What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-03-10 compared with 2020-03-11 · 554 added, 491 removed, 370 unchanged (74% of the section changed)

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 2020 and 2019 items and year-to-year comparisons between 2020 and 2019.

Discussions of 2018 items and year-to-year comparisons between 2019 and 2018 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, 2019.

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;

final expense;

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;

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

For over 45 years, we have been meeting the needs of our policyholders and their families by providing insurance products that provide both living and death benefits.

Citizens conducts operations through its insurance subsidiaries, who provide benefits to residents in 31 U.S.

states and more than 75 different countries.

We specialize in offering primarily ordinary whole life insurance, endowment products and final expense insurance in niche markets where we believe we can achieve competitive advantages.

Beginning in 2017, we endeavored to transform Citizens, setting the course for a sustainable future.

We took clear and decisive actions to improve internal controls, remediate weaknesses in our financial and operational structures and redefine our culture.

We assessed the strength of our people, products and operations.

Based on clearly defined values and priorities, we made the hard decisions to recruit new talent, exit unprofitable or undesirable markets, realign our distributors and improve the profitability of our product offerings.

As an insurance provider, we collect premiums on an ongoing basis from our policyholders and invest the majority of the premiums to pay future benefits, including claims and surrenders and policyholder dividends.

Accordingly, the Company derives its revenues principally from:

(1) life insurance premiums earned for insurance coverages provided to insureds in our two operating segments – Life Insurance and Home Services Insurance;

and (2) net investment income.

In addition to paying and reserving for insurance benefits that we pay to our policyholders, our expenses consist primarily of the costs of selling our insurance products (e.g., commissions, underwriting, marketing expenses), operating expenses and income taxes.

2020 Highlights

2020 was a challenging year.

As the COVID-19 pandemic spread across the world and changed behavior and economic patterns, as described in Part I, Item 1.

Business under “Strategic Initiatives”, we focused on pivoting our business to a more virtual model while executing on our growth initiatives that build on our expertise.

We did this while navigating through significant internal and external disruptions, uncertainties and challenges including a change in control, the resignation of our former chief executive officer and appointment of an interim chief executive officer, litigation in Colorado brought by the Foundation, as our former controlling shareholder, against the Company and our Board of Directors following the change in control, and the global pandemic.

These topics are discussed in more detail under Part I.

Business and Part I, Item 3.

Legal Proceedings of this Annual Report on Form 10-K.

During 2020, we reported a net loss of $11.0 million, compared to a net loss of $1.4 million in 2019.

The increase in net loss in 2020 was primarily driven by $10.0 million of general expenses related to executive severance costs and professional fees incurred in connection with the change in control of the Company.

Expenses related to the change in control in 2020 include (i) a severance payment of $8.8 million to a Rabbi Trust for the benefit of our former Chief Executive Officer, Geoffrey Kolander, following his resignation pursuant to the terms of his employment agreement and the Chief Executive Officer Separation of Service and Consulting Agreement dated July 29, 2020 (the “Separation and Consulting Agreement”), and (ii) $1.2 million of expenses related to the accelerated vesting of Mr.

Kolander’s Restricted Stock Units following his resignation upon the change in control pursuant to his employment agreement and Separation and Consulting Agreement.

Legal fees related to the litigation brought by the Foundation against the Company and its Board of Directors in Colorado also contributed to increased general expenses during 2020.

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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.

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

While our first-year premiums in the fourth quarter of 2020 in our Life Insurance segment were 75% higher than first year premiums in the third quarter of 2020 and 15% higher than first year premiums in the fourth quarter of 2019, premiums decreased by $9.0 million during 2020 as compared to 2019.

We believe that our overall sales in the Life Insurance segment for 2020 were negatively impacted by the COVID-19 pandemic.

First year premiums in our Home Service Insurance segment were also negatively impacted by the COVID-19 pandemic as we stopped our door-to-door selling for two months while we pivoted to more virtual selling methods.

Our renewal premiums in the Life Insurance segment were negatively impacted by higher levels of surrenders, which we believe was due to not only an aging block of business (i.e., maturities and surrenders of products where the surrender charges are close to expiring or have expired) and our decision to cease issuing new policies in Brazil in 2017 (where we see many policies lapsing), but also by economic circumstances in Latin America.

At December 31, 2020, we had $1.8 billion in total assets, an increase from $1.7 billion at December 31, 2019, and we had $34.1 million in cash.

We did not have any debt at December 31, 2020.

Revenue Highlights

As discussed above, insurance premiums and investment income are our primary sources of revenue.

• Insurance premiums declined 4.9% in 2020 compared to 2019, totaling $175.3 million and $184.3 million, respectively, driven by lower first year and renewal premiums in our Life Insurance segment.

• Net investment income increased 1.1% in 2020 compared to 2019, totaling $60.2 million and $59.5 million, respectively, driven by a growing asset base derived from cash flows from our insurance operations, which was partially offset by higher investment expenses from diversification of our investment portfolio into private equity investments.

The average yield on our consolidated investment portfolio was 4.24% (annualized rate) for 2020 compared to 4.36% (annualized rate) for 2019, a decline of twelve basis points, as we faced a challenging investment environment for fixed maturity securities in 2020.

• Lower realized investment gains in 2020 were primarily a function of a recorded net gain in 2019 of $2.4 million net of real estate sales and impairment losses and $2.0 million of realized gains in 2019 related to tender offers for fixed maturity securities.

Benefits and Expenses Highlights

The primary use of our funds is payment of insurance benefits.

Total insurance benefits paid or provided in 2020 increased by 1.3%, from $154.6 million in 2019, to $156.7 million in 2020.

This expense consists primarily of the following:

• Claims and surrender benefits, which increased 13.4% in 2020 compared to 2019.

This increase was primarily due to an increase in surrender benefits and matured endowments in the Life Insurance segment, due primarily to the aging block of business and other economic circumstances.

• Increase in future policy benefit reserves, which decreased 28.3% in 2020 compared to 2019.

Future policy benefit reserves decreased due to the lower in force block of business.

The other primary use of funds are the costs of selling our insurance products (e.g., commissions, underwriting, marketing expenses) and general expenses.

These costs increased in 2020 primarily due to an increase in general expenses, which rose 10.8% in 2020 compared to 2019, driven by the change in control and executive severance expenses as described above.

Our general expenses in 2020 benefited from a $2.2 million reduction in our 7702 tax compliance best estimate liability from the estimate at year end 2019.

The increase in general expenses was also offset by a reduction in costs directly related to the selling of our insurance products, including commissions and capitalization of deferred policy acquisition costs, which decreased in 2020 compared to 2019, as they are directly related to premium production, and primarily first year premium production, which declined in 2020.

ECONOMIC AND INSURANCE INDUSTRY DEVELOPMENTS

While it is difficult to quantify the full impact that the COVID-19 pandemic has had on our business and industry in 2020, as we have previously disclosed, our results of operations for the year ended December 31, 2020 were negatively impacted by the COVID-19 pandemic in the U.S.

and other countries where we do business.

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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.

COVID-19 pandemic primarily negatively impacted our product sales (and thus first year premium revenue), and our claims and surrender benefits.

We describe throughout this discussion in more detail areas of our results in which we believe our business may have been impacted by the COVID-19 pandemic.

As described above, we have implemented operational changes and sales practices to mitigate the impact of the COVID-19 pandemic on our business.

Because the COVID-19 pandemic continues to cause quarantines, “stay-at-home” orders and similar mandates for many individuals and businesses requiring them to substantially restrict daily activities and to curtail or cease normal operations globally where we do business, and because of slower-than-expected implementation of COVID-19 vaccines and treatment therapies, we continue to foresee some adverse impact to near-term sales activity and premiums, especially in Latin America, as well as potential continued impact to claims, policy benefits, invested assets and regulatory capital.

We continue to closely monitor developments related to the COVID-19 pandemic to assess its impact on our future results and business.

For an additional discussion of the potential impacts on our business from the COVID-19 pandemic, see Part I, Item 1A – Risk Factors , in this Annual Report on Form 10-K.

Additionally, we continue to be impacted by the following significant economic issues and other developments impacting our business and industry, including the following:

• Sustained Low Interest Rate Environment.

Market interest rates are a key driver of our results.

Persistent low interest rates are identified as a major threat for life insurance companies, given their rate-sensitive products and investments.

The sustained low interest rate environment continues to limit increases in profit margins for life insurers by:

◦ Reducing the spread between guaranteed interest rates credited to policyholders and interest earned on supporting assets;

◦ Causing us to reinvest proceeds in lower yielding assets as our fixed maturity investment portfolio, which is primarily invested in callable securities, are called and must be reinvested;

◦ Potentially requiring us to increase our reserves or trigger loss recognition events related to policy liabilities, accelerate amortization of DAC and COIA, and potentially impair intangible assets;

◦ Making our products less attractive (due to lower credited interest rates), resulting in lower sales;

◦ Changing policyholder behavior, including increasing surrender or withdrawal activity.

Although our investment strategy has not changed, the Company has attempted to mitigate the risk of the low interest rate environment by making new investments in securities of states, municipalities, essential services and corporate issuers as well as 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.

• Aging population.

According to data from the United Nations, "World Population Prospects:

the 2019 Revision", virtually every country in the world is experiencing growth in the number and proportion of older persons in their population.

As an increasing percentage of the world population reaches retirement age, we believe there will be a greater need for age-related products and 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.

However, as the population reaches retirement age, policyholders may decide to use their accumulated cash value for cash needed in retirement, thus increasing surrenders of long-term products.

• Availability of Reinsurance.

