within a policy to pay premiums.  The policy loan asset balance increased 1.5% in 2019 and 9.6% in 2018 and remains in line with historical levels when compared to policy benefit liabilities.

Net Investment Income.  Net investment income increased 9.8% to $59.5 million in 2019 compared to $54.2 million in 2018, despite a decline in overall market yields. The annualized yield increased by nineteen basis points in 2019 compared to 2018. We have been successful in achieving higher yields while maintaining a prudent risk profile for our portfolio in 2019 despite facing an increasingly challenging investment environment. During the fourth quarter of 2018, we repositioned our portfolio into more diversified holdings and maturities as part of our investment management strategy to improve our portfolio credit quality. In doing so, we increased our purchases of investment grade securities while reducing our municipal holdings. While these purchases improved the overall credit rating of our portfolio, these securities generally have lower yields. In addition, net investment income and the annualized yield on our portfolio were lower during 2018 due to the need to maintain sufficient cash balances to fund our Bermuda novation as previously noted.



December 31, 2019 | 10-K 32


CITIZENS, INC.
 
 
 

Net investment income performance is summarized as follows.

Years ended December 31,
(In thousands, except for %)
2019
 
2018
 
2017
Net investment income
$
59,531

 
54,205

 
53,146

Average invested assets, at amortized cost
1,365,036

 
1,300,755

 
1,233,580

Yield on average invested assets
4.36
%
 
4.17
%
 
4.31
%
 
We have traditionally invested in fixed maturity securities with a large percentage held in callable issues.  In the latter part of 2018, we began a process of repositioning our portfolio into more diversified holdings and maturities as part of our investment management strategy. The sustained low interest rate environment of the past several years has required that we manage a challenging balance of continuing to invest in quality issuers, while attempting to increase our portfolio yield. As part of the ongoing process of managing our portfolio and optimizing performance, we are continuing to identify and consider new asset classes.

Investment income from fixed maturity securities accounted for approximately 87.8% of total investment income for the year ended December 31, 2019 as compared to 87.0% for 2018.

Years ended December 31,
(In thousands)
2019
 
2018
 
2017
Gross investment income:
 
 
 
 
 
Fixed maturity securities
$
53,860

 
49,126

 
48,164

Equity securities
662

 
722

 
708

Policy loans
6,451

 
6,210

 
5,735

Long-term investments
13

 
15

 
87

Other
374

 
409

 
68

Total investment income
61,360

 
56,482

 
54,762

Less investment expenses
(1,829
)
 
(2,277
)
 
(1,616
)
Net investment income
$
59,531

 
54,205

 
53,146


Investment income from fixed maturity securities increased 9.6% in 2019 and 2.0% in 2018. We continue to adjust our investment management strategy to increase our investment yields while maintaining a prudent risk profile. In addition, the increase in the policy loans asset balance, which represents policyholders utilizing their accumulated policy cash value to pay for premiums, contributed to the increase in investment income for 2019.



December 31, 2019 | 10-K 33


CITIZENS, INC.
 
 
 

Realized Gains (Losses) on Investments.  Realized investment gains and losses are as follows:

Years ended December 31,
(In thousands)
2019
 
2018
 
2017
Realized investment gains (losses):
 
 
 
 
 
Sales, calls and maturities:
 
 
 
 
 
Fixed maturities
$
1,927

 
1,792

 
(506
)
Equity securities

 

 
121

Real estate
5,513

 

 
1,110

Property and equipment
(48
)
 
(80
)
 

Realized investment gains
7,392

 
1,712

 
725

Change in fair value of equity securities
962

 
(828
)
 

Other-than-temporary impairments ("OTTI"):
 

 
 

 
 

Fixed maturities

 
(776
)
 

Equity securities

 

 
(207
)
Real estate held for sale
(3,105
)
 

 

Realized losses on OTTI
(3,105
)
 
(776
)
 
(207
)
Net realized investment gains
$
5,249

 
108

 
518

 
In 2019, we recognized a gain of $1.9 million related to the redemption of two fixed maturity securities. We also recorded a realized gain of $5.5 million relating to the sale of our former corporate headquarters. In addition, we recorded realized gains of $1.0 million during 2019 related to fair value changes in our equity securities owned at December 31, 2019. Finally, an impairment loss of $3.1 million was recorded in connection with classifying our Citizens Academy training facility located near Austin, Texas as real estate held for sale. In 2018, realized gains of $1.8 million and realized losses of $0.8 million were recorded related to our fixed maturity and equity portfolios, respectively, along with investment losses recorded from OTTI of $0.8 million relating to fixed maturity securities that we did not intend to hold until recovery in value.


