Table of Contents CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES • 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 permanent executive salaries and temporary salaries, offset by a decrease in our tax compliance best estimate liability. In 2017, we recognized a $4.6 million impairment of our Home Service goodwill, reducing it down to zero. • Amortization of deferred policy acquisition expenses increased from $29.7 million at December 31, 2017 to $34.2 million at December 31, 2018 primarily due to the AXIS actuarial system conversion impacting amortization by $3.7 million in 2018 and higher surrender activity. 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 adjustment 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 life 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. Premiums in this segment decreased slightly in 2018 compared to 2017, as renewal premiums and first year premiums decreased. We noted slight increases in 2017 compared to 2016 which were driven by renewal premiums. Significant economic issues impacting our business and industry currently and into the future are discussed below. Economic and Insurance Industry Developments • Slow increases in the interest rate environment will 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 income investment portfolio, primarily invested in callable securities, has been reinvested at lower yields. The Company’s conservative investment strategy has not changed, but we have focused new investments into securities of state, municipalities, essential services and corporate issuers compared to our historical investment in U.S. government holdings. Our investment earnings also impact the reserve and deferred policy acquisition costs ("DAC") balances, as assumptions are used in the development of the balances. Due to the recent decline in investment yields on our portfolio, our projection of long-term investment returns has declined. This has resulted in increasing the reserves on policies issued in the current year, as well as reducing the DAC asset. • 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. • There has been a trend toward consolidation of domestic life insurance companies, due to significant losses incurred by the life insurance industry as a result of the low interest rate environment and related economic pressures, as well as increasing costs of regulatory compliance for domestic life insurance companies. • 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 32