Reinsurance market dynamics including increased pricing, years of accumulating catastrophic losses, investment market losses and the significant losses expected from the fallout of the COVID-19 pandemic have led to a decline in the availability of reinsurance, tighter terms (such as, for example, pandemic exclusions) and/or increased reinsurance prices.

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.

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• Technology Adoption.

Innovation and digital development strategies continue to evolve and impact all industries, including the insurance industry.

The COVID-19 pandemic has forced companies to virtualize their operations, almost overnight.

It is critical that we embrace these changes for the benefit of our policyholders, agents, employees and stockholders.

• Global Operations.

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 increased enforcement efforts by foreign governments, along with currency controls affecting our foreign resident insureds, could adversely impact our revenues, results of operations and financial condition.

Our Operating Segments

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.

For over 45 years, CICA Life Insurance Company of America ("CICA") and its predecessors have issued U.S.

dollar-denominated ordinary whole life insurance and endowment policies to non-U.S.

We completed a novation of all of the international policies issued by CICA to CICA Life Ltd.

("CICA Ltd."), our Bermuda-based insurer, effective July 1, 2018.

We distribute our international insurance products through independent marketing organizations and their agents located in the countries in which our policyholders reside.

Endowment product sales are the primary driver of sales in this segment.

The twenty-year endowment is our top selling product, followed by an endowment product that matures at age sixty-five.

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.

As we discussed in I tem 1.

Business - Strateg ic Initiatives , we will introduce, beginning in Florida, our domestic products and distribution in early 2021.

The majority of our current 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.

Our policies in this segment are sold and serviced through a home service marketing distribution system utilizing independent 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.

To a much lesser extent, our Home Service Insurance segment also sells limited liability named-peril property policies covering dwellings and content.

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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.

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.

Our insurance operations are the primary focus of the Company, as those operations generate most of our income.

The total dollar amount of insurance issued, number of policies issued, and average face amounts of policies issued in 2020 and 2019 are shown below.

Years Ended December 31, 2020 2019

Issued Number of

Issued Average Policy Face

Amount Issued Amount of

Issued Number of

Issued Average Policy Face

Amount Issued

Life Insurance $ 219,902,799 3,419 $ 64,318 $ 233,503,780 3,456 $ 67,565

Home Service Insurance 134,270,147 24,920 5,388 158,758,921 22,148 7,168

Total $ 354,172,946 28,339 $ 392,262,701 25,604

We issued $354.2 million in insurance face amounts in 2020 as compared to $392.3 million in 2019.

As discussed above, our first-year sales were impacted by the COVID-19 pandemic.

We issued 28,339 new policies in 2020, as compared to 25,604 new policies in 2019.

The increase was driven by policies issued by our Home Service Insurance segment, which have a significantly lower face value than policies issued in our Life Insurance segment.

The number of policies issued in the Life Insurance segment decreased 1.1% in 2020 compared to 2019.

While the total number of new business applications for our Life Insurance segment decreased during 2020 compared to 2019, the number of applications progressively increased during the second half of the year.

In the third quarter, new policies issued increased 53% from the second quarter while fourth quarter policies issued increased 36% from the third quarter.

The increase in applications was primarily due to enhancements to our business operations and sales practices to account for the impact of the COVID-19 pandemic, including sales promotions and campaigns, focused training on virtual selling and strategically prioritizing selling lower face amount policies, which typically have less stringent underwriting requirements and, in some cases, may not require the completion of medical tests, as many of our markets remain in lockdown due to the COVID-19 pandemic.

Although applications increased during the third and fourth quarters, due to these enhancements, average policy face amount declined by 4.8% and the amount of insurance issued declined by 5.8% during 2020 compared to 2019 for the Life Insurance segment.

The number of policies issued in the Home Service Insurance segment increased 12.5% in 2020 compared to 2019.

The increase in new business applications in our Home Service segment was driven primarily by the introduction of a new sales campaign targeted at existing policyholders in the third quarter that emphasized higher volume selling at lower average face amounts.

In doing so, we focused on sales of additional benefits for our existing policyholders, which have lower face values, thus leading to a 24.8% decline in average policy face values and a 15.4% decline in amount of insurance issued as compared to 2019.

Despite the increase in policies issued in 2020, our Home Service Insurance segment continued to be negatively impacted by the COVID-19 pandemic.

We had temporary office closures in Louisiana during the second and third quarters due to the COVID-19 pandemic and Hurricane Laura, and we also curtailed the sales of certain product offerings that require extensive person-to-person sales interaction due to the COVID-19 pandemic.

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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.

Revenues are primarily generated from insurance premium revenues and investment income on invested assets.

Years ended December 31,

(In thousands)

2020 2019 2018

Life insurance $ 170,328 178,351 181,825

3 unchanged sentences

Realized investment gains 1,502 5,249 108

Other income 1,828 1,418 1,833

Total revenues $ 238,856 250,545 244,006

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.

Premium income derived from life, accident and health, and property insurance sales decreased 4.9% during 2020 compared to 2019.

The decrease in 2020 was driven primarily by a decline in renewal and first year premiums in our Life insurance segment as discussed in "2020 Highlights".

Years ended December 31,

(In thousands)

2020 2019 2018

First year $ 15,972 17,508 17,639

Renewal 159,357 166,839 170,221

Total premiums $ 175,329 184,347 187,860

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.

As discussed in “2020 Highlights”, we believe that our consolidated first year premium revenue was negatively impacted by the COVID-19 pandemic.

The decrease in renewal premiums in our Life Insurance segment resulted from a decline in our in force business in this segment over the past few years, which is due in part to changes we made to our products and distribution.

Renewal premiums in our Home Services segment were strong but were negatively impacted by catastrophic reinsurance premiums paid in the second half of 2020, as described below.

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.

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CITIZENS, INC.

Net investment income increased 1.1% to $60.2 million in 2020 compared to $59.5 million in 2019 driven by a growing asset base derived from cash flows from our insurance operations.

The annualized yield decreased by twelve basis points in 2020 compared to 2019 as we continue to face a challenging investment environment for fixed maturity assets, which account for the majority of our investment portfolio.

Net investment income performance is summarized as follows.

1 unchanged sentence

(In thousands, except for %)

2020 2019 2018

Net investment income $ 60,197 59,531 54,205

1 unchanged sentence

Yield on average invested assets 4.24 % 4.36 % 4.17 %

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 .

The sustained low interest rate environment of the past several years has required us to reinvest a portion of our portfolio at lower interest rates, which led to a lower portfolio yield in 2020.

As part of the ongoing process of managing our portfolio and optimizing performance, we are continuing to identify and invest in new asset classes, including private equity.

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Investment income from fixed maturity securities accounted for approximately 87.6% of total investment income for the year ended December 31, 2020 and 87.8% for 2019.

Years ended December 31,

(In thousands)

2020 2019 2018

Gross investment income:

1 unchanged sentence

Equity securities 816 662 722

Policy loans 6,605 6,451 6,210

Long-term investments 238 13 15

Other 97 374 409

Total investment income 62,409 61,360 56,482

1 unchanged sentence

Net investment income $ 60,197 59,531 54,205

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.

Investment income from fixed maturity securities increased 1.5% in 2020 compared to 2019.

We have strategically increased our exposure to both private and public equity this year to improve our overall investment performance, endeavoring to increase our portfolio yields in a prudent manner.

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 2020.

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Realized Gains (Losses) on Investments.

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(In thousands)

2020 2019 2018

Realized investment gains (losses):

Sales, calls and maturities:

Fixed maturities

Equity securities

Fixed maturity securities $ (112) 1,927 1,792

Real estate — 5,513 —

Property and equipment 9 (48) (80)

Realized investment gains

Other long-term investments 9 — —

Realized investment gains (losses) (94) 7,392 1,712

Change in fair value of equity securities 1,596 962 (828)

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

Fixed maturities

Equity securities

Fixed maturity securities — — (776)

Real estate held for sale — (3,105) —

1 unchanged sentence

Net realized investment gains $ 1,502 5,249 108

In 2020, we recorded realized gains of $1.6 million primarily related to fair value changes in a preferred stock exchange traded fund investment owned at December 31, 2020.

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.

We also recorded a net realized gain of $2.4 million from Citizens-owned real estate transactions in 2019.

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BENEFITS AND EXPENSES

1 unchanged sentence

(In thousands)

2020 2019 2018

Benefits and expenses:

4 unchanged sentences

Total insurance benefits paid or provided 156,655 154,579 145,412

Commissions 32,069 34,222 34,962

Other general expenses 53,669 48,440 47,632

3 unchanged sentences

Total benefits and expenses $ 251,173 244,800 242,004

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Claims and Surrenders.

Death claim and surrender benefits are our primary use of cash.

As noted in the table below, claims and surrenders increased 13.4% from $106.8 million in 2019 to $121.1 million in 2020.

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Years ended December 31,

(In thousands)

2020 2019 2018

Claims and surrenders:

Surrender expenses

Death claim benefits $ 27,195 25,100 22,598

Surrender benefits 54,827 49,293 41,176

Endowment benefits 11,026 12,247 13,341

Matured endowments

Matured endowment benefits 21,580 15,147 9,088

Property claims 2,807 1,563 1,648

2 unchanged sentences

Total claims and surrenders $ 121,145 106,827 91,103

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.

• Death claim benefits increased 8.3% in 2020.

The increase in 2020 was concentrated in our Home Service Insurance segment and we believe likely reflected increased mortality due to the COVID-19 pandemic in our customer base in this segment.

Mortality experience and COVID-19 impacts will continue to be closely monitored by the Company.

• Surrender benefits increased 11.2% in 2020.

Surrender benefits represented less than 1.2% of total direct life insurance in force of $4.6 billion as of December 31, 2020.

The increase in surrender benefits is primarily within our Life Insurance segment.