BENEFITS AND EXPENSES
Years ended December 31,
(In thousands)
2019
 
2018
 
2017
Benefits and expenses:
 
 
 
 
 
Insurance benefits paid or provided:
 
 
 
 
 
Claims and surrenders
$
106,827

 
91,103

 
82,905

Increase in future policy benefit reserves
41,712

 
47,947

 
76,029

Policyholders' dividends
6,040

 
6,362

 
6,268

Total insurance benefits paid or provided
154,579

 
145,412

 
165,202

Commissions
34,222

 
34,962

 
41,324

Other general expenses
48,440

 
47,632

 
46,388

Capitalization of deferred policy acquisition costs
(22,255
)
 
(22,695
)
 
(29,120
)
Amortization of deferred policy acquisition costs
28,268

 
34,235

 
29,690

Amortization of cost of insurance acquired
1,546

 
2,458

 
2,129

Total benefits and expenses
$
244,800

 
242,004

 
255,613

 


December 31, 2019 | 10-K 34


CITIZENS, INC.
 
 
 

Claims and Surrenders.  As noted in the table below, claims and surrenders increased 17.3% from $91.1 million in 2018 to $106.8 million in 2019.

chart-5b708c6fbe0a50ce922.jpg
Years ended December 31,
(In thousands)
2019
 
2018
 
2017
Claims and Surrenders:
 
 
 
 
 
Death claims
$
25,100

 
22,598

 
22,773

Surrender expenses
49,293

 
41,176

 
37,192

Endowment benefits
12,247

 
13,341

 
15,134

Matured endowments
15,147

 
9,088

 
2,882

Property claims
1,563

 
1,648

 
1,744

Accident and health benefits
232

 
260

 
310

Other policy benefits
3,245

 
2,992

 
2,870

Total claims and surrenders
$
106,827

 
91,103

 
82,905


Death claims increased 11.1% in 2019 and declined 0.8% in 2018. The increase in 2019 was driven primarily by higher average paid death benefit amounts. The Company monitors death claims based upon expectations, and we reinsure for losses in excess of a threshold level.  These values may routinely fluctuate from year to year.
Policy surrenders increased 19.7% in 2019 and 10.7% in 2018. Surrenders represented less than 1.0% of total direct ordinary whole life insurance in force of $4.7 billion as of December 31, 2019. The increase in surrender expense is primarily related to our international business.  A significant portion of surrenders relates to policies that have been in force over fifteen years and no longer have associated surrender charges.
Matured endowments increased 66.7% in 2019 after tripling in 2018. These increases were anticipated based upon the dates of when our policy endowment contracts were sold and their expected maturities as set forth in their contracts.

Increase in Future Policy Benefit Reserves.  The change in future policy benefit reserves decreased 13.0% in 2019 and 36.9% in 2018. For both years, the decline was due in part to changes in actuarial valuation estimates associated with the conversion to the new actuarial valuation system. These changes resulted in a decrease in reserves of $2.4 million in 2019 and $11.9 million in 2018. The remaining changes in future policy benefit reserves were largely driven by policyholder activity (e.g. premiums, surrenders, etc.). See Note 1. Summary of Accounting Policies in the notes


December 31, 2019 | 10-K 35


CITIZENS, INC.
 
 
 

to our consolidated financial statements for a discussion of the conversion to our new actuarial system and the impact on our reserves.

Policyholder Dividends.  The Company issues long duration participating policies in our Life Insurance segment to foreign residents that are expected to pay dividends based upon actual experience. Initially, policyholder dividend scales are factored into the guaranteed premiums at the time the product is developed, based on expected future experience and desired profit goals. As actual and expected experience develops over time, it can become necessary to adjust dividends in order to maintain long term product profitability. Policyholders' dividends have remained relatively stable at $6.0 million, $6.4 million and $6.3 million in 2019, 2018, and 2017, respectively.

Commissions.  Commission expense for 2019 and 2018 fluctuated directly in relation to the decrease in first year and renewal premiums in both years.

Other General Expenses.  Total general expenses increased 1.7% in 2019 compared to 2018 due primarily to higher long-term incentive compensation expenses in 2019, partially offset by reduced audit fees. General expenses increased 2.7% in 2018, due primarily to additional audit fees related to the 2017 audit, higher legal and consulting fees and higher salaries, partially offset by a decrease in our tax compliance best estimate liability.

We perform an expense study on an annual basis, utilizing an enterprise-wide time study, and we adjust cost allocations among entities as needed based upon this review.  Any allocation changes are reflected in the segment operations, but do not impact total expenses.

Capitalization of DAC.  Capitalized DAC was $22.3 million, $22.7 million and $29.1 million in 2019, 2018 and 2017, respectively.  Decreases in capitalized amounts are in line with the decreases noted in sales activity. These costs will vary based upon successful efforts related to newly issued policies and renewal business.  Significantly lower amounts are capitalized related to renewal business in correlation with the lower commissions paid on that business compared to first year business which has higher commission rates.  

Amortization of DAC. Amortization of DAC totaled $28.3 million, $34.2 million and $29.7 million in 2019, 2018 and 2017, respectively. Year over year changes resulted primarily from the new actuarial system conversion increasing amortization by $3.7 million in 2018 and higher surrender activity, including early duration elections to convert existing policies to reduced paid up ("RPU") or extended term insurance ("ETI") status in 2019 and 2018. There is higher DAC associated with early duration conversions to RPU or ETI, which increases amortization expense. Amortization of DAC is also impacted by persistency and the level of surrenders.
 
Amortization of Cost of Insurance Acquired ("COIA"). Amortization of COIA decreased in 2019 compared to 2018 due primarily to an update in our Home Service Insurance segment expected earned rate assumptions used within annuity models that resulted in a write-down of approximately $0.7 million in 2018.

Federal Income Tax.  Federal income tax expense was $7.1 million, $13.1 million and $35.1 million in 2019, 2018 and 2017, respectively, resulting in effective tax rates of 126.0%, 652.6% and (1,176.9)%, respectively.  Subsequent to the novation, the operations of CICA Ltd. are subject to Subpart F of the IRC and, therefore, is included in Citizens taxable income. The Subpart F income inclusion generated $18.4 million of federal income tax expense in 2018 which was largely driven by the impact of the novation transaction, as compared to $5.9 million in 2019. The increase in tax from Subpart F income was partially offset in 2018 and 2019 by foreign income tax rate differential of $8.1 million and $1.6 million, respectively. The significant change in effective tax rate noted in 2017 is the result of the Tax Cuts and Jobs Act of 2017 (the "Tax Act") enacted at the end of 2017 which resulted in $35.7 million of income tax due to the remeasurement of deferred tax assets. Differences between our effective tax rate and the statutory tax rate result from income and expense items that are treated differently for financial reporting and tax purposes. Refer to Note 9. Income Taxes in the notes to our consolidated financial statements for further discussion.



December 31, 2019 | 10-K 36


CITIZENS, INC.
 
 
 

SEGMENT OPERATIONS

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

Years Ended December 31,
 
2019
 
 
 
2018
 
Amount of
Insurance
Issued
 
Number of
Policies
Issued
 
Average  Policy Face Amount Issued
 
Amount of
Insurance
Issued
 
Number of
Policies
Issued
 
Average  Policy Face Amount Issued
Life Insurance
$
233,503,780

 
3,456

 
$
67,565

 
$
231,142,212

 
3,786

 
$
61,052

Home Service Insurance
158,758,921

 
22,148

 
7,168

 
171,188,227

 
24,308

 
7,042


The number of policies issued decreased 8.7% and 8.9% for the Life Insurance and Home Service Insurance segments in 2019 and 2018, respectively. The decline in the number of new business applications in our Life Insurance segment is driven by ceasing sales in Brazil and terminating agreements with several independent consultants in Latin America who did not align with our vision, values and culture.  Excluding these two factors, the number of policies issued by our international business increased during 2018 and 2019 as we invested heavily in our sales and marketing activities and achieved better alignment with our independent consultants on vision, value and strategy.  While the number of policies issued has declined in the Life Insurance and Home Service Insurance segments during 2019, the average face amount issued has increased, resulting in overall premium income not declining at the same rate as policy issuances.
 
These segments are reported in accordance with U.S. GAAP.  The Company evaluates profit and loss performance based on net income before federal income taxes.

Years ended December 31,
(In thousands)
2019
 
2018
 
2017
Income (Loss) Before Federal Income Taxes:
 
 
 
 
 
Segments:
 
 
 
 
 
Life Insurance
$
11,795

 
12,085

 
5,394

Home Service Insurance
1,181

 
(2,496
)
 
(5,599
)
Total Segments
12,976

 
9,589

 
(205
)
Other Non-Insurance Enterprises
(7,231
)
 
(7,587
)
 
(2,781
)
Total income (loss) before federal income taxes
$
5,745

 
2,002

 
(2,986
)



December 31, 2019 | 10-K 37


CITIZENS, INC.
 
 
 

LIFE INSURANCE

Our Life Insurance segment primarily issues ordinary whole life insurance and endowment policies in U.S. dollar-denominated amounts to foreign residents in more than 20 countries through approximately 1,000 independent marketing consultants.