A significant portion of surrender benefits relates to policies that have been in force and have little or no associated surrender charges.

• Matured endowment benefits increased 42.5% in 2020 compared to 2019.

These increases were anticipated based upon the dates when our policy endowment contracts were sold and their expected maturities as set forth in their contracts.

• Property claim expenses increased 79.6% in 2020 compared to 2019 due to the three hurricanes that hit Louisiana in the second half of 2020.

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.).

Summary of Accounting Policies in the notes

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CITIZENS, INC.

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

The change in future policy benefit reserves decreased 28.3% in 2020 compared to 2019.

Future policy benefit reserves decrease as our block of in force business decreases and thus the decline was driven largely by lower policyholder retention.

In 2019, changes in actuarial valuation estimates associated with the conversion to a new actuarial valuation system also contributed $2.4 million to the decline.

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.

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

Most of our Life Insurance segment's international policies contain guaranteed cash values and are participating (i.e., provide for cash dividends as apportioned by our Board of Directors).

The policyowner has several options with regards 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 which would allow for participation in the CISIP, as described in Item 1 - Business - International Products.

Policyholders' dividends decreased by 7.5% in 2020 as compared to 2019 due to a lower in force block of business and actions taken by the Company to reduce discretionary dividends on existing international policies in response to the sustained low interest rate environment.

Commission expenses are a cost of acquiring business, as commissions are the primary compensation paid to our independent consultants and independent agents for selling our products.

First year commission rates are higher than renewal commission rates.

Commissions fluctuate directly in relation to sales and thus the decrease in commissions in 2020 as compared to 2019 was due to lower sales in 2020.

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.

Total general expenses increased 10.8% in 2020 compared to 2019 due primarily to change in control and severance expenses as described above, partially offset by a $2.2 million reduction in our 7702 compliance best estimate liability and decreases in audit and long-term incentive compensation expenses.

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CITIZENS, INC.

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.

Any allocation changes are reflected in the segment operations, but do not impact consolidated expenses.

Capitalization of DAC.

Capitalized DAC was $22.3 million , $22.7 million and $29.1 million in 2019 , 2018 and 2017 , respectively.

Capitalized DAC was $20.5 million and $22.3 million in 2020 and 2019, respectively.

Decreases in capitalized amounts are in line with the decreases noted in sales activity.

2 unchanged sentences

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 DAC totaled $27.4 million and $28.3 million in 2020 and 2019, respectively.

Amortization of DAC is impacted by new business, persistency and the level of surrenders.

Additionally, 2019 included $1.4 million of amortization associated with the conversion to a new actuarial valuation system.

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.

Amortization of COIA increased in 2020 compared to 2019 due primarily to an update in our Home Service Insurance segment's expected earned rate assumptions used within annuity models that resulted in additional amortization of approximately $0.2 million in 2020.

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.

Federal income tax benefit of $1.3 million in 2020 and federal income tax expense of $7.1 million in 2019 resulted in effective tax rates of 10.8% and 126.0%, respectively.

Subsequent to the novation of all of the international policies issued by CICA to CICA Ltd., the earnings of CICA Ltd.

are subject to Subpart F of the IRC and, therefore, are included in Citizens' taxable income.

The Subpart F income inclusion generated $2.2 million of federal income tax expense in 2020, as compared to $5.9 million in 2019.

The decrease in tax from Subpart F income was partially offset in 2019 and 2020 by foreign income tax rate differential of $1.6 million and $1.8 million, respectively.

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.

1 unchanged sentence

Income Taxes in the notes to our consolidated financial statements for further discussion.

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CITIZENS, INC.

SEGMENT OPERATIONS

2 unchanged sentences

• 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,

Average Policy Face Amount Issued

Life Insurance

Home Service Insurance

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.

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CITIZENS, INC.

These segments are reported in accordance with U.S.

The Company evaluates profit and loss performance based on net income before federal income taxes.

The Company evaluates profit and loss performance based on net income (loss) before federal income taxes for these segments.

Years ended December 31,

(In thousands)

2020 2019 2018

Income (loss) before federal income taxes:

4 unchanged sentences

Total income (loss) before federal income taxes $ (12,317) 5,745 2,002

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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.

dollar-denominated amounts to non-U.S.

residents in more than 75 countries through almost 1,000 independent marketing consultants as of December 31, 2020.

Years ended December 31,

(In thousands)

2020 2019 2018

Premiums $ 129,202 137,666 141,146

Net investment income 45,885 44,779 39,985

Realized investment gains (losses), net

Realized investment gains, net 1,340 6,795 358

Other income 1,806 1,412 1,833

Total revenue 178,233 190,652 183,322

5 unchanged sentences

Total insurance benefits paid or provided 125,192 128,841 119,136

Commissions 17,944 20,128 20,079

Other general expenses 16,323 23,012 18,718

4 unchanged sentences

Income before income tax expense $ 9,895 11,795 12,085

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.

Premium revenues decreased by 6.1% in 2020 compared to 2019 as first year premiums decreased by 11.1%, while renewal premiums declined by 5.7%.

While first year premiums declined sharply in 2020 due to the COVID-19 pandemic, we experienced progressive improvement in our new business production for our international business during the second half of the year as described above and in the fourth quarter we experienced the highest level of first year sales over the last three years due to executing on our strategic initiatives.

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Life Insurance premium breakout is detailed below.

1 unchanged sentence

(In thousands)

2020 2019 2018

First year $ 10,397 11,692 11,451

Renewal 118,805 125,974 129,695

Total premium $ 129,202 137,666 141,146

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

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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.

92% of our Life Insurance premium revenue in each of the past three years was generated by renewal premiums.

The Company has taken actions over the past few years to pursue long-term growth and stability, including reducing discretionary dividends on existing international policies in response to the sustained low interest environment and making changes to our distribution, which has negatively impacted sales levels.

These changes also included the discontinuance of new business in Brazil in April 2018, following the review of our international business model and regulatory risks.

Brazil had been one of our top premium-producing countries in our international life insurance business for the prior several years.

Finally, Venezuela, which has historically been one of our top premium-producing countries, has experienced prolonged economic and political turmoil, which has negatively impacted our sales in the country, decreasing approximately 10% in each of 2020 and 2019.

As discussed in Part I.

Item 1, Business - Strategic Initiatives, we are beginning to implement on our growth strategies in the Life Insurance segment, by expanding our product offerings to the U.S.

Endowment sales represent a significant portion of our new business sales internationally and totaled approximately $8.6 million and $9.3 million, representing approximately 82.7% and 79.5% of total first year premiums in 2020 and 2019, 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.

1 unchanged sentence

The policy loan asset balance increased 2.0% from 2019 to 2020 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.

Years ended December 31,

(In thousands, except for %)

Other Non-U.S.

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

International Premiums.

The following table sets forth, for our top five producing countries, our direct premiums from our international life insurance business for the periods indicated.

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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.

Years ended December 31,

(In thousands, except for %)

Total premiums

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;

2020 2019 2018

Colombia $ 25,783 20.4 % $ 26,768 20.1 % $ 27,605 20.0 %

Venezuela 19,956 15.8 22,353 16.8 24,783 18.0

Taiwan 19,078 15.1 19,403 14.6 18,888 13.7

Ecuador 13,301 10.5 14,198 10.6 15,187 11.0

Argentina 9,175 7.3 10,069 7.6 9,953 7.2

Other Non-U.S.

38,992 30.9 40,562 30.3 41,309 30.1

Total $ 126,285 100.0 % $ 133,353 100.0 % $ 137,725 100.0 %

Sales from Colombia, Venezuela and Taiwan represented the majority of the new and renewal business premiums in 2020 and 2019.

Overall, all of our top five countries listed above experienced a decline in premium levels from 2019 to 2020, with the biggest decrease occurring in Venezuela.

As we discussed above, our in force business, in terms of policy counts and amount of in force insurance, has been declining for several years due to changes we made to our products and distribution over the last few years, which resulted in the pace of new policies issued lagging the number of policies terminated from death, surrender or lapse.

We believe the economic uncertainty in Venezuela contributed to the larger decline in that country.

Domestic Premiums.

Domestic premiums in our Life Insurance segment were $5.1 million in 2020, down from $6.2 million in 2019.

We discontinued new sales of domestic ordinary whole life and endowment life insurance products within our Life Insurance segment in 2017;

therefore, the majority of the premium recorded in 2018, 2019 and 2020 is related to renewal business.

The increase in premiums in Texas from 2019 to 2018 is due to increased accident and health sales.

We plan to expand our Life Insurance segment to the Hispanic market in the U.S and expect to begin selling in this market during 2021 as detailed above under Item 1 - Business - Strategic Initiatives.

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.

Net investment income in our Life Insurance segment increased 2.5% in 2020 compared to 2019 due to continued growth in average invested assets.

We experienced a decrease in portfolio yield of 13 basis points in this segment in 2020 compared to 2019 as we continue to face a challenging investment environment for fixed maturity assets, which account for the majority of our investment portfolio.

See the Investments section below for more detailed information on our investments.

1 unchanged sentence

(In thousands, except for %)

2020 2019 2018

Net investment income $ 45,885 44,779 39,985

1 unchanged sentence

Annualized yield on average invested assets 4.28 % 4.41 % 4.17 %

Realized Investment Gains, Net.

T he realized gain for 2020 was primarily due to the appreciation in the value of a preferred stock exchange traded fund purchased during the first quarter as we were able to take advantage of the market dislocation to identify an attractive risk-adjusted investment opportunity.

Realized gains for 2019 were primarily due to a realized gain of $5.5 million during the first quarter of 2019 related to the sale of our former corporate headquarters in Austin, Texas and $1.3 million gain on fixed maturity redemptions above par.

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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.

A breakout of death claim and surrender benefits for the Life Insurance segment is detailed below.

Years ended December 31,

(In thousands)

2020 2019 2018

Claims and surrenders:

Surrender expenses

Death claim benefits $ 5,990 6,710 5,880

Surrender benefits 52,218 46,062 38,187

Endowment benefits 11,016 12,233 13,329

Matured endowments

Matured endowment benefits 20,965 14,601 8,548

Accident and health benefits 149 128 229

1 unchanged sentence

Total claims and surrenders $ 93,813 82,964 69,149

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.

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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.

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.

78% of our claims and surrender benefits in 2020 and 73% in 2019 were related to payment of surrender benefits and matured endowment benefits.

Policy surrenders increased 13.4% in 2020 as compared to 2019 and matured endowment benefits increased by 43.6% in 2020.

These expenses have been increasing over the last several years, which is expected, due to the aging of this block of business - a significant portion of surrenders relates to policies that have been in force and have little to no associated surrender charges and endowment products reaching their stated maturities.

These charges are within expected levels.

The other key component of claims and surrender benefits is death claim benefits, which decreased 10.7% in 2020 compared to 2019.

Mortality experience is closely monitored by the Company as a key performance indicator and these amounts were within expected levels.

HOME SERVICE INSURANCE

We operate in the Home Service Insurance market through our subsidiaries Security Plan Life Insurance Company ("SPLIC"), Magnolia Guaranty Life Insurance Company ("MGLIC") and Security Plan Fire Insurance Company ("SPFIC"), and focus on the life insurance needs of the middle- and lower-income markets, primarily in Louisiana, Mississippi and Arkansas.

Our policies are sold and serviced through a home service insurance marketing distribution system of 415 independent agents who work on a debit route system and through funeral homes that sell policies, collect premiums and service policyholders.

Our Home Service Insurance products consist primarily of small face amount ordinary whole life and pre-need policies, which are designed to fund final expenses for the insured, primarily consisting of funeral and burial costs.

To a much lesser extent, our Home Service Insurance segment sells limited-liability, named-peril property policies

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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.

covering dwellings and contents.

We provide $30,000 maximum coverage on any one dwelling and contents, while content only coverage and dwelling only coverage are both limited to $20,000.

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

Years ended December 31,

(In thousands)

2020 2019 2018

Premiums $ 46,128 46,681 46,714

Net investment income 13,051 13,058 13,125

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Total insurance benefits paid or provided 31,463 25,738 26,276

Commissions 14,125 14,094 14,883

Other general expenses 17,402 19,517 20,435

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Income (loss) before income tax expense $ (3,470) 1,181 (2,496)

The premiums in this segment remained relatively flat in 2019 compared to 2018 and 2017 .

First year premiums in this segment were negatively impacted by the COVID-19 pandemic and thus declined slightly in 2020 as compared to 2019.

We had temporary office closures in Louisiana during the second and third quarters due to the COVID-19 pandemic and we have also had to curtail the sales of certain product offerings that require extensive person-to-person sales interaction.

Premiums were also negatively affected due to three hurricanes in Louisiana during 2020 that increased reinsurance premiums paid to our reinsurers, which we net against premium revenue.

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

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(In thousands, except for %)

2020 2019 2018

Louisiana $ 42,950 90.2 % $ 42,867 90.2 % $ 42,898 90.2 %

Mississippi 1,955 4.1 2,037 4.3 2,105 4.4

Arkansas 1,690 3.6 1,660 3.5 1,675 3.5

Other states 995 2.1 938 2.0 857 1.9

Total premiums $ 47,590 100.0 % $ 47,502 100.0 % $ 47,535 100.0 %

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.

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

Years ended December 31,

(In thousands, except for %)

Net investment income

Average invested assets, at amortized cost

Annualized yield on average invested assets

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.

A breakout of death claim and surrender benefits for the Home Service Insurance segment is detailed below.

Years ended December 31,

(In thousands)

2020 2019 2018

Claims and surrenders:

Surrender expenses

Death claim benefits $ 21,205 18,390 16,718

Surrender benefits 2,609 3,231 2,988

Endowment benefits 10 14 12

Matured endowments

Matured endowment benefits 615 546 541

Property claims 2,807 1,563 1,648

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Total claims and surrenders $ 27,332 23,863 21,954

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.

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 .

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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

The majority of claims and surrender benefits in our Home Service Insurance segment relate to death claim benefits.

Death claim benefits increased 15.3% in 2020 compared to 2019 due primarily to the COVID-19 pandemic and the average dollar amount of claims incurred.

Mortality experience is closely monitored by the Company and can fluctuate based on reported claims as a key performance indicator.

The other primary claims and surrender benefits were:

• Surrender benefits decreased in 2020 compared to 2019 but were within anticipated ranges based on management expectations.

• Property claims increased materially in 2020 compared to 2019.

During the third quarter of 2020, SPFIC was impacted by Hurricane Laura, a Category 4 hurricane that caused significant damage in Louisiana.

During the fourth quarter of 2020 SPFIC was also impacted by Hurricanes Delta and Zeta, both of which were Category 2 storms that also hit Louisiana.

The Company has a reinsurance agreement that covers catastrophic events such as a hurricane.

The reinsurance agreement specifies a maximum coverage per event of $11.0 million and a retention level of $0.5 million per event.

We have paid the $0.5 million retention in claim amounts for each of Hurricane Laura and Delta and do not believe we will exceed the maximum coverage;

however, any claims in excess of $11.0 million would have to be paid by SPFIC.

Hurricane Zeta has been a less significant storm and at this point, we do not expect the impact of this storm to have a material effect on our consolidated financial statements.

OTHER NON-INSURANCE ENTERPRISES

Years ended December 31,

(In thousands)

2020 2019 2018

Income (loss) before income tax expense (18,741) (7,231) (7,587)

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.

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.

Revenue in this operating unit consists primarily of net investment income and realized investment gains or losses, while expenses consist of other general expenses.

The loss reported for 2020 was negatively impacted by the change in control costs described above, which contributed to the $19.9 million of other general expenses.

The loss in 2019 was impacted by an impairment loss of $3.1 million in connection with reclassifying our Citizens Academy training facility located near Austin, Texas as real estate held for sale.

This facility is no longer being used by the Company and is for sale.

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Our investments are an integral part of our business success, as we invest the majority of premiums collected to pay for future benefits and rely on net investment income for our ongoing operations.

The administration of our investment portfolio is handled by our management and 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.

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.

Our investment guidelines comply with the applicable statutes and require that fixed maturity securities, both government and corporate, are investment grade and comprise a majority of the investment portfolio.

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

Years ended December 31,

(In thousands, except for %)

Cash, Cash Equivalents and Investments:

2020 % 2019 %

Cash and invested assets:

Fixed maturity securities:

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Government-sponsored enterprises $ 16,117 1.0 % $ 15,878 1.0 %

Corporate 877,208 52.8 650,088 42.6

Municipal bonds (1)

409,665 24.7 536,284 35.1

Mortgage-backed (2)

140,184 8.5 131,387 8.6

Asset-backed 46,091 2.8 44,203 2.9

Foreign governments 118 — 119 —

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Other investments:

Policy loans 83,318 5.0 82,005 5.4

Equity securities 22,102 1.3 16,033 1.1

Real estate and other long-term investments 29,865 1.8 2,956 0.2

Total cash, cash equivalents and investments

Total cash and invested assets $ 1,658,799 100.0 % $ 1,526,459 100.0 %

(1) Includes $164.0 million and $188.1 million of securities guaranteed by third parties for the years ended December 31, 2020 and 2019, respectively.

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Government agencies and government-sponsored enterprises for the years ended December 31, 2020 and 2019, respectively.

During 2020, we continued repositioning our portfolio into more diversified holdings as part of our investment management strategy.

As investments matured or were called, the Company increased investments in corporate securities, which now represent 52.8% of our cash and invested assets as of December 31, 2020 as compared to 42.6% at December 31, 2019.

The Company has also decreased its exposure to the municipal bond market, which now represents 24.7% of the investment portfolio in 2020 compared to 35.1% in 2019.

Cash and cash equivalents decreased as of December 31, 2020 compared to December 31, 2019 due to timing of cash inflows and investments of cash into marketable securities.

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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 .

Real estate and other long-term investments increased to $29.9 million as of December 31, 2020 as compared to $3 million as of December 31, 2019 primarily due to investments of $18.1 million in private equity funds and other alternative investments and payment of $8.8 million to a Rabbi Trust for the benefit of Mr.

Kolander representing the severance payments due to him under his employment agreement and Chief Executive Officer Separation of Service and Consulting Agreement in connection with his resignation following the change in control.

At December 31, 2020, investments in fixed maturity and equity securities were 91.1% of our total cash and invested assets.

All of our fixed maturity securities were classified as available-for-sale at December 31, 2020 and 2019.

We had no fixed maturity securities that were classified as trading securities at December 31, 2020 or 2019.

The following table shows annualized investment yields by segment operations as of December 31 for each year presented.

Service Insurance

Insurance Home

Service Insurance Consolidated

2020 4.28 % 4.37 % 4.24 %

2019 4.41 % 4.45 % 4.36 %

2018 4.17 % 4.52 % 4.17 %

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.

Our annualized yield on average invested assets on the consolidated level decreased twelve basis points in 2020 compared to 2019, primarily driven by the Life Insurance segment.

Credit quality is an important feature of our investment guidelines for our fixed maturity securities.

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.

If there is no NRSRO rating, the Company may use credit ratings of the NAIC Securities Valuation Office ("SVO") as assigned.

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.