Years ended December 31,
(In thousands)
2019
 
2018
 
2017
Revenue:
 
 
 
 
 
Premiums
$
137,666

 
141,146

 
150,708

Net investment income
44,779

 
39,985

 
38,578

Realized investment gains (losses), net
6,795

 
358

 
(461
)
Other income
1,412

 
1,833

 
1,061

Total revenue
190,652

 
183,322

 
189,886

Benefits and expenses:
 

 
 

 
 

Insurance benefits paid or provided:
 

 
 

 
 

Claims and surrenders
82,964

 
69,149

 
60,393

Increase in future policy benefit reserves
39,873

 
43,671

 
70,783

Policyholders' dividends
6,004

 
6,316

 
6,226

Total insurance benefits paid or provided
128,841

 
119,136

 
137,402

Commissions
20,128

 
20,079

 
25,760

Other general expenses
23,012

 
18,718

 
18,597

Capitalization of deferred policy acquisition costs
(17,448
)
 
(17,194
)
 
(23,157
)
Amortization of deferred policy acquisition costs
23,832

 
29,915

 
25,295

Amortization of cost of insurance acquired
492

 
583

 
595

Total benefits and expenses
178,857

 
171,237

 
184,492

Income before income tax expense
$
11,795

 
12,085

 
5,394

 
Premiums.  Premium revenues decreased by 2.5% in 2019 compared to 2018 as first year premiums increased 2.1%, while renewal premiums declined by 2.9%. We have invested heavily in our sales and marketing activities in 2019 and achieved better alignment with our independent consultants on vision, value, and strategy. The increase in first year premiums is also partly due to the Company's focus on selling higher average premium policies. Since the first quarter of 2019, we have experienced progressive improvement in our new business production for our international business. For 2018, premiums decreased 6.3% as we experienced declines in both first year and renewal premiums.

Life Insurance premium breakout is detailed below.

Years ended December 31,
(In thousands)
2019
 
2018
 
2017
Premiums:
 
 
 
 
 
First year
$
11,692

 
11,451

 
17,403

Renewal
125,974

 
129,695

 
133,305

Total premium
$
137,666

 
141,146

 
150,708


The Company has taken actions over the past few years to pursue long-term stability that may have negatively impacted sales levels, including reducing discretionary dividends on existing international policies in response to the sustained low interest environment. In addition, in 2017, the Company introduced a set of repriced products in response to the continued low interest rate environment. These measures resulted in more expensive policies for our customers and


December 31, 2019 | 10-K 38


CITIZENS, INC.
 
 
 

likely negatively impacted our new sales. Also, in April 2018, in connection with the review of our international business model, we discontinued accepting new life insurance applications from Brazilian citizens or residents. Brazil had been one of our top premium-producing countries in our international life insurance business for the past several years. Finally, Venezuela, which has historically been one of our more critical markets, has experienced prolonged economic and social turmoil, which has negatively impacted our sales in the country, decreasing approximately 10% in both 2019 and 2018.

Endowment sales represent a significant portion of our new business sales internationally and totaled approximately $9.3 million, $10.4 million and $13.3 million, representing approximately 79.5%, 90.8% and 76.4% of total first year premiums in 2019, 2018, and 2017, respectively.

Most of our life insurance policies contain a policy loan provision, which allows the policyholder to use the accumulated cash value of a policy to pay premiums.  These accumulated cash values can also be taken as a cash loan from the policy at the request of the policyholder and are secured by the policy values. The policy loan asset balance increased 1.3% from 2018 to 2019 and remains at the same approximate ratio to life reserves as noted in prior years.

The following table sets forth, by country, our direct premiums from our international life insurance business for the periods indicated.

chart-c11bd49de3755b11ae7.jpg
Years ended December 31,
(In thousands, except for %)
2019
 
2018
 
2017
Country:
 
 
 
 
 
 
 
 
 
 
 
Colombia
$
26,768

 
20.1
%
 
$
27,605

 
20.0
%
 
$
29,200

 
20.0
%
Venezuela
22,353

 
16.8

 
24,783

 
18.0

 
27,997

 
19.2

Taiwan
19,403

 
14.6

 
18,888

 
13.7

 
19,535

 
13.4

Ecuador
14,198

 
10.6

 
15,187

 
11.0

 
16,440

 
11.3

Argentina
10,069

 
7.6

 
9,953

 
7.2

 
10,534

 
7.2

Other Non-U.S.
40,562

 
30.3

 
41,309

 
30.1

 
42,268

 
28.9

Total
$
133,353

 
100.0
%
 
$
137,725

 
100.0
%
 
$
145,974

 
100.0
%
 
Sales from Colombia, Venezuela and Taiwan represented the majority of the new business premiums in 2019, 2018 and 2017. Overall, three of our top five countries listed above experienced a decline in premium levels from 2018 to 2019, with Venezuela leading the decline. While overall premiums declined in 2019 compared to 2018 due to a decrease in renewal premiums, first year premiums increased during the period. Our international business and premiums 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 where we accept applications. In addition, marketing or operational changes made by the Company to comply with those laws or regulations may adversely impact our


December 31, 2019 | 10-K 39


CITIZENS, INC.
 