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(In thousands, except for %)

2020 % 2019 %

AAA $ 31,990 2.1 % $ 56,977 4.1 %

AA 449,934 30.3 513,190 37.2

A 451,488 30.3 385,345 28.0

BBB 532,993 35.8 406,515 29.5

BB and other 22,978 1.5 15,932 1.2

Totals $ 1,489,383 100.0 % $ 1,377,959 100.0 %

The Company made new investments in investment grade bonds during 2020.

Non-investment grade securities are the result of downgrades of issuers or securities acquired during acquisitions of companies, as the Company has not purchased below investment grade securities.

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The Company made new investments in investment grade bonds during 2019 .

Non-investment grade securities are the result of downgrades of issuers or securities acquired during acquisitions of companies, as the Company does not purchase below investment grade securities.

As of December 31, 2020, the Company held municipal fixed maturity securities that include third-party guarantees.

Detailed below is a presentation by NRSRO rating of our municipal holdings by funding type.

Detailed below is a presentation by credit rating of our municipal holdings by funding type.

December 31, 2020

General Obligation

Special Revenue

(In thousands, except for %)

General Obligation Special Revenue Other Total % Based on

(In thousands, except for %) Fair

Value Amortized

Municipal fixed maturity securities shown including third-party guarantees

AAA $ 22,785 22,066 3,334 3,096 — — 26,119 25,162 6.7 %

AA 66,897 62,227 129,071 120,231 12,479 10,787 208,447 193,245 51.2

A 16,909 15,221 130,463 117,694 5,184 4,419 152,556 137,334 36.4

BBB 4,273 4,169 11,491 11,062 1,592 1,450 17,356 16,681 4.4

BB and other 4,509 4,432 678 608 — — 5,187 5,040 1.3

Total $ 115,373 108,115 275,037 252,691 19,255 16,656 409,665 377,462 100.0 %

Municipal fixed maturity securities shown excluding third-party guarantees

AAA $ 4,530 4,419 — — — — 4,530 4,419 1.2 %

AA 45,779 44,235 46,048 42,602 7,839 6,542 99,666 93,379 24.7

A 30,432 28,169 164,915 149,742 8,156 7,146 203,503 185,057 49.0

BBB 9,232 8,642 34,177 32,316 — — 43,409 40,958 10.9

BB and other 25,400 22,650 29,897 28,031 3,260 2,968 58,557 53,649 14.2

Total $ 115,373 108,115 275,037 252,691 19,255 16,656 409,665 377,462 100.0 %

The table below shows the categories in which the Company held investments in special revenue bonds that were greater than 10% of fair value based upon the Company's portfolio of fixed maturity securities at December 31, 2020.

(In thousands, except for %)

Amortized Cost

% of Total Fair Value

(In thousands, except for %) Fair

Value Amortized Cost % of Total Fair Value

Utilities $ 69,190 60,895 16.9 %

Education 71,766 66,174 17.5 %

The Company's municipal holdings are spread across many states, however, municipal fixed maturity securities from Texas comprise the most significant concentration of the total municipal holdings portfolio as of December 31, 2020.

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The table below represents the Company’s detailed exposure to municipal holdings in Texas, which comprises the most significant state concentration of the total municipal fixed maturity portfolio as of December 31, 2019 .

The Company holds 21.4% of its municipal holdings in Texas issuers as of December 31, 2020.

General Obligation

Special Revenue

(In thousands)

There were no other states or individual issuer holdings that represented or exceeded 10% of the total municipal portfolio as of December 31, 2020.

General Obligation Special Revenue Total

(In thousands) Fair

Value Amortized

Texas securities including third-party guarantees

AAA $ 22,176 21,557 3,334 3,096 25,510 24,653

AA 23,009 22,554 14,092 13,067 37,101 35,621

A — — 22,334 21,855 22,334 21,855

BBB — — 1,977 1,828 1,977 1,828

BB and other — — 559 508 559 508

Total $ 45,185 44,111 42,296 40,354 87,481 84,465

Texas securities excluding third-party guarantees

There were no other states or individual issuer holdings that represented or exceeded 10% of the total municipal portfolio as of December 31, 2019 .

AAA $ 4,530 4,419 — — 4,530 4,419

AA 33,368 32,710 3,612 3,316 36,980 36,026

A 6,063 5,830 30,117 29,028 36,180 34,858

BBB 1,224 1,152 5,547 5,209 6,771 6,361

BB and other — — 3,020 2,801 3,020 2,801

Total $ 45,185 44,111 42,296 40,354 87,481 84,465

IMPAIRMENT CONSIDERATIONS RELATED TO INVESTMENTS IN FIXED MATURITY AND EQUITY SECURITIES

We evaluate the carrying value of our fixed maturity securities at least quarterly.

We measure our equity securities at fair value through the income statement so there is no need to assess these securities for impairment.

The Company monitors all debt securities on an on-going basis relative to changes in credit ratings, market prices, earnings trends and financial performance, in addition to specific region or industry reviews.

The assessment of whether impairments have occurred is based on a case-by-case evaluation of underlying reasons for the decline in fair value.

The Company determines OTTI by reviewing all relevant evidence related to the specific security issuer as well as the Company's intent to sell the security, or if it is more likely than not that the Company would be required to sell a security before recovery of its amortized cost.

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

If the Company intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis, an OTTI is recognized in earnings equal to the entire difference between the investment's cost and its fair value at the consolidated financial statement date.

If the Company does not intend to sell the security and it is not more likely than not that the Company is required to sell the security before recovery of its amortized cost basis, the OTTI will be separated into the following:

(a) the amount representing the credit loss;

and (b) the amount related to all other factors.

The amount of the total OTTI related to the credit loss is recognized in earnings.

The amount of the total OTTI related to other factors is recognized in other comprehensive income, net of applicable taxes.

The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.

The new amortized cost is not adjusted for subsequent recoveries in fair value.

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The Company recorded no OTTI losses on securities in 2019 and recorded losses of $0.8 million in 2018 related to fixed maturity bond and equity securities holdings.

Based upon our analysis of whether declines in fair value below cost are temporary or other-than-temporary, management believes that our investments in fixed maturity investments at December 31, 2019 were not impaired, and no additional other-than-temporary losses were recorded.

Gross unrealized losses on fixed maturities available-for-sale amounted to $1.6 million as of December 31, 2019 and $11.3 million as of December 31, 2018 .

This decrease in gross unrealized losses during 2019 was a result of a decrease in the interest rate environment.

Information on both unrealized and realized gains and losses by category, including OTTI, is set forth in Note 2.

Beginning January 1, 2020, in connection with the adoption of a new accounting standard, the Company assesses available-for-sale ("AFS") fixed maturity securities in an unrealized loss position for expected credit losses.

Summary of Significant Accounting Policies for a discussion regarding our application of this accounting standard in 2020.

The Company recorded no credit losses on securities in 2020 or other-than-temporary impairments ("OTTI") on securities in 2019.

Gross unrealized losses on AFS fixed maturity securities amounted to $1.9 million as of December 31, 2020 and $1.6 million as of December 31, 2019.

This increase in gross unrealized losses during 2020 was a result of the market disruption caused by the COVID-19 pandemic.

Information on both unrealized and realized gains and losses by category is set forth in Note 2.

Investments of the notes to our consolidated financial statements.

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We believe we have established appropriate reinsurance coverage based upon our net retained insured liabilities compared to our surplus.

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The effect of reinsurance on premiums is as follows.

1 unchanged sentence

(In thousands)

2020 2019 2018

Direct premiums $ 178,952 187,009 191,561

1 unchanged sentence

Reinsurance ceded (3,714) (2,761) (3,800)

Net premiums $ 175,329 184,347 187,860

Our insurance subsidiaries monitor the solvency of their reinsurers in seeking to minimize the risk of loss in the event of default by a reinsurer.

3 unchanged sentences

(In millions)

Direct written life insurance inforce

2020 2019 2018

Direct written life insurance in force $ 4,612 4,729 4,836

Reinsurance assumed 5 5 5

Reinsurance ceded (475) (487) (490)

Net life insurance inforce

Net life insurance in force $ 4,142 4,247 4,351

Virtually all of the Company's non-credit accident and health insurance has been reinsured and is administered by Unified Life Insurance Company, an unaffiliated party.

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Best Company range from B+ (Good) to A+ (Superior).

SPFIC has first and second event catastrophe reinsurance coverage of $10.0 million per event and a retention level of $0.5 million per event.

Thus, the first $0.5 million of incurred claims and any claims in excess of $10.0 million are

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SPFIC's responsibility.

The reinsurance premium for first event catastrophe reinsurance was $0.8 million in 2019 , 2018 and 2017 , respectively.

SPFIC generally carries first and second event catastrophe reinsurance coverage of $10.0 million per event and a retention level of $0.5 million per event.

Thus, the first $0.5 million of incurred claims and any claims in excess of $10.0 million per event are SPFIC's responsibility.

The reinsurance premium for catastrophe reinsurance was $1.4 million in 2020 and $0.8 million in 2019 and 2018, respectively.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity refers to a company's ability to generate sufficient cash flows to meet the needs of its operations.

Liquidity is managed through insurance operations to ensure stable and reliable sources of cash flows are available to meet obligations and is provided by a variety of sources.

Our liquidity requirements are met primarily by funds provided from operations.

Premium deposits and revenues, investment income and investment maturities are the primary sources of funds, while investment purchases, policy benefits, and operating expenses are the primary uses of funds.

Historically, we have not had to liquidate investments to provide cash flow, and there were no liquidity issues in 2019 or 2018 .

At December 31, 2019 , our investments consist of 93.1% marketable debt securities classified as available-for-sale and 1.1% of equity securities that could be readily converted to cash for liquidity needs.