 
 

financial performance. 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.

The following table sets forth our direct premiums by state from our domestic business for the periods indicated.
chart-52a7a05514b1530185a.jpg
Years ended December 31,
(In thousands, except for %)
2019
 
2018
 
2017
State
 
 
 
 
 
 
 
 
 
 
 
Texas
$
1,994

 
32.4
%
 
$
1,753

 
27.8
%
 
$
2,096

 
30.3
%
Indiana
1,008

 
16.4

 
1,150

 
18.2

 
1,198

 
17.3

Florida
768

 
12.5

 
834

 
13.2

 
802

 
11.6

Missouri
395

 
6.4

 
414

 
6.6

 
444

 
6.4

Louisiana
270

 
4.4

 
272

 
4.3

 
260

 
3.8

Other States
1,719

 
27.9

 
1,879

 
29.9

 
2,109

 
30.6

Total premiums
$
6,154

 
100.0
%
 
$
6,302

 
100.0
%
 
$
6,909

 
100.0
%
 
We discontinued new sales of domestic ordinary whole life and endowment life insurance products within our Life Insurance segment in 2017 while we evaluate our domestic life strategy; therefore, the majority of the premium recorded in 2017, 2018 and 2019 is related to renewal business. The increase in premiums in Texas from 2019 to 2018 is due to increased accident and health sales.

Net Investment Income.  Net investment income increased 12.0% in 2019 compared to 2018 due to continued growth in average invested assets, improvements in cash management, and a strategic focus on increasing portfolio yields in a prudent manner. Despite facing a difficult investment environment in 2019, our strong focus on the execution of our investment strategy to increase yield drove an increase in portfolio yield of 24 basis points in this segment compared to 2018. Both net investment income and portfolio yield were negatively impacted in 2018 by the need to maintain sufficient cash balances to fund our Bermuda novation, as noted previously. See the Investments section below for more detailed information on our investments.

Years ended December 31,
(In thousands, except for %)
2019
 
2018
 
2017
Net investment income
$
44,779

 
39,985

 
38,578

Average invested assets, at amortized cost
1,016,055

 
958,135

 
890,705

Annualized yield on average invested assets
4.41
%
 
4.17
%
 
4.33
%



December 31, 2019 | 10-K 40


CITIZENS, INC.
 
 
 

Realized Investment Losses, Net.  The realized gains for 2019 were primarily due to a $5.5 million realized gain from the sale of our former corporate headquarters in Austin, Texas. We also recorded a $1.3 million gain on fixed maturity redemptions above par. In 2018, we recognized losses on other-than-temporary impairments totaling $0.5 million in our fixed maturity portfolio for this segment.

Claims and Surrenders. A breakout of claims and surrender benefits is detailed below.
chart-75a6ebb680695b3896c.jpg
Years ended December 31,
(In thousands)
2019
 
2018
 
2017
Claims and Surrenders:
 
 
 
 
 
Death claims
$
6,710

 
5,880

 
5,530

Surrender expenses
46,062

 
38,187

 
34,275

Endowment benefits
12,233

 
13,329

 
15,117

Matured endowments
14,601

 
8,548

 
2,364

Accident and health benefits
128

 
229

 
253

Other policy benefits
3,230

 
2,976

 
2,854

Total claims and surrenders
$
82,964

 
69,149

 
60,393


Death claims expense increased 14.1% in 2019 compared to 2018 and 6.3% in 2018 compared to 2017. The increase in 2019 was driven primarily by higher average paid death benefit amounts. While death claim amounts are subject to variation from period to period, they are monitored closely by the Company.
We noted increases in surrender expense over the last several years, which is primarily related to activity in Colombia and Venezuela and is expected to increase over time due to the aging of this block of business and the larger distribution of in force business in these two top countries.  Most of our policy surrender benefits paid are attributable to our international business and are related to policies that have been in force over fifteen years, when surrender charges are no longer assessed.
Endowment benefit expense primarily results 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, and thus this expense will vary with new sales and the persistency of the business.
Matured endowments increased 70.8% in 2019 compared to 2018 after increasing 261.6% in 2018 compared to 2017. We anticipate this trend will continue as previous endowments products sold reach their stated maturity.
Other policy benefits relate primarily to interest paid on premium deposits and policy benefit accumulations.