A primary liquidity concern is the risk of an extraordinary level of early policyholder withdrawals.

We include provisions within our insurance policies, such as surrender charges, that help limit and discourage early withdrawals.

Since these contractual withdrawals, as well as the level of surrenders experienced, have been largely consistent with our assumptions in asset liability management, our associated cash outflows historically have not had an adverse impact on our overall liquidity.

Individual life insurance policies are less susceptible to withdrawal than annuity reserves and deposit liabilities because policyholders may incur surrender charges and may need to undergo a new underwriting process in order to obtain a new insurance policy.

Cash flow projections and cash flow tests under various market interest rate scenarios are also performed annually to assist in evaluating liquidity needs and adequacy.

In the year ended December 31, 2020, our operations provided $48.8 million in net cash.

We manage our insurance operations as described herein in order to ensure that we have stable and reliable sources of cash flows to meet our obligations.

We expect to meet our cash needs for the next 12 months with cash generated by our insurance operations and from our invested assets.

Since the Company does not have any debt, the Company could seek a line of credit in order to provide additional liquidity at the holding company level if needed to provide for longer-term or emergency cash needs.

PARENT COMPANY LIQUIDITY AND CAPITAL RESOURCES

Liquidity is the ability to generate amounts of cash adequate to meet our cash needs.

Citizens is a holding company and has had minimal operations of its own.

Our assets consist of the capital stock of our subsidiaries, cash and investments.

Our liquidity requirements are met primarily from two sources:

cash generated from our operating subsidiaries and our invested assets.

Our ability to obtain cash from our insurance subsidiaries depends primarily upon the availability of statutorily permissible payments, including payments Citizens receives from service agreements with our life insurance subsidiaries and dividends from the subsidiaries.

The ability to make payments to the holding company is limited by applicable laws and regulations of Bermuda and U.S.

states of domicile which

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subject insurance operations to significant regulatory restrictions.

As discussed in Part I, Item 1, Business and Part I.

Risk Factors , these laws and regulations require, among other things, that our insurance subsidiaries maintain minimum solvency requirements, which limit the amount of dividends that can be paid to the holding company.

The regulations also require approval of our service agreements with the applicable regulatory authority in order to prevent insurance subsidiaries from moving large amounts of cash to the unregulated holding company.

As we discussed in "2020 Highlights", Citizens had significant expenses in 2020 related to executive severance costs due to severance payable to our former Chief Executive Officer following the change in control.

These expenses included payment of $8.8 million to a Rabbi Trust for the benefit of Mr.

During the third quarter of 2020, Citizens sold approximately $5.7 million of fixed maturity securities held in our investment portfolio in order to fund a portion of the $8.8 million severance payment to the Rabbi Trust for the benefit of Mr.

The $8.8 million payment was paid to Mr.

Kolander on February 8, 2021.

We also incurred significant one-time expenses related to the build-out of our new headquarters in Austin, Texas and for the purchase of furniture and fixtures for the leased space.

Additionally, as discussed in Part I.

Business , on March 5, 2021, the Company paid $9.1 million to the Foundation to hold in escrow in order to purchase, upon obtaining final regulatory approval, 100% of the outstanding Class B common stock.

See Contractual Obligations and Off-balance Sheet Arrangements below for a discussion of real estate lease payments to be made under our new long-term contract for our headquarters in Austin, Texas.

We have been closely monitoring the impact that the COVID-19 pandemic may have on our liquidity and capital resources.

To the extent that we continue to experience decreases in sales or collections of renewal premiums, increases in surrenders, decreases in our investment income and/or increases in claim payments as a result of the COVID-19 pandemic, the liquidity of our insurance subsidiaries would be negatively impacted, inhibiting their ability to make dividends to the Company, and we may have to sell some of our investments to meet operational cash flow requirements.

INSURANCE COMPANY SUBSIDIARY LIQUIDITY AND CAPITAL RESOURCES

The liquidity requirements of our insurance operations are primarily met by premium revenues, investment income and investment maturities.

Primary cash needs are for payments of policy benefits to policyholders, investment purchases, and operating expenses.

Historically, we have not had to liquidate investments to provide cash flow for our insurance operations and we did not do so in 2020.

We believe that we have adequate capital resources to support the liquidity requirements of our insurance operations if the cash flow from our insurance operations is insufficient to meet our cash needs.

As discussed above, premium revenue was $175.3 million and $184.3 million in the years ended December 31, 2020 and 2019, respectively.

See Contractual Obligations and Off-balance Sheet Arrangements below for a discussion of known and estimated cash needs related to payments of future policy benefits and policy claims.

Cash flows from operating activities were $48.8 million, $72.2 million and $84.6 million for the years ended December 31, 2020, 2019 and 2018, respectively.

We have traditionally also had significant cash flows from both scheduled and unscheduled investment security maturities, redemptions, and prepayments.

These cash flows, for the most part, are reinvested in fixed income securities and to a lesser extent private equity funds or other alternative investments.

However, during the third quarter of 2020, the Company used funds from matured securities to pay $6.0 million to the IRS for the tax compliance matter described in Note 7.

Commitments and Contingencies in the notes to our consolidated financial statements.

As noted in Note 7 .

Commitments and Contingencies , our payment does not represent closure of the matter or IRS acceptance of the tax liability shown on the submitted withholding tax returns, and the IRS reserves the right to revise our total tax liability for the covered period.

Net cash outflows from investing activities totaled $61.8 million and $69.3 million for the years ended December 31, 2020 and 2019, respectively.

The investing activities fluctuate from period to period due to timing of securities activities such as calls and maturities and reinvestment of those funds.

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Our investments consist of 91.7% of marketable fixed maturity securities classified as available-for-sale and 1.4% of equity securities that could be readily converted to cash for liquidity needs.

Over the last several years, a large portion of our fixed maturity security investment portfolio has matured, which required us to reinvest in fixed maturity securities with lower interest rates.

We are seeking to diversify our portfolio with private equity investments in order to earn higher interest rates to mitigate the effect of a decrease in our spread between our policy liability crediting rates and our investment earned rates (our gross margin), which could also negatively impact our liquidity.

Our investment portfolio (and, specifically, the valuations of investment assets we hold) has also been, and may continue to be, adversely affected as a result of market developments from the COVID-19 pandemic and uncertainty regarding its outcome.

Moreover, changes in interest rates, reduced liquidity or a continued slowdown in the U.S.

or in global economic conditions may also adversely affect the values and cash flows of these assets.

Because claims and surrenders are our largest expense, a primary liquidity concern is the risk of an extraordinary level of early policyholder surrenders.

We include provisions in our insurance policies, such as surrender charges, that help limit and discourage early withdrawals.

Since these contractual withdrawals, as well as the level of surrenders experienced, have been largely consistent with our assumptions, our associated cash outflows for claims and surrender benefits historically have not had an adverse impact on our overall liquidity.

Although we experienced an increase in surrenders in the Life Insurance segment during 2020 compared to 2019, we believe that such surrenders were not materially impacted by the COVID-19 pandemic.

To the extent that we continue to experience an increase in surrenders in our Life Insurance segment, whether due to the COVID-19 pandemic or otherwise, our liquidity could be negatively impacted.

We continue to monitor surrenders and early withdrawals.

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.

As of December 31, 2019 , the Company has a significant amount of endowment products representing approximately 41.0% of total insurance in force.

As of December 31, 2020, 41% of the Company's total insurance in force was in endowment products.

Approximately 13% of the endowments in force will mature in the next five years.

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Meeting these distributions could require the Company to sell securities at inopportune times to pay policyholder withdrawals.

Alternatively, if the policyholder were to leave the money on deposit with the Company at interest, our profitability could be impacted if the product guaranteed rate is higher than the current market rate we can earn on our investments.

We currently anticipate that available liquidity sources and future cash flows will be adequate to meet our needs for funds, but we will monitor closely our policyholder behavior patterns.

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 instruments, further reducing our investment income.

Our profitability could be negatively impacted depending on the market rates at the time of reinvestment.

This could result in a decrease in the spread between our policy liability crediting rates and our investment earned rates.

This could also negatively impact our liquidity.

Cash flows from our insurance operations historically have been sufficient to meet current needs.

Cash flows from operating activities were $72.2 million , $84.6 million and $93.0 million for the years ended December 31, 2019 , 2018 and 2017 , respectively.

Operating cash flow declined in 2019 , due primarily to the decrease in premium revenues and higher policyholder benefits paid in 2019 .

We have traditionally also had significant cash flows from both scheduled and unscheduled fixed maturity security calls, maturities, redemptions, and prepayments, which totaled $181.6 million , $86.6 million and $84.0 million in 2019 , 2018 and 2017 , respectively.

These cash flows, for the most part, are reinvested in fixed maturity securities.

Net cash outflows from investment activity totaled $69.3 million , $85.1 million and $85.0 million for the years ended December 31, 2019 , 2018 and 2017 , respectively.

The outflows from investing activities for the year ended December 31, 2019 , were primarily related to the investment of excess cash and cash equivalents generated from operations during 2019 and 2018 .

The Company's cash outflows from financing activities were $2.2 million , $0.1 million and cash inflows of $2.5 million in 2019 , 2018 and 2017 , respectively.

See Parent Company Liquidity and Capital Resources below for a discussion of additional Parent Company liquidity.

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We have established a liability of $10.0 million , net of tax, for probable liabilities and expenses associated with a tax compliance matter as of December 31, 2019 as described in Note 7.

Commitments and Contingencies in the notes to our consolidated financial statements, which represents management’s best estimate.

We have disclosed an estimated range related to probable liabilities and expenses of $7.4 million to $52.5 million , net of tax.

This estimate and range include projected settlement amounts payable to the IRS, as well as estimated increased payout obligations to current and former holders of non-compliant domestic life insurance policies expected to result from remediation of those policies.

The amount of our liabilities and expenses depends on a number of uncertainties, including the number of prior tax years for which we may be liable to the IRS, the number of domestic life insurance policies we will be required to remediate, and the methodology applicable to the calculation of the tax liabilities for policies.

Given the range of potential outcomes and the significant variables assumed in establishing our estimates, actual amounts incurred may exceed our reserve and exceed the high end of our estimated range of liabilities and expenses.

The NAIC has established minimum capital requirements in the form of Risk-based capital ("RBC").

Alternatively, if the policyholders were to leave the money on deposit with the Company at interest, our profitability could be impacted if the product guaranteed rate is higher than the market rate we are earning on our investments.

We currently anticipate that available liquidity sources, our capital resources and future cash flows will be adequate to meet our needs for funds, but we will monitor closely our policyholder behavior patterns.

For reasons previously discussed, we have experienced increased death claim benefits in our Home Service Insurance segment in 2020 compared to 2019.

Additionally, we are closely monitoring claim volumes to evaluate whether there is a delay in reporting or filing for benefits as a result of the COVID-19 pandemic in our Home Service Insurance segment and Life Insurance segment.

To the extent we continue to experience increased claims and the associated death benefit payouts in our Home Service Insurance segment and, possibly our Life Insurance segment, as a result of the COVID-19 pandemic, our liquidity could be negatively impacted.

Some of our policies include pandemic exclusions, and we carry reinsurance to offset some of these risks.

While our mortality experience is closely monitored by the Company and the activity has historically been within expected levels, we cannot predict whether we will see increased death benefit payouts above expected levels due to the COVID-19 pandemic.

Cash flow projections and cash flow tests under various market interest rate scenarios are performed annually to assist in evaluating liquidity needs and adequacy.

As described above in "Home Service Insurance", we experienced substantial increases in property claims in the last half of 2020 due in large part to three hurricanes that hit Louisiana.

As a result, Citizens had to contribute additional capital to SPFIC in order to maintain statutory capital requirements.

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

Our domestic companies are subject to minimum capital requirements set by the NAIC in the form of risk-based capital ("RBC").

RBC considers the type of business written by an insurance company, the quality of its assets, and various other aspects of an insurance company's business to develop a minimum level of capital called "Authorized Control Level Risk-Based Capital".

This level of capital is then compared to an adjusted statutory capital that includes capital and surplus as reported under statutory accounting principles, plus certain investment reserves.

Should the ratio of adjusted statutory capital to control level risk-based capital fall below 200%, a series of remedial actions by the affected company would be required.

We have a parental guarantee between Citizens, Inc.

and CICA to maintain an RBC level above 350%.

The Bermuda Monetary Authority ("BMA") established risk-based regulatory capital adequacy and solvency margin requirements for Bermuda insurers that mandate that a Bermuda domiciled subsidiary’s Enhanced Capital Requirement ("ECR") be calculated by either (a) Bermuda Solvency Capital Requirement ("BSCR"), or (b) an internal capital model that the BMA has approved for use for this purpose.

CICA Ltd., Citizens, Inc.'s wholly-owned subsidiary domiciled in Bermuda, uses the BSCR in calculating its solvency requirements.

The Economic Balance Sheet (“EBS”) framework is embedded as part of the BSCR and forms the basis of its ECR.

In order to minimize the risk of a shortfall in capital arising from an unexpected adverse deviation and in moving towards the implementation of a risk-based capital approach, the BMA has established a threshold capital level (termed the Target Capital Level ("TCL")), set at 120 percent 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.

At December 31, 2019 , all our insurance subsidiaries were above the required minimum RBC or TCL levels.

This level of capital is then compared to an adjusted statutory capital that

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includes capital and surplus as reported under statutory accounting principles, plus certain investment reserves.

Should the ratio of adjusted statutory capital to control level RBC fall below 200% for our domestic companies, a series of remedial actions by the affected company would be required.

Additionally, we have a parental guarantee between Citizens and CICA, Citizens' wholly-owned subsidiary domiciled in Colorado, to maintain a RBC level above 350%.

At December 31, 2020, our domestic insurance subsidiaries were above the required minimum RBC levels.

is a Bermuda domiciled company.

The BMA requires Bermuda insurers to maintain available statutory economic capital and surplus at a level equal to or in excess of the BMA's Enhanced Capital Requirement, which requires a certain Target Capital Level ("TCL").

As of December 31, 2020, CICA Ltd.

was above the TCL threshold.

However, as discussed in Part I.

Business – International Regulation – Bermuda, due to the Prudential Review, the BMA is requiring Citizens and CICA Ltd.

to enter into a “Keepwell Agreement”, which would encumber certain assets of the Company.

The Keepwell Agreement will include a specific target solvency level at which the Company would be required to make a capital injection into CICA Ltd.

Both the Keepwell Agreement and any capital injection could negatively impact the Company’s capital resources and liquidity.

CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS

We have committed to the following contractual obligations as of December 31, 2020, with the payments due by the period indicated below:

(In thousands)

(In thousands) Total Less than 1

Year 1 to 3 Years 3 to 5 Years More than 5

Contractual Obligations:

Investment commitments $ 68,571 30,000 38,571 — —

Operating leases

Real estate and equipment leases 11,973 1,145 2,053 2,253 6,522

Future policy benefit reserves:

Life insurance 1,246,423 22,561 77,937 128,601 1,017,324

Annuities 78,304 — 7 4 78,293

Accident and health 761 107 396 8 250

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Accident and health 149 149 — — —

Casualty 743 743 — — —

Total policy claims payable 13,206 13,206 — — —

Total purchase obligations 9,592 9,592 — — —

Total contractual obligations $ 1,525,218 77,541 122,203 136,249 1,189,225

Future Policy Benefit Reserves and Policy Claims Payable.

The payments related to the future policy benefits and policy claims payable reflected in the table above have been projected utilizing assumptions based upon our historical experience and anticipated future experience.

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Because the exact timing and amount of the ultimate policyholder fund obligation is subject to significant uncertainty, we have reflected the obligation at the amount of the liability presented on the consolidated balance sheet in the more than five-year category.

The Company’s principal executive office is temporarily located at 14231 Tandem Boulevard, Second Floor, Austin, Texas.

In January 2019, the Company entered into a long-term lease agreement with an unrelated party for our new principal executive office.

The building in which we have leased office space is under construction and is expected to be completed in 2020.

The long-term lease will commence after construction of the building is complete and has a 121-month term.

Payments under the new long-term lease agreement will average approximately $112,340 per month.

The Company does not have off-balance sheet arrangements at December 31, 2019 and does not expect any future effects on the Company's financial condition related to any such arrangements.

We do not utilize special purpose entities as investment vehicles, nor are there any such entities in which we have an investment that engages in speculative activities of any nature, and we do not use such investments to hedge our investment positions.

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PARENT COMPANY LIQUIDITY AND CAPITAL RESOURCES

Citizens is a holding company and has minimal operations of its own.

Our assets consist of the capital stock of our subsidiaries, cash, fixed maturity securities, mutual funds and investment real estate.

Our cash flows depend primarily upon the availability of statutorily permissible payments, primarily payments under management agreements from our life insurance subsidiaries.

The ability to make payments is limited by applicable laws and regulations of Bermuda and U.S.

states of domicile, which subject insurance operations to significant regulatory restrictions.

These laws and regulations require, among other things, that these insurance subsidiaries maintain minimum solvency requirements and limit the amount of dividends these subsidiaries can pay to the holding company.

We historically have not relied upon dividends from subsidiaries for our cash flow needs.

However, our subsidiaries have made dividend payments of available funds from time to time in relation to business strategies.

As of December 31, 2019 , Citizens had fixed maturities available-for-sale of $50.5 million and cash of $10.8 million , which represents additional liquidity for future acquisitions, liquidity support for the life insurance companies and for general corporate purposes.

Additionally, a substantial portion of our international policyholders invest their policy cash dividends and benefits in our Class A common stock through our Citizens, Inc.

Stock Investment Plan (the "CISIP").

Once a policyholder elects to participate in the CISIP, their policy benefits can be used to purchase Citizens Class A common stock through the CISIP in the open market, or, at our option, directly from us from newly issued or treasury shares.

In addition, our existing holders of Class A common stock, employees, directors and independent consultants are eligible to participate in the CISIP.

If fewer policyholders elect to participate in the CISIP, or if our international premium collections were to decrease as a result of regulatory or marketing impediments, the trading volume of our Class A common stock may decline from its present levels.

Real Estate and Equipment Leases.

The Company entered into a long-term lease agreement with an unrelated party for its new home office in Austin, Texas and moved into its new home office in the first week of November 2020.

Payments under this new long-term lease agreement average approximately $112,340 per month.

Total Purchase Obligations.

Total purchase obligations in the table above reflect primarily the $8.8 million held in the Rabbi Trust at December 31, 2020 for the severance payment made to Mr.

Kolander in February 2021.

The Company does not have off-balance sheet arrangements at December 31, 2020 and does not expect any future effects on the Company's financial condition related to any such arrangements.

CRITICAL ACCOUNTING POLICIES

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Summary of Significant Accounting Policies in the notes to our consolidated financial statements for further information on our critical accounting policies.

Our critical accounting policies are as follows.

VALUATION OF INVESTMENTS IN FIXED MATURITY AND EQUITY SECURITIES

Based upon current accounting guidance, investment securities must be classified as held-to-maturity, available-for-sale or trading.

VALUATION OF INVESTMENTS IN FIXED MATURITY SECURITIES

Based upon current accounting guidance, investment securities must be classified as held-to-maturity, available-for-sale ("AFS") or trading.