December 31, 2019 | 10-K 41


CITIZENS, INC.
 
 
 

Increase in Future Policy Benefit Reserves.  Changes in policy benefit reserves were lower in 2019 compared to 2018 due to the impact of increased surrender and maturity activity and lower premiums compared to 2018. The conversion to a new actuarial valuation system resulted in a decrease in reserves of $11.9 million in 2018 compared to 2017. The conversion to a new actuarial valuation system in 2018 helped offset the impact of increased surrender and maturity activity and lower premiums compared to 2017.

Policyholder Dividends.  Policyholders' dividends decreased 4.9% and increased 1.4% in 2019 and 2018, respectively. Policyholders’ dividends are impacted by changes in persistency and production. The Company issues long duration participating policies to foreign residents that are expected to pay dividends to policyholders based upon actual experience.  The boards of our life insurance companies approve any dividends on an annual basis and may change the dividend rates as needed for business purposes.

Commissions.  Commission expenses increased 0.2% from 2018 to 2019 in line with the increase in first year premiums. Commission expense increases or decreases are directly related to increases or decreases in premiums.  First year policy premiums pay a higher commission rate than renewal policy premiums.

Other General Expenses.  Expenses increased 22.9% to $23.0 million in 2019 compared to 2018 and 0.7% to $18.7 million in 2018 compared to 2017. The increase in expense in 2019 was due in part to the reduction in the 7702 tax compliance estimated costs recorded in 2018, which resulted in lower expenses during 2018. We also had lower audit fees which were offset by additional costs related to salaries, bonuses and other compensation in 2019. Expenses are allocated by segment, based upon an annual expense study performed by the Company.

Capitalization and Amortization of DAC.  Capitalized costs fluctuate in direct relation to commissions. Capitalized costs increased in 2019 compared to 2018 as commission-related costs increased due to higher first year sales levels.  Amortization of DAC decreased by 20.3% in 2019 compared to 2018, as amortization costs in 2018 were increased by $3.7 million due to the impact of the conversion to a new actuarial valuation system. Amortization costs fluctuate with changes in first year premium activity, surrenders, and persistency. As previously described, persistency is closely monitored by the Company. We have experienced increased surrender activity in 2019 and 2018, including early duration elections to convert to reduced paid-up policies or extended term insurance as compared to 2017. There is higher DAC associated with early duration conversions to reduced paid-up policies or extended term insurance, which, when converted, increases amortization expense.



December 31, 2019 | 10-K 42


CITIZENS, INC.
 
 
 

HOME SERVICE INSURANCE

Our Home Service Insurance segment provides pre-need and final expense ordinary life insurance and annuities to middle and lower income individuals primarily in Louisiana, Mississippi and Arkansas.  Our policies in this segment are sold and serviced through a home service marketing distribution system and through funeral homes utilizing over 444 employees and independent agents.
 
Years ended December 31,
(In thousands)
2019
 
2018
 
2017
Revenue:
 
 
 
 
 
Premiums
$
46,681

 
46,714

 
47,012

Net investment income
13,058

 
13,125

 
13,132

Realized investment gains (losses), net
1,470

 
(46
)
 
979

Other income (loss)
4

 
(1
)
 
3

Total revenue
61,213

 
59,792

 
61,126

Benefits and expenses:
 

 
 

 
 

Insurance benefits paid or provided:
 
 
 

 
 

Claims and surrenders
23,863

 
21,954

 
22,512

Increase in future policy benefit reserves
1,839

 
4,276

 
5,246

Policyholders' dividends
36

 
46

 
42

Total insurance benefits paid or provided
25,738

 
26,276

 
27,800

Commissions
14,094

 
14,883

 
15,564

Other general expenses
19,517

 
20,435

 
23,395

Capitalization of deferred policy acquisition costs
(4,807
)
 
(5,501
)
 
(5,963
)
Amortization of deferred policy acquisition costs
4,436

 
4,320

 
4,395

Amortization of cost of insurance acquired
1,054

 
1,875

 
1,534

Total benefits and expenses
60,032

 
62,288

 
66,725

Income (loss) before income tax expense
$
1,181

 
(2,496
)
 
(5,599
)
 
Premiums.  The premiums in this segment remained relatively flat in 2019 compared to 2018 and 2017.

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

Years ended December 31,
(In thousands, except for %)
2019
 
2018
 
2017
State
 
 
 
 
 
 
 
 
 
 
 
Louisiana
$
42,867

 
90.2
%
 
$
42,898

 
90.2
%
 
$
42,837

 
89.6
%
Mississippi
2,037

 
4.3

 
2,105

 
4.4

 
2,369

 
5.0

Arkansas
1,660

 
3.5

 
1,675

 
3.5

 
1,716

 
3.6

Other States
938

 
2.0

 
857

 
1.9

 
906

 
1.8

Total premiums
$
47,502

 
100.0
%
 
$
47,535

 
100.0
%
 
$
47,828

 
100.0
%
 
Net Investment Income.  Net investment income decreased slightly in 2019 as a fall in yields and an increase in investment expenses offset a slight increase in average invested assets. As previously described, it has been challenging to find attractive yields in the current low interest rate environment. See Investments below for more detailed information on our investments.



December 31, 2019 | 10-K 43


CITIZENS, INC.
 
 
 

Net investment income yield for our Home Service Insurance segment is summarized as follows:

Years ended December 31,
(In thousands, except for %)
2019
 
2018
 
2017
Net investment income
$
13,058

 
13,125

 
13,132

Average invested assets, at amortized cost
293,497

 
290,443

 
289,634

Annualized yield on average invested assets
4.45
%
 
4.52
%
 
4.53
%

Realized Investment Gains (Losses), Net.  Realized net gains for 2019 were primarily related to equity securities fair value adjustments of $0.8 million, as financial markets generally performed well during 2019. In addition, we recognized a gain of $0.7 million in 2019 related to fixed maturity redemptions above par value.

Claims and Surrenders.  A breakout of claims and surrender benefits is detailed below.

Years ended December 31,
(In thousands)
2019
 
2018
 
2017
Claims and Surrenders:
 
 
 
 
 
Death claims
$
18,390

 
16,718

 
17,243

Surrender expenses
3,231

 
2,988

 
2,917

Endowment benefits
14

 
12

 
17

Matured endowments
546

 
541

 
518

Property claims
1,563

 
1,648

 
1,744

Accident and health benefits
104

 
31

 
56

Other policy benefits
15

 
16

 
17

Total claims and surrenders
$
23,863

 
21,954

 
22,512


Death claims expense increased 10.0% in 2019 compared to 2018 after declining in 2018. Death claims can fluctuate from year to year. In 2019, we experienced higher average paid death benefit amounts. Mortality experience is closely monitored by the Company as a key performance indicator and these amounts were within expected levels.
Surrender expenses increased in 2019, but were within anticipated ranges based on management expectations.
Property claims decreased in 2019 compared to 2018, and in 2018 compared to 2017, as we experienced relatively favorable weather in 2019 and 2018.

Increase in Future Policy Benefit Reserves.  The decrease in change in reserves is primarily due to changes in actuarial valuation estimates associated with the conversion to the new actuarial valuation system in 2019 that resulted in a decrease in reserves of $2.4 million compared to 2018.

Commissions.  Commission expense decreased in 2019 and 2018, which was in line with the premium levels and was consistent for all three periods presented based upon fluctuations in premiums collected.

Other General Expenses.  Expenses decreased 4.5% in 2019 and 12.7% in 2018 compared to prior periods. Expenses for 2019 were lower as a decline in audit fees which offset higher salaries, bonuses and other compensation. Expenses are allocated by segment, based upon an annual expense study performed by the Company. Expenses in 2017 were higher due to the impairment of our Home Service Insurance goodwill, which resulted in an increase in expenses of $4.6 million.

Capitalization and Amortization of DAC.  DAC capitalization declined in 2019 as it is directly correlated to fluctuations in first year commissions.  Amortization of DAC was relatively flat in 2019 and 2018.  



December 31, 2019 | 10-K 44


CITIZENS, INC.
 
 
 

Amortization of Cost of Insurance Acquired. Amortization decreased in 2019 mainly due to an annual review and true up performed in the first quarter of 2019. Amortization increased in 2018 compared to 2017 due to an update in our assumptions that resulted in an adjustment of approximately $0.7 million.
 
OTHER NON-INSURANCE OPERATIONS

This operating unit represents the administrative support entities to the insurance operations whose revenues are primarily intercompany and have been eliminated in consolidation under U.S. GAAP, which typically results in a segment loss. Losses reported for 2019 were impacted by the impairment of the Citizens Academy training facility property. In 2018, higher expenses included long-term compensation and increased audit fees as discussed in the segment analysis.

INVESTMENTS

The administration of our investment portfolios is handled by our management and, since May 2018, a third-party investment manager, pursuant to Board-approved investment guidelines, with all trading activity approved by each board of Citizens and its insurance subsidiaries.  The guidelines used require that fixed maturities, both government and corporate, are investment grade and comprise a majority of the investment portfolio.  State insurance statutes prescribe the quality and percentage of the various types of investments that may be made by insurance companies and generally permit investment 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 assets are intended to mature in accordance with the average maturity of the insurance products and to 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, and the percentage of each to total invested assets.

Years ended December 31,
(In thousands, except for %)
2019
 
%
 
2018
 
%
Cash, Cash Equivalents and Investments:
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
U.S. Treasury and U.S. Government-sponsored enterprises
$
15,878

 
1.0
%
 
$
15,554

 
1.1
%
Corporate
650,088

 
42.6

 
381,796

 
27.5

Municipal bonds (1)
536,284

 
35.1

 
720,115

 
52.0

Mortgage-backed (2)
131,387

 
8.6

 
108,698

 
7.8

Asset-backed
44,203

 
2.9

 
4,757

 
0.3

Foreign governments
119

 

 
119

 

Total fixed maturity securities
1,377,959

 
90.2

 
1,231,039

 
88.7

Short-term investments
1,301

 
0.1

 
7,865

 
0.6

Cash and cash equivalents
46,205

 
3.0

 
45,492

 
3.3

Other investments:
 

 
 
 
 

 
 
Policy loans
82,005

 
5.4

 
80,825

 
5.8

Equity securities
16,033

 
1.1

 
15,068

 
1.1

Real estate and other long-term investments
2,956

 
0.2

 
7,409

 
0.5

Total cash, cash equivalents and investments
$
1,526,459

 
100.0
%
 
$
1,387,698

 
100.0
%
(1) Includes $188.1 million and $220.6 million of securities guaranteed by third parties for the years ended December 31, 2019 and 2018, respectively.
(2) Includes $130.1 million and $108.5 million of U.S. Government agencies and government-sponsored enterprises for the years ended December 31, 2019 and 2018, respectively.



December 31, 2019 | 10-K 45


CITIZENS, INC.
 
 
 

The Company significantly increased investments in mortgage-backed securities in the latter part of 2018, which now represent 8.6% of our cash, cash equivalents, and investment portfolio as of December 31, 2019. We also began a process of repositioning our portfolio into more diversified holdings and maturities as part of our investment management strategy in the latter part of 2018. The Company has also decreased its exposure to the municipal bond market, which now represents 35.1% of the investment portfolio in 2019 compared to 52.0% in 2018.

At December 31, 2019, investments in fixed maturity and equity securities were 91.3% of our total cash, cash equivalents and investments.  All of our fixed maturities were classified as available-for-sale securities at December 31, 2019 and 2018.  We had no fixed maturity or equity securities that were classified as trading securities at December 31, 2019 or 2018.

The following table shows annualized investment yields by segment operations as of December 31 for each year presented.
 
Year
 
Life
Insurance
 
Home
Service Insurance
 
Consolidated
2019
 
4.41
%
 
4.45
%
 
4.36
%
2018
 
4.17
%
 
4.52
%
 
4.17
%
2017
 
4.33
%
 
4.53
%
 
4.31
%

Yields on investment assets vary between segment operations due to different portfolio mixes and durations in the segments.  Our annualized yield on average invested assets on the consolidated level increased 19 basis points in 2019 compared to 2018, primarily driven by the Life Insurance segment and maintaining sufficient cash balances in 2018 to fund our Bermuda novation.

The annualized yield decreased in 2018 compared to 2017 due to the decrease in investment income as make-whole calls declined compared to prior years. These calls resulted in $0.7 million of additional net income in 2017, all of which related to the Life Insurance segment, providing additional net income in 2017. A make-whole call provision in the bond instruments allows the borrower to pay off the debt early and, in doing so, incur make-whole premiums. This option was elected by borrowers on some of our bond issues as noted.

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 and Fitch Ratings.  A credit rating assigned by a NRSRO is a quality based rating, with AAA representing the highest quality and D the lowest, with BBB and above being considered investment grade.  In addition, the Company may use credit ratings of the 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 a NRSRO are included in the "other" category.

The following table shows the distribution of the credit ratings of our portfolio of fixed maturity securities by carrying value.

December 31,
(In thousands, except for %)
2019
 
%
 
2018
 
%
AAA
$
56,977

 
4.1
%
 
$
96,333

 
7.8
%
AA
513,190

 
37.2

 
551,978

 
44.8

A
385,345

 
28.0

 
281,553

 
22.9

BBB
406,515

 
29.5

 
277,584

 
22.6

BB and other
15,932

 
1.2

 
23,591

 
1.9

Totals
$
1,377,959