Management determines the appropriate classification at the time of purchase.

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Fixed maturity securities are classified as held-to-maturity and carried at amortized cost when management has the positive intent and the Company has the ability to hold the securities to maturity.

Securities not classified as held-to-maturity are classified as available-for-sale and are carried at fair value, with the unrealized holding gains and losses, net of tax, reported in other comprehensive income and do not affect earnings until realized.

Securities not classified as held-to-maturity are classified as AFS and are carried at fair value, with the unrealized holding gains and losses, net of tax, reported in other comprehensive income and do not affect earnings until realized.

The Company currently does not hold any fixed maturity securities classified as held-to-maturity.

The evaluation of securities for impairments is a quantitative and qualitative process, which is subject to risks and uncertainties and is intended to determine whether declines in the fair value of investments should be recognized in current period earnings.

The risks and uncertainties include changes in general economic conditions, the issuer's

The Company monitors all fixed maturity securities on an on-going basis relative to changes in credit ratings, market prices, earnings trends and financial performance, in addition to specific region or industry reviews.

The Company evaluates whether a credit impairment exists for fixed maturity securities by considering primarily the following factors:

(a) changes in the financial condition of the security's underlying collateral;

(b) whether the issuer is current on contractually obligated interest and principal payments;

and (d) the payment structure of the security.

The Company's best estimate of expected future cash flows used to determine the credit loss amount is a quantitative and qualitative process.

Quantitative review includes information received from third-party sources such as financial statements, pricing and rating changes, liquidity and other statistical information.

Qualitative factors include judgments related to business strategies, economic impacts on the issuer, overall judgment related to estimates and industry factors as well as the Company's intent to sell the security, or if it is more likely than not that the Company would be required to sell a security before recovery of its amortized cost.

The Company's best estimate of future cash flows involves assumptions including, but not limited to, various performance indicators, such as historical and projected default and recovery rates, credit ratings, and current delinquency rates.

These assumptions require the use of significant management judgment and include the

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financial condition or future prospects, the effects of changes in interest rates or credit spreads and the expected recovery period.

The Company evaluates all securities on a quarterly basis, and more frequently when economic conditions warrant additional evaluations, for determining if an OTTI exists pursuant to the accounting guidelines.

In evaluating the possible impairment of securities, consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial conditions and near-term prospects of the issuer, and the ability and intent of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

In analyzing an issuer's financial condition, the Company may consider whether the securities are issued by the Federal government or its agencies, by government-sponsored agencies, or whether downgrades by bond rating agencies have occurred, and reviews of the issuer's financial condition.

If management determines that an investment experienced an OTTI, management must then determine the amount of OTTI to be recognized in earnings.

If management does not intend to sell the security and it is more likely than not that the Company will not be required to sell the security before recovery of its amortized cost basis less any current period loss, the OTTI will be separated into the amount representing the credit loss and the amount related to all other factors.

The amount of OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings.

The amount of OTTI related to other factors will be recognized in other comprehensive income, net of applicable taxes.

The previous amortized cost basis less the OTTI recognized in earnings will become the new amortized cost basis of the investment.

If management intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current period credit loss, the OTTI will be recognized in earnings equal to the entire difference between the investment's amortized cost basis and its fair value at the consolidated financial statement date.

Any recoveries related to the value of these securities are recorded as an unrealized gain (as other comprehensive income (loss) in shareholders' equity) and not recognized in income until the security is ultimately sold.

The Company from time to time may dispose of an impaired security in response to asset/liability management decisions, future market movements, business plan changes, or if the net proceeds can be reinvested at a rate of return that is expected to recover the loss within a reasonable period of time.

probability of issuer default and estimates regarding timing and amount of expected recoveries, which may include estimating the underlying collateral value.

In addition, projections of expected future fixed maturity security cash flows may change based upon new information regarding the performance of the issuer.

Any credit losses are presented as an allowance rather than as a write-down of AFS fixed maturity securities.

DEFERRED POLICY ACQUISITION COSTS

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This method limits the amount of deferred costs to its estimated realizable value, provided actual experience is comparable to that contemplated in the locked-in assumptions.

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Inherent in the capitalization and amortization of DAC are certain management judgments about what acquisition costs are deferred, the ending asset balance and the annual amortization.

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Loss recognition testing considers, among other things, actual experience and projected future experience and calculates the available premium (gross premium less the benefit and expense portion of premium) for the next 50 years.

DAC is evaluated for recoverability using best estimate assumptions.

Based on the results of DAC recoverability testing and loss recognition testing, management believes that our DAC and related amortization for the years ended December 31, 2019 , 2018 and 2017 limits the amount of deferred costs to its estimated realizable value.

DAC is evaluated for recoverability using best estimate assumptions related to interest rates, mortality and lapses.

Based on the results of DAC recoverability and loss recognition testing, management believes that our DAC for the years ended December 31, 2020, 2019 and 2018 is recorded at its estimated realizable value.

However, if expenses or mortality increase by 5% from our underlying assumptions or interest rates continue to decline, a loss recognition event could occur in our Home Service Insurance segment.

For DAC related to long-duration traditional insurance contracts, if the assets supporting the liabilities are in a net unrealized gain position at the balance sheet date, loss recognition testing assumptions are updated to exclude such gains from future cash flows by reflecting the impact of reinvestment rates on future yields.

If a future loss is anticipated under this basis, any additional shortfall indicated by loss recognition tests is recognized as a reduction in accumulated other comprehensive income (shadow loss recognition).

Similar to other loss recognition on long-duration insurance contracts, such shortfall is first reflected as a reduction in DAC and secondly as an increase in

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liabilities for future policy benefits.

The change in these adjustments, net of tax, is included with the change in net unrealized appreciation of investments that is credited or charged directly to other comprehensive income.

COST OF INSURANCE ACQUIRED

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A recoverability test that considers, among other things, actual experience and projected future experience is performed at least annually.

These annual recoverability tests are based initially on an estimate of the available premium (gross premium less the benefit and expense portion of premium) for the next 50 years.

These annual recoverability tests are based initially on an estimate of the available premium (gross premium less the benefit and expense portion of premium) for the next 50 years using best estimate assumptions related to interest rates, mortality and lapses.

Management believes that our COIA is recoverable for the years ended December 31, 2020 and 2019.

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Management’s determination of the fair value of each reporting unit under the accounting guidance incorporates multiple inputs including 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.

We elected to early adopt the FASB's issued Accounting Standards Update ("ASU") No.

2017-04, Simplifying the Test for Goodwill Impairmen t as of December 31, 2017.

Management’s determination of the fair value of each reporting unit incorporates multiple inputs including 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.

Other assumptions can include levels of economic capital, future business growth, discount rates and earnings projections.

Spread compression and related effects to profitability caused by lower interest rates affect the valuation of in force business more significantly than the valuation of new business, as new business pricing assumptions reflect the current and anticipated future interest rate environment.

Estimates of fair value are inherently uncertain and represent management's reasonable expectations regarding future developments.

We performed our annual goodwill impairment test and the fair value was in excess of the segment's carrying value for the years ended 2020, 2019 or 2018.

As of December 31, 2020, the Company had $12.6 million of goodwill allocated to the Life Insurance segment and the segment's fair value exceeded the carrying value by approximately 8%.

We apply significant judgment when determining the estimated fair value of our reporting unit.

These judgements incorporate multiple inputs including discounted cash flow calculations based on assumptions that market participants would make in valuing the reporting unit, levels of economic capital, production levels and profitability of new business, pricing changes, spread compression, value of in force and earnings projections.

Estimates of fair value are inherently uncertain and represent management’s reasonable expectations regarding future developments.

Unfavorable changes to assumptions or factors that decrease the fair value and could result in future impairment include, but are not limited to, lower expectations for future sales, higher maintenance expenses, unfavorable mortality, higher discount rates and market-based inputs.

Increases in the carrying value of the segment caused by recognition of uncertain tax benefits could also result in future impairment.

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POLICY LIABILITIES

Future policy benefit reserves have been computed using the net level premium method with assumptions as to investment yields, dividends on participating business, mortality and withdrawals based upon our experience.

The preparation of consolidated financial statements requires management to make estimates and assumptions that affect the reported amount of policy liabilities and the increase in future policy benefit reserves.

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If we were to have a gain contingency, we would disclose it in the notes to our consolidated financial statements.

PREMIUM REVENUE AND RELATED EXPENSES

Premiums on life and accident and health policies are reported as earned when due or, for short duration contracts, over the contract period on a pro rata basis.

Benefits and expenses are associated with earned premiums and occur throughout the estimated life of the contracts.

This matching is accomplished by means of provisions for future benefits and the capitalization and amortization of DAC.

Annuities are accounted for in a manner consistent with accounting for interest bearing financial instruments.

Our primary annuity products do not include fees or other such charges.

TAX ACCOUNTING

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The effect on deferred tax assets and liabilities of a change in tax rates is recognized in net income in the period in which the change is enacted.

Given the enactment of the Tax Act on December 22, 2017, we re-measured our deferred tax assets and deferred tax liabilities to the new corporate tax rate of 21%, which resulted in a $35.7 million tax expense in 2017.

CICA Ltd., a wholly-owned subsidiary of Citizens, is considered a controlled foreign corporation for federal tax purposes.

As a result, the insurance activity of CICA Ltd.

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is subject to Subpart F of the IRC and is included in Citizens taxable income on its US federal income tax return and due to the 0% enacted tax rate in Bermuda there are no deferred taxes recorded for CICA Ltd.'s temporary differences.

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Accounting Pronouncements in the notes to our consolidated financial statements.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis