What changed in this filing

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Item 9A. Controls and Procedures

2021-03-10 compared with 2020-03-11 · 854 added, 491 removed, 1168 unchanged (54% of the section changed)

CONTROLS AND PROCEDURES

(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

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

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communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosures.

(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES [To be updated]

Our management, including our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Exchange Act as of December 31, 2020, the end of the period covered by this Annual Report on Form 10-K.

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Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act.

The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S.

The Company’s internal control over financial

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reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

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Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may

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become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ DELOITTE & TOUCHE LLP

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March 10, 2021

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(d) CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

There were no changes in our internal control over financial reporting during the quarter ended December 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, except as described below.

As disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018, management identified a material weakness in our internal control over financial reporting as of December 31, 2018 related to ineffectively designing and maintaining controls to analyze and account for significant and unusual transactions.

A material weakness, as defined in Rule 12b-2 of the Exchange Act, is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

During 2019, management, with oversight from our principal executive officer and principal financial officer, established policies and procedures to identify significant and unusual transactions, assess related risks, evaluate technical accounting implications, and document and communicate any significant and unusual transactions.

We have designed and implemented controls to identify such transactions and review sufficiently detailed analysis to evaluate the accounting treatment for significant and unusual transactions on a timely basis.

There were no changes in our internal control over financial reporting during the quarter ended December 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

OTHER INFORMATION

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The information in this Part III indicated below is incorporated by reference from other sections of this Annual Report on Form 10-K or from our definitive proxy statement pursuant to General Instruction G(3) of Form 10-K.

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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Item 12 of this Annual Report on Form 10-K incorporates by reference the information in the sections entitled "Control of the Company and Share Ownership - Security Ownership of Directors and Management" and "Control of the Company and Share Ownership - Security Ownership of Certain Beneficial Owners" in our Proxy Statement and the information in this Annual Report on Form 10-K under the heading "Item 5 - Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities - Securities Authorized for Issuance under Equity Compensation Plans."

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Item 12 of this Annual Report on Form 10-K incorporates by reference the information in the sections entitled "Security Ownership of Directors and Management" and "Security Ownership of Certain Beneficial Owners" in our Proxy Statement.

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

The following table sets forth information regarding securities authorized for issuance under our equity compensation plan, the Citizens, Inc.

Omnibus Incentive Plan as of December 31, 2020.

Stock Compensation in the notes to our consolidated financial statements for additional information regarding our Omnibus Incentive Plan.

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

Equity compensation plans approved by security holders 189,300 $ 6.03 2,561,836

Equity compensation plans not approved by security holders — — —

Total 189,300 $ 6.03 2,561,836

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Item 13 of this Annual Report on Form 10-K incorporates by reference the information in the sections entitled "Corporate Governance - Director Independence" and "Corporate Governance - Certain Relationships and Related Party Transactions" in our Proxy Statement.

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PRINCIPAL ACCOUNTING FEES AND SERVICES

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EXHIBITS, FINANCIAL STATEMENT SCHEDULES

Documents filed as part of this Report

(a) Documents filed as part of this Report

(1) and (2) Financial Statements and Schedules

The financial statements and schedules listed on the following index to financial statements and financial statement schedules are filed under Item 8 as part of this Form 10-K.

Index to Consolidated Financial Statements and Financial Statement Schedules

Index to Consolidated Financial Statements and Financial Statement Schedules Page

Report of Independent Registered Public Accounting Firm 73

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We have audited the accompanying consolidated balance sheets of Citizens, Inc.

and consolidated subsidiaries (the “Company”) as of December 31, 2019 and 2018, the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity, and cash flows, for each of the three years in the period ended December 31, 2019, and the related notes and the schedules listed in the Index at Item 15(b) (collectively referred to as the “consolidated financial statements”).

and consolidated subsidiaries (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and the schedules listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

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We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current-period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Future Policy Benefit Reserves and Amortization of Deferred Policy Acquisition Costs for Life Insurance Contracts — Refer to Notes 1 and 4 to the consolidated financial statements

Critical Audit Matter Description

The Company’s management sets assumptions used in (1) recording a liability for policy benefit payments that will be made in the future (future policy benefit reserves), (2) amortization of deferred policy acquisition costs, (3)

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deferred policy acquisition costs recoverability testing and (4) loss recognition testing.

The most significant assumptions include mortality, lapse and interest rate.

Assumptions are based upon the Company’s experience, modified as necessary to reflect anticipated trends and to include provisions for possible adverse deviations.

Management’s estimate of future policy benefits for life insurance contracts was $1.25 billion as of December 31, 2020.

Total amortization of deferred policy acquisition costs for life insurance contracts was $24 million for the year ended December 31, 2020.

Given the inherent uncertainty in selecting the mortality, lapse and interest rate assumptions and sensitivity of these significant assumptions, auditing the development of such assumptions involved especially subjective judgment and the involvement of our actuarial specialists.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to management’s judgments regarding the mortality, lapse and interest rate assumptions used in the development of future policy benefit reserves, the amortization of deferred policy acquisition costs, and performing annual deferred policy acquisition costs recoverability testing and loss recognition testing included the following, among others:

• We tested the operating effectiveness of the Company’s controls over the assumption development process, the valuation of future policy benefit reserves and amortization of deferred policy acquisition costs.

• We tested the underlying data of management’s experience studies used in the development of the assumptions.

• With the assistance of our actuarial specialists, we evaluated management’s selected actuarial assumptions, including consideration of management’s process, methodologies and judgments used to develop the assumptions.

• With the assistance of our actuarial specialists, we evaluated whether the assumptions used for future policy benefit reserves and amortization of deferred policy acquisition costs calculations were consistent with assumptions determined by management in their experience studies and assumption setting process.

• With the assistance of our actuarial specialists, we evaluated loss recognition and deferred policy acquisition costs recoverability projections for consistency with assumptions determined by management in their experience studies and assumption setting process.

Goodwill — Refer to Note 1 to the consolidated financial statements

Critical Audit Matter Description

The Company’s evaluation of goodwill for impairment involves the comparison of the estimated fair value of the reporting unit to its carrying value.

The Company’s determination of the estimated fair value of the reporting unit incorporates significant judgments, including discounted cash flow calculations based on assumptions that market participants would make in valuing the reporting unit, including discount rate and projections of production levels and profitability of new business.

Changes in these assumptions could have an impact on either the fair value, the amount of any goodwill impairment charge, or both.

The goodwill balance was $12.6 million as of December 31, 2020, all of which was allocated to the Life Insurance segment reporting unit.

The fair value of the Life Insurance segment exceeded its carrying value by 8% as of the measurement date and, therefore, no impairment was recognized.

Given the significant judgments made by management to estimate the fair value of the reporting unit, and the difference between its fair value and carrying value, performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to selection of the discount rate and projections of production levels and profitability of new business required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists and actuarial specialists.

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How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures performed to evaluate the reasonableness of management’s estimates and assumptions related to the discount rate and production levels and profitability of new business used by management to estimate the fair value of the reporting unit, included the following, among others:

• We tested the operating effectiveness of the Company’s controls related to its goodwill impairment assessment, including controls related to management’s selection of the discount rate and projections of production levels and profitability of new business.

• With the assistance of our fair value specialists, we evaluated the discount rate, which included developing a range of independent estimates of discount rate assumptions and comparing those to the discount rate selected by management.

• We evaluated the reasonableness of management’s projections of production levels and profitability of new business by comparing the projections to internal communications to management and the Board of Directors and sales targets included in compensation plans approved by the Board of Directors.

• With the assistance of our actuarial specialists, we evaluated whether mortality, lapse and interest rate assumptions used in the projections of production levels and profitability of new business were consistent with assumptions determined by management in their experience studies and assumption setting process.

• We tested the underlying data used in the discounted cash flow calculations and the mathematical accuracy of the discounted cash flow calculations.

/s/ DELOITTE & TOUCHE LLP

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CITIZENS, INC.

AND CONSOLIDATED SUBSIDIARIES

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(In thousands)

Fixed maturities available-for-sale, at fair value (amortized cost:

Fixed maturity securities available-for-sale, at fair value (amortized cost:

$ 1,321,487 and $ 1,293,853 in 2020 and 2019, respectively)

$ 1,489,383 1,377,959

Equity securities, at fair value 22,102 16,033

Real estate held for investment (less $1,284 accumulated depreciation in 2018)

Real estate held for sale (less $1,325 and $4,411 accumulated depreciation in 2019 and 2018, respectively)

Other long-term investments

Policy loans 83,318 82,005

Real estate held-for-sale 2,571 2,571

Other long-term investments (portion measured at fair value $ 11,923 in 2020;

less allowance for losses of $ 11 in 2020)

Short-term investments — 1,301

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Property and equipment, net 16,312 5,904

Due premiums 11,309 12,656

Other assets (less allowance for losses of $ 297 in 2020)

Total assets $ 1,843,420 1,744,936

See accompanying Notes to Consolidated Financial Statements.

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CITIZENS, INC.

AND CONSOLIDATED SUBSIDIARIES

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December 31, continued

(In thousands)

(In thousands, except share amounts)

Liabilities and Stockholders' Equity

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Life insurance $ 1,246,423 1,218,757

Annuities 78,304 76,380

Accident and health 761 1,031

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Current federal income tax payable 43,916 44,622

Payable for securities in process of settlement 5,265 —

Other liabilities 46,076 30,804

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Class A, no par value, 100,000,000 shares authorized, 52,654,016 and 52,364,993 shares issued and outstanding in 2020 and 2019, respectively, including shares in treasury of 3,135,738 in 2020 and 2019

262,869 261,515

Class B, no par value, 2,000,000 shares authorized, 1,001,714 shares issued and outstanding in 2020 and 2019

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Accumulated other comprehensive income:

Net unrealized gains on debt securities, net of tax

Net unrealized gains on fixed maturity securities, net of tax 128,255 77,117

Treasury stock, at cost ( 11,011 ) ( 11,011 )

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CITIZENS, INC.

AND CONSOLIDATED SUBSIDIARIES

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(In thousands, except share amounts)

2020 2019 2018

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

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

Realized investment gains, net

Realized investment gains (losses), net 1,502 5,249 108

Other income 1,828 1,418 1,833

Total revenues 238,856 250,545 244,006

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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

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Income (loss) before federal income tax ( 12,317 ) 5,745 2,002

Federal income tax expense

Federal income tax expense (benefit) ( 1,329 ) 7,115 13,064

Net income (loss) ( 10,988 ) ( 1,370 ) ( 11,062 )

Per Share Amounts:

Basic and diluted loss per share of Class A common stock

Basic and diluted loss per share of Class B common stock

Basic and diluted earnings (losses) per share of Class A common stock $ ( 0.22 ) ( 0.03 ) ( 0.22 )

Basic and diluted earnings (losses) per share of Class B common stock ( 0.11 ) ( 0.01 ) ( 0.11 )

Other Comprehensive Income (Loss):

Unrealized gains (losses) on debt securities:

Unrealized gains (losses) on fixed maturity securities:

Unrealized holding gains (losses) arising during period 48,642 78,825 ( 30,639 )

Reclassification adjustment for losses (gains) included in net income 111 ( 1,927 ) ( 953 )

Unrealized gains (losses) on debt securities, net

Income tax expense (benefit) on unrealized gains (losses) on debt securities

Unrealized gains (losses) on fixed maturity securities, net 48,753 76,898 ( 31,592 )

Income tax expense (benefit) on unrealized gains (losses) on fixed maturity securities ( 2,385 ) 5,147 ( 6,464 )

Other comprehensive income (loss) 51,138 71,751 ( 25,128 )

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CITIZENS, INC.

AND CONSOLIDATED SUBSIDIARIES

Consolidated Statements of Stockholders' Equity

Common Stock Accumulated

deficit Accumulated

comprehensive

income (loss)

income (loss) Treasury

Stock-holders'

(In thousands)

(In thousands) Class A Class B

Balance at December 31, 2017 $ 259,383 3,184 ( 54,375 ) 26,332 ( 11,011 ) 223,513

Accounting standards adopted January 1, 2018 (1)

— — ( 4,162 ) 4,162 — —

Comprehensive income (loss):

Unrealized investment gains, net

Net income (loss) — — ( 11,062 ) — — ( 11,062 )

Unrealized investment gains (losses), net — — — ( 28,498 ) — ( 28,498 )

Unrealized gain from held-to-maturity securities transferred to available-for-sale, net — — — 3,370 — 3,370

Total comprehensive income (loss) — — ( 11,062 ) ( 25,128 ) — ( 36,190 )

Stock-based compensation 410 — — — — 410

Balance at December 31, 2018 259,793 3,184 ( 69,599 ) 5,366 ( 11,011 ) 187,733

Accounting standards adopted January 1, 2018 (1)

Balance at January 1, 2018

Comprehensive loss

Unrealized investment losses, net

Unrealized gain from held-to-maturity securities transferred to available-for-sale, net

Total comprehensive loss

Comprehensive income (loss):

Net income (loss) — — ( 1,370 ) — — ( 1,370 )

Unrealized investment gains (losses), net — — — 71,751 — 71,751

Total comprehensive income (loss) — — ( 1,370 ) 71,751 — 70,381

Stock-based compensation 1,722 — — — — 1,722

Balance at December 31, 2019 261,515 3,184 ( 70,969 ) 77,117 ( 11,011 ) 259,836

Accounting standards adopted January 1, 2020 (1)

— — ( 395 ) — — ( 395 )

Comprehensive income (loss):

Unrealized investment gains, net

Net income (loss) — — ( 10,988 ) — — ( 10,988 )

Unrealized investment gains (losses), net — — — 51,138 — 51,138

Total comprehensive income (loss) — — ( 10,988 ) 51,138 — 40,150

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AND CONSOLIDATED SUBSIDIARIES

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(In thousands)

2020 2019 2018

Cash Flows from Operating Activities:

Adjustments to reconcile net loss to net cash provided by operating activities:

Realized investment gains on sale of investments and other assets

Net income (loss) $ ( 10,988 ) ( 1,370 ) ( 11,062 )

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

Realized investment (gains) losses on sale of investments and other assets ( 1,502 ) ( 5,249 ) ( 108 )

Net deferred policy acquisition costs 6,964 6,013 11,540

Amortization of cost of insurance acquired 1,816 1,546 2,458

Depreciation 1,423 1,677 1,451

Amortization of premiums and discounts on investments 8,061 12,859 16,998

Stock-based compensation 2,223 2,099 410

Deferred federal income tax expense

Impairment of goodwill

Deferred federal income tax expense (benefit) ( 402 ) 1,573 62,633

Accrued investment income 1,316 1,014 595

Reinsurance recoverable ( 2,057 ) ( 32 ) 51

Due premiums 1,347 669 ( 560 )

Future policy benefit reserves 29,650 41,479 48,496

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Commissions payable and other liabilities 3,702 2,924 3,609

Net cash provided by operating activities

Other, net ( 3,043 ) ( 1,707 ) ( 752 )

Net cash provided by (used in) operating activities 48,834 72,223 84,620

Cash Flows from Investing Activities:

Sales of fixed maturities, available-for-sale

Maturities and calls of fixed maturities, available-for-sale

Maturities and calls of fixed maturities, held-to-maturity

Purchases of fixed maturities, available-for-sale

(Increase) decrease in equity securities

Sales of fixed maturity securities, available-for-sale 20,537 66,900 38,823

Maturities and calls of fixed maturity securities, available-for-sale 220,397 181,618 65,906

Maturities and calls of fixed maturity securities, held-to-maturity — — 20,699

Purchases of fixed maturity securities, available-for-sale ( 271,474 ) ( 329,627 ) ( 195,001 )

Purchases of equity securities ( 4,473 ) — ( 9 )

Principal payments on mortgage loans 9 9 9

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Sales of other long-term investments and real estate 3,671 6,983 14

Purchases of other long-term investments and real estate

Purchases of other long-term investments ( 30,256 ) ( 187 ) —

Purchases of property and equipment ( 221 ) ( 511 ) ( 724 )

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Purchases of short-term investments — ( 2,456 ) ( 7,850 )

Net cash used in investing activities

Net cash provided by (used in) investing activities ( 61,812 ) ( 69,345 ) ( 85,134 )

See accompanying Notes to Consolidated Financial Statements.

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CITIZENS, INC.

AND CONSOLIDATED SUBSIDIARIES

Consolidated Statements of Cash Flows, Continued

Consolidated Statements of Cash Flows

Years Ended December 31,

(In thousands)

2020 2019 2018

Cash Flows from Financing Activities:

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Annuity withdrawals ( 5,759 ) ( 8,505 ) ( 7,323 )

Other ( 869 ) ( 377 ) —

Net cash provided by (used in) financing activities 904 ( 2,165 ) ( 58 )

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Cash paid during the year for income taxes $ — 2,200 2,510

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:

SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:

During 2020, 2019 and 2018, various fixed maturity issuers exchanged securities with book values of $ 9.1 million, $ 16.8 million and $ 2.5 million, respectively, for securities of equal value.

The Company recognized right-of-use assets of $ 12.0 million in exchange for new operating lease liabilities during 2020.

The Company accrued purchases of property and equipment of $ 0.8 million as of December 31, 2020, which is reflected in other liabilities on the Consolidated Balance Sheets and recorded none as of December 31, 2019 and 2018.

The Company also had $ 5.3 million of unsettled securities trades as of December 31, 2020 and none as of December 31, 2019 and 2018.

See accompanying Notes to Consolidated Financial Statements.

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The consolidated financial statements include the accounts and operations of Citizens, Inc.

("Citizens"), a Colorado corporation, and its wholly-owned subsidiaries, CICA Life Insurance Company of America ("CICA"), CICA Life Ltd.

("Citizens" or the "Company"), a Colorado corporation, and its wholly-owned subsidiaries, CICA Life Insurance Company of America ("CICA"), CICA Life Ltd.

("CICA Ltd."), Citizens National Life Insurance Company ("CNLIC"), Security Plan Life Insurance Company ("SPLIC"), Security Plan Fire Insurance Company ("SPFIC"), Magnolia Guaranty Life Insurance Company ("MGLIC"), and Computing Technology, Inc.

All significant inter-company accounts and transactions have been eliminated.

Citizens and its wholly-owned subsidiaries are collectively referred to as "the Company," "we," or "our."

Citizens and its wholly-owned subsidiaries are collectively referred to as the "Company," "we," "us," or "our".

Our Life Insurance segment operates through CICA Ltd., CICA and CNLIC.

Our international life insurance business, which operates through CICA Ltd., issues U.S.

dollar-denominated endowment contracts internationally, which are principally accumulation contracts that incorporate an element of life insurance protection and ordinary whole life insurance in U.S.

Dollar-denominated amounts sold to foreign residents.

dollar-denominated amounts sold to non-U.S.

These contracts are designed to provide a fixed amount of insurance coverage over the life of the insured and may utilize rider benefits to provide additional increasing or decreasing coverage and annuity benefits to enhance accumulations.

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Our Home Service Insurance segment operates through our subsidiaries SPLIC, MGLIC and SPFIC, and focuses on the life insurance needs of the middle- and lower-income markets, primarily in Louisiana, Mississippi and Arkansas.

Our products in this segment 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 as well as limited liability, named peril property policies covering dwelling and contents.

Our products in this segment consist primarily of small face amount ordinary whole life, industrial life and pre-need policies, which are designed to fund final expenses for the insured, primarily consisting of funeral and burial costs as well as limited liability, named peril property policies covering dwelling and contents.

CTI provides data processing systems and services to the Company.

SIGNIFICANT ACCOUNTING POLICIES

Investment securities are classified as held-to-maturity, available-for-sale or trading.

Investment securities are classified as held-to-maturity ("HTM"), available-for-sale ("AFS") or trading.

Management determines the appropriate classification at the time of purchase.

The classification of securities is significant since it directly impacts the accounting for unrealized gains and losses on securities.

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 are not reported in earnings until realized.

Fixed maturities consist primarily of bonds classified as available-for-sale or held-to-maturity.

The Company does not classify any fixed maturities as trading and beginning September 30, 2018, the Company no longer classifies any fixed maturities as held-to-maturity.

Fixed maturity securities are classified as HTM 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 HTM 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 are not reported in earnings until realized.

Fixed maturity securities consist primarily of bonds classified as AFS or HTM.

The Company does not classify any fixed maturity securities as trading and, beginning September 30, 2018, the Company no longer classifies any fixed maturity securities as HTM.

Equity securities are measured at fair value beginning January 1, 2018, with the change in fair value recorded through net income.

Prior to 2018, changes in equity security fair values were a component of accumulated other comprehensive income.

Unrealized gains (losses) of fixed maturities held as available-for-sale is shown as a separate component of stockholders' equity, net of tax, and is a separate component of comprehensive income.

The Company evaluates all securities on a quarterly basis, and more frequently when economic conditions warrant additional evaluations, in determining if an other-than-temporary impairment ("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 amortized 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

Unrealized gains (losses) of fixed maturity securities held as AFS are shown as a separate component of stockholders' equity, net of tax, and is a separate component of comprehensive income.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

agencies, or whether downgrades by bond rating agencies have occurred, and reviews of the issuer’s financial condition.

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

First, we assess whether we intend to sell, or it is more likely than not that we will be required to sell, the security before recovery of its amortized cost.

If either of the criteria is met, the security's amortized cost is written down to its fair value.

For AFS fixed maturity securities that do not meet either criteria, we evaluate whether the decline in fair value has resulted from credit losses or other factors.

In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors.

If management deems a credit loss has occurred, the impairment is recorded through an allowance for credit losses rather than as a write-down.

Changes in the allowance for credit losses are recorded through realized investment gains and losses.

Any impairment that has not been recorded through an allowance for credit losses is recognized in accumulated other comprehensive income on our consolidated balance sheets.

Prior to 2020, the Company evaluated all fixed maturity securities on a quarterly basis, and more frequently when economic conditions warranted additional evaluations, to determine if a write-down should be recorded due to an other-than-temporary impairment ("OTTI").

If an OTTI was required, the write-down was recorded directly to operations and any subsequent recoveries were recorded through net investment income over the remaining life of the security.

The Company made a policy election to exclude accrued interest from the amortized cost of AFS fixed maturity securities and report accrued interest separately in accrued investment income in the consolidated balance sheets.

AFS fixed maturity securities are placed on non-accrual status when we no longer expect to receive all contractual amounts due.

Accrued interest receivable is reversed against interest income when a security is placed on non-accrual status.

Accordingly, we do not recognize an allowance for credit loss against accrued interest receivable.

Premiums and discounts are amortized or accreted over the life of the related security as an adjustment to yield using the effective interest method.

Dividend and interest income is recognized when earned.

Dividend and interest income are recognized when earned.

Realized gains and losses are included in earnings and are derived using the specific identification method for determining the cost of securities sold.

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 stockholders' 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.

Policy loans are reported at unpaid principal balances.

Real estate held for investment consists primarily of land and buildings that are recorded at depreciated cost.

If the fair value of the real estate is less than the carrying value, an impairment loss is recognized and charged to earnings.

Real estate held for sale at December 31, 2019 consisted of the Citizens Academy training facility located near Austin, Texas and at December 31, 2018 consisted of the Company's previous home office location which was sold during 2019.

Other long-term investments consists primarily of Federal Home Loan Bank ("FHLB") common stock and mortgage loans.

Real estate held for sale consists of the Citizens Academy training facility located near Austin, Texas.

This asset is recorded at fair value, less estimated sales costs and is no longer being depreciated.

Other long-term investments at December 31, 2020, consisted primarily of investments in private equity funds, a Rabbi Trust established for the benefit of the former Chief Executive Officer for the severance payment that was made to him on February 8, 2021, Federal Home Loan Bank ("FHLB") common stock and mortgage loans.

We initially estimate the fair value of investments in private equity funds by reference to the transaction price.

Subsequently, we obtain the fair value of these investments from net asset value information provided by the general partner or manager of the investments, the financial statements of which are audited annually.

Recognition of investment income on these funds is delayed due to the availability of the related financial statements, which are generally obtained from the partnerships' general partners.

As a result, our private equity funds are generally reported on a three-month delay.

We are a member of the FHLB of Dallas and such membership requires members to own stock in the FHLB.

Our FHLB stock is carried at amortized cost, which approximates fair value.

Mortgage loans on real estate are reported at unpaid principal balances.

The Company had cash equivalents and fixed maturities with an aggregate fair value of $9.6 million and $9.5 million at December 31, 2019 and 2018 , respectively, on deposit with various state regulatory authorities to fulfill statutory requirements.

CASH EQUIVALENTS

The Company considers cash equivalents as all securities whose duration does not exceed 90 days at the date of acquisition.

SHORT-TERM INVESTMENTS

The Company considers investments maturing within one year at acquisition as short-term.

These securities are carried at fair value.

The Rabbi trust is carried at amortized cost which approximates fair value.

The Company had cash equivalents and fixed maturity securities with an aggregate fair value of $ 10.8 million and $ 9.6 million at December 31, 2020 and 2019, respectively, on deposit with various state regulatory authorities to fulfill statutory requirements.

December 31, 2020 | 10-K 83

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CASH AND CASH EQUIVALENTS

Cash consists of balances on hand and on deposit in banks and financial institutions.

Cash equivalents consists of securities whose duration does not exceed 90 days at the date of acquisition.

SHORT-TERM INVESTMENTS

The Company considers investments maturing within one year at acquisition as short-term.

These securities are carried at fair value.

REINSURANCE RECOVERABLE

6 unchanged sentences

DEFERRED POLICY ACQUISITION COSTS

Acquisition costs, consisting of commissions and policy issuance, underwriting and agent convention expenses that are directly related to and vary with the successful production of new business are deferred.

Acquisition costs consist of commissions and policy issuance, underwriting and agent convention expenses that are directly related to and vary with the successful production of new business are deferred.

These deferred amounts, referred to as deferred policy acquisition costs ("DAC"), are recorded as an asset on the consolidated balance sheets and amortized to income in a systematic manner, based on related contract revenues or gross profits as appropriate.

9 unchanged sentences

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.

Approximately 93.6% of our capitalized DAC are attributed to first year and renewal excess commissions.

The remaining 6.4% are attributed to costs that vary with and are directly related to the successful acquisition of new insurance business.

Approximately 93.3 % of our capitalized DAC is attributed to first year and renewal excess commissions.

The remaining 6.7 % is attributed to costs that vary with and are directly related to the successful acquisition of new insurance business.

Those costs generally include costs related to the production, underwriting and issuance of new business.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DAC is subject to recoverability testing at the time of policy issuance and loss recognition testing on an annual basis, or when an event occurs that might require loss recognition testing.

3 unchanged sentences

Based on the results of DAC recoverability testing and loss recognition testing, management believes that our DAC as of the years ended December 31, 2020 and 2019 limits the amount of deferred costs to its estimated recoverable value.

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DAC related to investment-oriented products is also adjusted to reflect the effect of unrealized gains or losses on AFS fixed maturity securities with related changes recognized through other comprehensive income (shadow DAC).

The adjustment is made at each balance sheet date, as if the securities had been sold at their stated aggregate fair value and the proceeds reinvested at current yields.

Similarly, for 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 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.

The components of DAC from year to year are summarized as follows:

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(In thousands)

2020 2019 2018

Balance at beginning of period $ 149,249 155,747 167,063

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as of July 1, 2018.

The total impact of these system conversions, which impacted both the Home Service Insurance and Life Insurance segments, reflect changes in actuarial valuation estimates associated with the conversion.

The total impact of these system conversions, which impacted both the Home Service Insurance and Life Insurance segments, reflect changes in actuarial valuation estimates associated with the

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The impact is reflected in the accompanying consolidated financial statements and summarized in the table below.

2 unchanged sentences

Consolidated Balance Sheets

DAC $ ( 1,396 ) ( 4,339 )

Future policy benefit reserves:

5 unchanged sentences

Federal income tax expense 190 1,230

Net income $ 713 4,628

COST OF INSURANCE ACQUIRED

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This belief is based upon the analysis performed on estimated future results of the block and our annual recoverability testing.

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COIA relative to purchased blocks of insurance is summarized as follows:

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(In thousands)

2020 2019 2018

Balance at beginning of period $ 13,455 15,225 17,499

Amortization ( 1,816 ) ( 1,546 ) ( 2,458 )

Change in effects of unrealized (gains) losses on COIA ( 98 ) ( 224 ) 184

Balance at end of period $ 11,541 13,455 15,225

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Estimated amortization of COIA in each of the next five years and thereafter is as follows.

Actual future amortization will differ from these estimates due to variances from estimated future withdrawal assumptions.

(In thousands)

(In thousands) Amount

Cost of insurance acquired:

Thereafter 8,823

Effects of unrealized (gains) losses on COIA ( 484 )

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We elected to apply the quantitative assessment for the goodwill in our reporting units within each of our operating segments as of December 31, 2020 and 2019.

We assessed the assumptions used in the 2017 goodwill analysis considering then current circumstances and completed a qualitative review in 2018 .

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

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, respectively.

As of December 31, 2020, the Company had $ 12.6 million of goodwill allocated to the Life Insurance segment.

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

These judgments 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, discount rate 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.

December 31, 2020 | 10-K 87

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

the reporting unit.

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

As of December 31, 2019 , the Company had $12.6 million of goodwill allocated to the Life Insurance segment.

In 2017, we recorded an impairment of $4.6 million in our Home Service Insurance segment.

There was no impairment of goodwill in 2019 and 2018 related to our segments.

Goodwill is summarized as follows:

1 unchanged sentence

(In thousands)

2020 2019 2018

Life Insurance Segment:

Balance at January 1, $ 12,624 12,624 12,624

Balance at December 31,

Home Service Insurance Segment:

Balance at January 1,

Balance at December 31,

Total Segments:

Balance at January 1,

Impairment — — —

Balance at December 31, $ 12,624 12,624 12,624

8 unchanged sentences

Electronic data processing equipment and computer software 7,179 8,215

Automobiles 50 91

Real estate and equipment leases (See Note 7 )

2 unchanged sentences

Total property and equipment $ 16,312 5,904

The Company has several lease agreements for real estate and equipment, such as its corporate home office and several district office locations related to our Home Service Insurance segment.

The Company recognizes these lease agreements on the consolidated balance sheets as a right-of-use asset and a corresponding lease liability.

The Company uses its estimated incremental borrowing rate, which is derived from information available at lease commencement date, in determining the present value of lease payments.

FUTURE POLICY BENEFITS AND EXPENSES

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GAAP and applicable actuarial standards.

Assumptions as to investment yields,

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expenses, mortality and lapses are based upon our experience, modified as necessary to reflect anticipated trends and to include provisions for possible adverse deviations.

Assumptions as to investment yields, expenses, mortality and lapses are based upon our experience, modified as necessary to reflect anticipated trends and to include provisions for possible adverse deviations.

The accrued account balance for non-traditional life insurance and investment contracts is computed as deposits net of withdrawals made by the contract holder, plus amounts credited based on contract specifications, less contract fees and charges assessed, plus any additional interest.

4 unchanged sentences

The liability for incurred but not reported claims includes estimates for additional claim amounts due related to reported claims.

Liabilities for unpaid claims are estimated using individual case basis valuations and statistical analysis.

Liabilities for

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unpaid claims are estimated using individual case basis valuations and statistical analysis.

Those estimates are subject to the effects of trends in claim severity and frequency.

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If no amount within the range is a better estimate than any other amount, the minimum amount in the range is accrued.

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A gain contingency is an uncertain situation that will be resolved in the future, possibly resulting in a gain.

5 unchanged sentences

Premiums on accident and health policies are recognized as revenue over the contract period on a pro rata basis.

Benefits and expenses are associated with earned premiums so as to result in the recognition of profits over the estimated lives of the contracts.

Benefits and expenses are associated with earned premiums so as to result in the

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

recognition of profits over the estimated lives of the contracts.

This matching is accomplished by means of a provision for future policy benefits and the capitalization and amortization of deferred policy acquisition costs.

15 unchanged sentences

Actual results could differ materially from these estimates.

Significant estimates include those used in the evaluation of credit losses on fixed maturity securities, actuarially determined assets and liabilities and assumptions, tests of goodwill impairment, valuation allowance on deferred tax assets, valuation of uncertain tax positions and contingencies relating to litigation and regulatory matters.

Certain of these estimates are particularly sensitive to market conditions, and deterioration and/or volatility in the worldwide debt or equity markets could have a material impact on the consolidated financial statements.

RECLASSIFICATIONS

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2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities .

This ASU requires equity investments, except those accounted for under the equity method of accounting, that have readily determinable fair

This ASU requires equity investments, except those accounted for under the equity method of accounting, that have readily determinable fair values to be measured at fair value with any changes in fair value recognized in net income.

Equity securities that do not have readily determinable fair values may be measured at estimated fair value or cost less impairment, if any, adjusted for subsequent observable price changes, with changes in the carrying value

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

values to be measured at fair value with any changes in fair value recognized in net income.

recognized in net income.

A qualitative assessment for impairment is required for equity investments without readily determinable fair values.

1 unchanged sentence

The Company adopted the updated guidance effective January 1, 2018.

The adoption of this guidance resulted in the recognition of $0.6 million of net after-tax unrealized gains on equity investments as a cumulative effect adjustment that decreased retained deficit as of January 1, 2018 and decreased AOCI by the same amount.

The adoption of this guidance resulted in the recognition of $ 0.6 million of net after-tax unrealized gains on equity investments as a cumulative effect adjustment that decreased retained deficit as of January 1, 2018 and decreased accumulated other comprehensive income ("AOCI") by the same amount.

The Company elected to report changes in the fair value of equity investments in realized investment gains (losses), net.

At December 31, 2017, equity investments were classified as available-for-sale on the Company's consolidated financial statements.

However, upon adoption, the updated guidance eliminated the available-for-sale consolidated financial statement classification for equity investments.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) .

This ASU requires organizations that lease assets, referred to as "lessees," to recognize on the consolidated balance sheets the rights and obligations created by those leases.

The ASU also requires disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases.

These disclosures include qualitative and quantitative requirements, providing additional information about the amounts recorded in the consolidated financial statements.

The ASU on leases became effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.

The Company has several lease agreements, such as its corporate home office and several district office locations related to our Home Service Insurance segment.

The Company adopted this standard effective January 1, 2019 and recognizes these lease agreements on the consolidated balance sheets as a right-of-use asset and a corresponding lease liability.

The adoption of this ASU did not have a material impact on our consolidated financial statements.

Commitments and Contingencies for further discussion.

In March 2017, the FASB issued ASU No.

2017-08, Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20).

The amendments in this ASU shorten the amortization period for certain callable debt securities held at a premium.

Specifically, the amendments require the premium to be amortized to the earliest call date.

The amendments do not require an accounting change for securities held at a discount;

the discount continues to be amortized to maturity.

The Company has a large portfolio of callable debt securities purchased at a premium.

As such, the Company had already been amortizing the premium to the earliest call date (yield to worst), thus adoption of this guidance as of January 1, 2019 did not have a material impact on our consolidated financial statements.

For public business entities, the amendments in this ASU were effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.

In February 2018, the FASB issued ASU No.

2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income .

This ASU allows a reclassification from accumulated other comprehensive income ("AOCI") to retained earnings of the stranded tax effects that occurred due to the enactment of the Tax Cuts and Jobs Act of 2017 (the "Tax Act").

This ASU allows a reclassification from AOCI to retained earnings of the stranded tax effects that occurred due to the enactment of the Tax Cuts and Jobs Act of 2017 (the "Tax Act").

The updated guidance was effective for reporting periods beginning after December 15, 2018 and is to be applied retrospectively to each period in which there are items impacted by the Tax Act remaining in AOCI or at the beginning of the period of adoption.

3 unchanged sentences

In June 2016, the FASB issued ASU No.

2018-07, Compensation-Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting.

This ASU is intended to simplify aspects of share-based compensation issued to non-employees by making the guidance consistent with the accounting for employee share-based compensation.

This ASU was effective for annual periods beginning after December 15, 2018 and interim periods within those annual periods, with early adoption permitted.

We adopted the provisions of this ASU as of January 1, 2019.

This guidance did not have a material impact on our consolidated financial statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In August 2018, the FASB issued ASU No.

2018-13, Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement .

This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements.

Among the changes, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements.

This ASU was effective for interim and annual reporting periods beginning after December 15, 2019;

however, early adoption was permitted.

We elected to adopt the provisions of this ASU as of December 31, 2019.

This guidance did not have a material impact on our consolidated financial statements.

ACCOUNTING STANDARDS NOT YET ADOPTED

In June 2016, the FASB issued ASU No.

2016-13, Financial Instruments-Credit Losses (Topic 326) , with the main objective to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date.

The ASU requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected.

The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset.

The ASU requires a financial asset (or a group of financial assets) measured at amortized cost to be presented at the net amount expected to be collected.

The allowance for credit losses is a valuation account that is deducted from the amortized cost of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset.

The income statement reflects the measurement of credit losses for newly recognized financial assets, as well as the increases or decreases of expected credit losses that have taken place during the period.

Credit losses on available-for-sale debt securities should be measured in a manner similar to current U.S.

Credit losses on AFS fixed maturity securities should be measured in a manner similar to current U.S.

however, the credit losses are recorded through an allowance for credit losses rather than as a write-down.

This approach is an improvement to current U.S.

This approach is an improvement to prior U.S.

GAAP because an entity will be able to record reversals of credit losses (in situations in which the estimate of credit losses declines) in current period net income, which in turn should align the income statement recognition of credit losses with the reporting period in which changes occur.

GAAP prohibits reflecting those improvements in current-period earnings.

For public business entities, the amendments in this ASU will be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.

The Company has evaluated the impact this guidance will have on our consolidated financial statements, including but not limited to our available-for-sale securities, reinsurance recoverable and amounts due from agents, and concluded the impact is immaterial.

GAAP prohibited reflecting those improvements in current-period earnings.

The Company adopted this standard effective January 1, 2020 using the modified retrospective approach.

The adoption resulted in an increase in accumulated deficit of $ 0.4 million related to agents' debit balance collectability.

In September 2018, the FASB issued ASU No.

2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract .

This ASU requires an entity in a cloud computing arrangement (i.e., hosting arrangement) that is a service contract to follow the internal-use software guidance in Accounting Standards Codification 350-40 to determine which implementation costs to capitalize as assets or expense as incurred.

Capitalized implementation costs should be presented in the same line item on the balance sheet as amounts prepaid for the hosted service, if any (generally as an "other asset").

The capitalized costs will be amortized over the term of the hosting arrangement, with the amortization expense being presented in the same income statement line item as the fees paid for the hosted service.

We adopted this standard effective January 1, 2020.

The adoption had no impact on our consolidated financial statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ACCOUNTING STANDARDS NOT YET ADOPTED

In August 2018, the FASB issued ASU No.

12 unchanged sentences

The new disclosures include rollforwards and information about significant assumptions and the effects of changes in those assumptions.

For calendar-year public companies, the changes will be effective on January 1, 2022.

For calendar-year public companies, the changes will be effective on January 1, 2023, however, early adoption is permitted.

The Company is evaluating the impact of this new guidance, and it is expected to have a material impact on our consolidated financial statements.

In September 2018, the FASB issued ASU No.

2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract .

This ASU requires an entity in a cloud computing arrangement (i.e., hosting arrangement) that is a service contract to follow the internal-use software guidance in ASC

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350-40 to determine which implementation costs to capitalize as assets or expense as incurred.

Capitalized implementation costs should be presented in the same line item on the consolidated financial statements as amounts prepaid for the hosted service, if any (generally as an "other asset").

This ASU will be effective for interim and annual reporting periods beginning after December 15, 2019;

early adoption is permitted.

We will adopt this ASU prospectively and concluded the impact is immaterial.

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

(2) INVESTMENTS

The Company invests primarily in fixed maturity securities, which totaled 90.2% of total cash, cash equivalents and investments at December 31, 2019 .

The Company invests primarily in fixed maturity securities, which totaled 89.8 % of total cash and invested assets at December 31, 2020.

Carrying Value as of December 31,

(In thousands, except for %)

Cash, Cash Equivalents and Investments:

2020 % 2019 %

Cash and invested assets

Fixed maturity securities $ 1,489,383 89.8 % $ 1,377,959 90.2 %

Equity securities 22,102 1.3 16,033 1.1

Policy loans 83,318 5.0 82,005 5.4

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

1 unchanged sentence

Cash and cash equivalents 34,131 2.1 46,205 3.0

Total cash, cash equivalents and investments

We are a member of the Federal Home Loan Bank (“FHLB”) of Dallas and such membership requires members to own stock in the FHLB.

Our FHLB stock is carried at amortized cost, which approximates fair value and is included in other long-term investments.

The amortized cost, gross unrealized gains and losses and fair value of investments in fixed maturities as of December 31, 2019 and 2018 are as follows.

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table represents the amortized cost, gross unrealized gains and losses and fair value of fixed maturity securities as of December 31, 2020 and 2019.

December 31, 2020

(In thousands)

Fixed Maturities:

Available-for-sale securities:

Fixed maturity securities:

Available-for-sale:

Treasury securities $ 9,529 1,797 — 11,326

1 unchanged sentence

States and political subdivisions 377,462 32,751 548 409,665

Financial 204,160 31,000 13 235,147

Consumer 196,648 30,116 245 226,519

Energy 81,223 8,174 536 88,861

All Other 284,209 42,554 82 326,681

Commercial mortgage-backed 225 — 4 221

Residential mortgage-backed 118,144 21,819 — 139,963

Asset-backed 46,295 278 482 46,091

Foreign governments 102 16 — 118

Total fixed maturity securities $ 1,321,487 169,806 1,910 1,489,383

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

We reclassified all of our fixed maturity holdings that were previously classified as held-to-maturity to available-for-sale based upon our intent and investment strategy as of September 30, 2018.

The net carrying value of the fixed maturities held-to-maturity reclassified as available-for-sale amounted to $209.7 million .

December 31, 2019

(In thousands)

Fixed Maturities:

Available-for-sale securities:

Fixed maturity securities:

Available-for-sale:

Treasury securities $ 9,709 1,638 — 11,347

1 unchanged sentence

States and political subdivisions 512,239 24,285 240 536,284

Financial 169,146 13,094 135 182,105

Consumer 148,575 12,591 464 160,702

Energy 74,315 4,765 115 78,965

All Other 212,714 16,022 420 228,316

Commercial mortgage-backed 1,105 — 5 1,100

Residential mortgage-backed 118,130 12,223 66 130,287

Asset-backed 44,302 11 110 44,203

Foreign governments 102 17 — 119

Total fixed maturity securities $ 1,293,853 85,661 1,555 1,377,959

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Most of the Company's equity securities are diversified stock and bond mutual funds.

4 unchanged sentences

Bond mutual funds 12,354 12,311

Common stock 1,143 134

Non-redeemable preferred stock 281 314

Non-redeemable preferred stock fund 5,150 —

Total equity securities $ 22,102 16,033

VALUATION OF INVESTMENTS

AFS fixed maturity securities are reported in the consolidated financial statements at fair value.

Equity securities are measured at fair value with the change in fair value recorded through net income.

The Company recognized net realized gains of $ 1.6 million and $ 1.0 million on equity securities held for the years ended December 31, 2020 and 2019.

The Company monitors all AFS 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 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 on AFS fixed maturity securities management does not intend to sell or believes that it is more likely than not we will be required to sell.

We adopted ASU 2016-13 using the prospective transition approach for fixed maturity securities for which other-than-temporary impairment had been recognized prior to January 1, 2020.

As a result, the amortized cost remains the same before and after adoption.

The effective interest rate on these fixed maturity securities was not changed.

Amounts previously recognized in accumulated other comprehensive income as of January 1, 2020 relating to improvements in cash flow expected to be collected will be accreted into income over the remaining life of the asset.

Recoveries of amounts previously written off relating to improvements in cash flows after January 1, 2020 will be recorded in earnings when received.

The Company recorded no credit valuation losses on fixed maturity securities for the year December 31, 2020 and recognized no fixed maturity investment impairments for the year ended December 31, 2019.

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2 unchanged sentences

For fixed maturity security investments that have unrealized losses as of December 31, 2020, the gross unrealized losses that have been in a continuous unrealized loss position for less than 12 months, gross unrealized losses that have been in a continuous unrealized loss position for 12 months or longer and fair value are as follows.

December 31, 2019

Less than 12 months

Greater than 12 months

(In thousands, except for # of securities)

Fixed Maturities:

Available-for-sale securities:

December 31, 2020 Less than 12 months Greater than 12 months Total

(In thousands, except for # of securities) Fair

Value Unrealized

Securities Fair

Value Unrealized

Securities Fair

Value Unrealized

Fixed maturity securities:

Available-for-sale:

States and political subdivisions $ 32,487 548 27 — — — 32,487 548 27

Financial 1,308 13 1 — — — 1,308 13 1

Consumer 10,740 230 5 1,667 15 1 12,407 245 6

Energy 6,350 536 8 — — — 6,350 536 8

All Other 9,418 82 11 — — — 9,418 82 11

Commercial mortgage-backed 221 4 1 — — — 221 4 1

Residential mortgage-backed 83 — 1 — — — 83 — 1

Asset-backed 26,353 481 26 994 1 1 27,347 482 27

Total fixed maturity securities $ 86,960 1,894 80 2,661 16 2 89,621 1,910 82

The Company does not consider securities to be other-than-temporarily impaired when the market decline is attributable to factors such as market volatility, liquidity, spread widening and credit quality when it is anticipated that a recovery of all amounts due under the contractual terms of the security will occur.

Based on our evaluation of the credit worthiness of the issuers and because we do not intend to sell the investments, nor is it likely that we would be required to sell these investments before recovery of their amortized cost bases, which may be maturity, none of the unrealized losses are considered to be other-than-temporary.

We monitor 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 OTTI has occurred is based on a case-by-case evaluation of underlying reasons for the decline in fair value.

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

All securities with a market price below par were segregated and reviewed as of December 31, 2019 based upon the items above for impairment.

In each category of our fixed maturity securities described below, we do not intend to sell our investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases.

While the losses are currently unrealized, we continue to monitor all fixed maturity securities on an on-going basis as future information may become available which could result in an allowance being recorded.

States and political subdivisions.

The Company's investments in states and political subdivisions were purchased at a premium, relative to their face amount, and the contractual cash flows are guaranteed by the respective state or political subdivision.

Accordingly, it is expected that the securities will not be settled at a price less than the amortized cost bases of the Company's investments.

We did not recognize credit losses on corporate securities with unrealized losses that were due to interest rate sensitivity and changes in credit spreads.

We believe that fluctuations caused by movements in interest rates and credit spreads have little bearing on the recoverability of our investments.

While we are experiencing unrealized losses across several corporate sectors, the energy and automobile sectors have been impacted the most by recent economic pressures and some issuers within these sectors have been downgraded to below investment grade.

We have assessed our exposure in the energy sector and believe our investments have access to sufficient liquidity to meet their debt obligations.

The auto industry has been able to issue debt which has increased the liquidity of the component companies in the sector significantly.

The automobile sector is included in the Consumer subtotal above.

Asset-backed.

Our asset-backed securities are primarily collateralized loan obligations.

We do not expect to realize any losses for these securities and see the current valuations as a result of general market conditions.

All of the active asset-backed securities are rated investment grade.

December 31, 2020 | 10-K 95

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For fixed maturity investments that have unrealized losses as of December 31, 2018 , the gross unrealized losses that have been in a continuous unrealized loss position for less than 12 months, gross unrealized losses that have been in a continuous unrealized loss position for 12 months or longer and fair value are as follows.

December 31, 2018

Less than 12 months

Greater than 12 months

(In thousands, except for # of securities)

Fixed Maturities:

Available-for-sale securities:

The following table presents the fair values and gross unrealized losses of fixed maturity securities that are not deemed to have OTTI, aggregated by investment category and length of time that individual securities have been in a continuous loss position at December 31, 2019.

December 31, 2019 Less than 12 months Greater than 12 months Total

(In thousands, except for # of securities) Fair

Value Unrealized

Securities Fair

Value Unrealized

Securities Fair

Value Unrealized

Fixed maturity securities:

Available-for-sale:

States and political subdivisions $ 24,064 163 24 1,961 77 6 26,025 240 30

Financial 13,581 135 15 — — — 13,581 135 15

Consumer 22,671 464 20 — — — 22,671 464 20

Energy 4,208 34 4 898 81 2 5,106 115 6

All Other 22,437 285 30 2,771 135 3 25,208 420 33

Commercial mortgage-backed 1,100 5 2 — — — 1,100 5 2

Residential mortgage-backed 1,656 65 11 91 1 3 1,747 66 14

Asset-backed 36,039 110 27 — — — 36,039 110 27

Total fixed maturity securities $ 125,756 1,261 133 5,721 294 14 131,477 1,555 147

The amortized cost and fair value of fixed maturities at December 31, 2019 by contractual maturity are shown in the table below.

We have reviewed the securities in an unrealized loss position for the period ended December 31, 2019 and determined that no OTTI exists that has not been recognized based on our evaluation of the credit worthiness of the issuers and the fact that we do not intend to sell the investments nor is it likely that we will be required to sell the securities before recovery of their amortized cost bases which may be at maturity.

The amortized cost and fair value of fixed maturity securities at December 31, 2020 by contractual maturity are shown in the table below.

Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

Securities not due at a single maturity date have been reflected based upon the final stated maturity.

(In thousands)

Amortized Cost

Fixed maturities:

Securities not due at a single maturity date have been reflected based upon final stated maturity.

(In thousands) Amortized Cost Fair Value

Fixed maturity securities:

Due in one year or less $ 15,515 15,726

2 unchanged sentences

Due after ten years 956,423 1,090,636

Total fixed maturities

Total fixed maturity securities $ 1,321,487 1,489,383

The Company had no investments in any one entity which exceeded 10% of stockholders' equity at December 31, 2020 or 2019.

6 unchanged sentences

(In thousands)

2020 2019 2018

Gross investment income:

Fixed maturities

Fixed maturity securities $ 54,653 53,860 49,126

Equity securities 816 662 722

Policy loans 6,605 6,451 6,210

Other 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

Proceeds and gross realized gains and losses from sales of available-for-sale fixed maturity securities for 2019 , 2018 and 2017 are summarized as follows:

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

Years ended December 31,

(In thousands)

2020 2019 2018

Proceeds $ 20,537 66,900 38,823

Gross realized gains $ 239 2,538 1,301

1 unchanged sentence

We sold 29 , 68 and 41 fixed maturity securities from our available-for-sale portfolio in 2020, 2019 and 2018, respectively, as part of a repositioning strategy recommended by our asset manager.

There were no securities sold from the held-to-maturity portfolio in 2018 or 2017 .

Proceeds and gross realized gains and losses from sales of equity securities for 2019 , 2018 and 2017 are summarized as follows:

Years ended December 31,

(In thousands)

Gross realized gains

Gross realized losses

December 31, 2019 | 10-K 85

CITIZENS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

There were no securities sold from the held-to-maturity portfolio in 2018.

There were no sales of equity securities in 2020, 2019 and 2018.

Realized investment gains (losses) are as follows:

1 unchanged sentence

(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 (losses) $ 1,502 5,249 108

December 31, 2020 | 10-K 97

CITIZENS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

During 2019, the Company sold its former corporate office in Austin, Texas for a gross sale price of $ 7.5 million, resulting in a gain on the sale of $ 5.5 million.

The building was owned by CICA and was in our Life Insurance segment.

The building was owned by CICA and was included in our Life Insurance segment.

An impairment loss of $ 3.1 million was recorded in 2019 in our Other Non-Insurance Enterprises segment 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 being actively marketed for sale.

During 2017, the Company sold its Markham building in Little Rock, Arkansas for a gross sales price of $3.25 million , resulting in a gain on sale of $1.1 million in our Home Service Insurance segment.

(3) FAIR VALUE MEASUREMENTS

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

We hold available-for-sale fixed maturity securities, which are carried at fair value.

We also report our equity securities at fair value with changes reported through the consolidated statements of operations and comprehensive income (loss).

We hold AFS fixed maturity securities, which are carried at fair value.

We also report our equity securities at fair value with changes in fair value reported through the consolidated statements of operations and comprehensive income (loss).

Fair value measurements are generally based upon observable and unobservable inputs.

8 unchanged sentences

Treasury securities and actively traded mutual fund and stock investments.

December 31, 2019 | 10-K 86

CITIZENS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Level 2 includes those financial instruments that are valued by independent pricing services or broker quotes.

These models are primarily industry-standard models that consider various inputs, such as interest rates, credit spreads and foreign exchange rates for the underlying financial instruments.

These pricing models are primarily industry-standard models that consider various inputs, such as interest rates, credit spreads and foreign exchange rates for the underlying financial instruments.

All significant inputs are observable or derived from observable information in the marketplace or are supported by observable levels at which transactions are executed in the marketplace.

Financial instruments in this category primarily include corporate securities, U.S.

Government-sponsored enterprise securities, municipal securities and certain mortgage and asset-backed securities.

Government-sponsored enterprise securities, securities issued by states and political subdivisions and certain mortgage and asset-backed securities.

Level 3 is comprised of financial instruments whose fair value is estimated based on non-binding broker prices utilizing significant inputs not based on or corroborated by readily available market information.

Real estate held for sale is included in this category.

There were no securities in this category as of or during the years ended December 31, 2019 and 2018 .

Real estate held-for-sale is in this category.

We review the fair value hierarchy classifications each reporting period.

Changes in the observability of the valuation attributes may result in a reclassification of certain financial assets.

Such reclassifications are reported as transfers in and out of Level 3 at the beginning fair value for the reporting period in which the changes occur.

There were no transfers in or out of Level 3 during the years ended December 31, 2020 and 2019.

December 31, 2020 | 10-K 98

CITIZENS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

1 unchanged sentence

(In thousands)

Level 1 Level 2 Level 3 Total

Financial assets:

Fixed maturities available-for-sale:

Fixed maturity securities available-for-sale:

Treasury and U.S.

1 unchanged sentence

States and political subdivisions — 409,665 — 409,665

Corporate 52 877,156 — 877,208

Commercial mortgage-backed — 221 — 221

Residential mortgage-backed — 139,963 — 139,963

Asset-backed — 46,091 — 46,091

Foreign governments — 118 — 118

Total fixed maturities available-for-sale

Total fixed maturity securities available-for-sale 11,378 1,478,005 — 1,489,383

Equity securities:

1 unchanged sentence

Bond mutual funds 12,354 — — 12,354

Common stock 1,143 — — 1,143

Non-redeemable preferred stock 281 — — 281

Non-redeemable preferred stock fund 5,150 — — 5,150

Total equity securities 22,102 — — 22,102

Other long-term investments (1)

Total financial assets $ 33,480 1,478,005 — 1,523,408

(1) In accordance with Subtopic 820-10, certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy.

The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the balance sheet.

December 31, 2020 | 10-K 99

3 unchanged sentences

(In thousands)

Level 1 Level 2 Level 3 Total

Financial assets:

Fixed maturities available-for-sale:

Fixed maturity securities available-for-sale:

Treasury and U.S.

1 unchanged sentence

States and political subdivisions — 536,284 — 536,284

Corporate 52 650,036 — 650,088

Commercial mortgage-backed — 1,100 — 1,100

Residential mortgage-backed — 130,287 — 130,287

Asset-backed — 44,203 — 44,203

Foreign governments — 119 — 119

Total fixed maturities

Total fixed maturity securities available-for-sale 11,400 1,366,559 — 1,377,959

Equity securities:

1 unchanged sentence

Bond mutual funds 12,311 — — 12,311

Common stock 134 — — 134

Non-redeemable preferred stock 314 — — 314

3 unchanged sentences

Fixed maturity securities, available-for-sale.

At December 31, 2019 , the fixed maturities, valued using a third-party pricing source, totaled $1.4 billion for Level 2 assets and comprised 98.0% of total reported fair value.

Fair values for Level 3 assets are based upon unadjusted broker quotes that are non-binding.

The Level 1 and Level 2 valuations are reviewed and updated quarterly through random testing by comparisons to separate pricing models, other third-party pricing services, and back tested to recent trades.

At December 31, 2020, fixed maturity securities, valued using a third-party pricing source, totaled $ 1.5 billion for Level 2 assets and comprised 97.0 % of total reported fair value of our financial assets.

The Level 1 and Level 2 valuations are reviewed and updated quarterly through testing by comparisons to separate pricing models, other third-party pricing services, and back tested to recent trades.

In addition, we obtain information annually relative to the third-party pricing models and review model parameters for reasonableness.

There were no Level 3 assets as of December 31, 2020.

For the period ended December 31, 2020, there were no material changes to the valuation methods or assumptions used to determine fair values, and no broker or third-party prices were changed from the values received.

Equity securities.

Fair values of these securities are provided by a third-party pricing service and based upon quoted market price and are classified as Level 1 assets.

We review the fair value hierarchy classifications each reporting period.

Changes in the observability of the valuation attributes may result in a reclassification of certain financial assets.

Such reclassifications, if any, are reported as transfers in and out of Level 3 at the beginning fair value for the reporting period in which the changes occur.

There were no transfers in or out of Level 3 during the years ended December 31, 2019 and 2018 .

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

Private equity funds.

The Company considers the net asset value ("NAV") to represent the value of the investment fund and is measured by the total value of assets minus the total value of liabilities.

The following table includes information related to our investments in private equity funds that calculate NAV per share.

For these investments,

December 31, 2020 | 10-K 100

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

which are measured at fair value on a recurring basis, we use the NAV per share to measure fair value.

These investments are included in other long-term investments on the consolidated balance sheets.

December 31, 2020 Fair Value Using NAV Per Share Unfunded Commitments Life in years

(In thousands, except years) Description

Private equity funds

Middle market Investments in privately-originated, performing senior secured debt primarily in North America-based companies $ 10,542 $ 29,783 10

Term liquidity facility Investments in a facility established by the U.S.

Federal Reserve that provides financing to U.S.

company market participants for levered asset purchases with a focus on asset-backed, commercial mortgage and collateralized loan obligation markets 1,381 — 3

Late-stage growth Investments in private late-stage, established companies seeking capital to accelerate growth prior to an IPO or sale — 16,291 7

Infrastructure Investments in climate infrastructure assets, focusing on renewable power generation in wind and solar energy — 17,497 12

Total private equity funds $ 11,923 $ 63,571

Our private equity fund investments are not redeemable because distributions from the funds will be received when the underlying investments of the funds are liquidated.

The life spans indicated above may be shortened or extended at the fund manager's discretion, typically in one or two-year increments.

FINANCIAL INSTRUMENTS NOT CARRIED AT FAIR VALUE

2 unchanged sentences

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

December 31, 2019

December 31, 2018

(In thousands)

December 31, 2020 December 31, 2019

(In thousands) Carrying

Value Carrying

Financial assets:

Policy loans $ 83,318 83,318 82,005 82,005

Mortgage loans 157 195 177 210

2 unchanged sentences

Financial liabilities:

Annuities - investment contracts

Annuity - investment contracts $ 60,861 71,547 56,878 60,667

Policy loans.

Policy loans had a weighted average annual interest rate of 7.7 % at both December 31, 2020 and 2019 and no specified maturity dates.

The aggregate fair value of policy loans approximates the carrying value reflected on the consolidated financial statements.

These loans typically carry an interest rate that corresponds to the crediting rate applied to the related policy and contract reserves.

Policy loans are an integral part of the life insurance policies we have in force;

therefore, they cannot be valued separately and are not marketable.

As a result, the fair value of policy loans approximates the carrying value and policy loans are considered Level 3 assets in the fair value hierarchy.

The aggregate fair value of policy loans approximates the carrying value

December 31, 2020 | 10-K 101

CITIZENS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

reflected on the consolidated balance sheets.

Policy loans are an integral part of the life insurance policies we have in force, cannot be valued separately and are not marketable.

Therefore, the fair value of policy loans approximates the carrying value and policy loans are considered Level 3 assets in the fair value hierarchy.

Mortgage loans.

Other long-term investments include mortgage loans, which are secured principally by residential properties.

Weighted average interest rates for these loans were approximately 6.4% and 6.6% per year as of December 31, 2019 and 2018 , respectively, with maturities ranging from 19 to 23 years.

Mortgage loans are secured principally by residential properties.

Weighted average interest rates for these loans were approximately 6.4 % at both December 31, 2020 and 2019, with maturities ranging from 8 to 19 years.

Management estimated the fair value using an annual interest rate of 6.25 % at both December 31, 2020 and 2019.

Our mortgage loans are considered Level 3 assets in the fair value hierarchy.

The following table summarizes the carrying amounts of other long-term investments not carried at fair market value.

December 31, 2019

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

Annuity liabilities.

The fair value of the Company's liabilities under annuity contract policies, which are considered Level 3 liabilities, was estimated at December 31, 2020 and 2019 using discounted cash flows based upon spot rates adjusted for various risk adjustments ranging from 0.22 % to 2.34 % and 1.67 % to 3.02 %, respectively.

The fair value of liabilities under all insurance contracts are taken into consideration in the overall management of interest rate risk, which seeks to minimize exposure to changing interest rates through the matching of investment maturities with amounts due under insurance contracts.

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

Years ended December 31,

(In thousands)

Other long-term investments:

Private equity funds $ 18,135 —

FHLB common stock 190 187

2 unchanged sentences

Total other long-term investments $ 27,293 385

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

Annuity liabilities.

The fair value of the Company's liabilities under annuity contract policies, which are considered Level 3 instruments, was estimated at December 31, 2019 and 2018 using discounted cash flows based upon spot rates ranging from 1.67% to 3.02% and 2.70% to 3.8% , respectively, based upon swap rates adjusted for various risk adjustments.

The fair value of liabilities under all insurance contracts are taken into consideration in the overall

We are a member of the FHLB of Dallas and such membership requires members to own stock in the FHLB.

Our FHLB stock is carried at amortized cost, which approximates fair value.

Included in all other investments at December 31, 2020 is a Rabbi Trust holding of $ 8.8 million for the benefit of our former Chief Executive Officer, Geoffrey M.

Kolander, representing the severance payment due to him under the terms of his employment agreement in connection with his resignation following a change in control of the Company.

Such amount was paid to him in February 2021.

(4) POLICY LIABILITIES AND SHORT DURATION CONTRACTS

Various assumptions used to determine the future policy benefit reserves of life insurance include valuation interest rates, mortality assumptions and withdrawals.

December 31, 2020 | 10-K 102

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

management of interest rate risk, which seeks to minimize exposure to changing interest rates through the matching of investment maturities with amounts due under insurance contracts.

(4) POLICY LIABILITIES AND SHORT DURATION CONTRACTS

Various assumptions used to determine the future policy benefit reserves of life insurance include valuation interest rates, mortality assumptions and withdrawals.

The following table presents information on changes in the liability for life, accident and health and property policy and contract claims for the years ended December 31, 2020, 2019 and 2018.

1 unchanged sentence

(In thousands)

2020 2019 2018

Policy claims payable:

3 unchanged sentences

Add claims incurred, related to:

Current year 38,400 26,816 24,793

Prior years 195 543 ( 197 )

38,595 27,359 24,596

Deduct claims paid, related to:

Current year 29,767 20,629 18,933

Prior years 5,897 6,570 6,803

35,664 27,199 25,736

Net balance December 31 10,194 7,263 7,103

1 unchanged sentence

Balance at December 31 $ 13,206 8,059 7,614

The Company experienced unfavorable development in 2019 of $0.5 million and favorable development of $0.2 million in 2018 and 2017 .

The Company experienced unfavorable development in 2020 and 2019 of $ 0.2 million and $ 0.5 million, respectively, and favorable development of $ 0.2 million in 2018.

No unusual claims or trends have been noted.

SHORT DURATION CONTRACTS

The Company's short duration contracts consist of credit life and credit disability in the Life Insurance segment and property insurance in the Home Service Insurance segment.

The credit insurance lines are an immaterial part of short duration contracts so the following disclosures cover only the property insurance line of business in the Home Service segment.

December 31, 2020 | 10-K 103

CITIZENS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Special Property Insurance (Allied and Fire)

The following table presents incurred claims development as of December 31, 2020, net of reinsurance, as well as cumulative claim frequency and the total of incurred-but-not-reported liabilities plus expected development on reported claims included within the net incurred claims amounts.

This information is presented for the last five years as these claims rarely pay out over a longer period of time.

December 31, 2020

Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance Total of Incurred but Not Reported Liabilities Plus Expected Development on Reported Claims Cumulative Number of Reported Claims

For the Years Ended December 31,

($ In thousands) 2016 2017 2018 2019 2020

Accident Year:

2016 $ 2,071 2,096 2,066 2,062 2,062 — 550

2017 1,761 1,715 1,662 1,663 1 658

2018 1,760 1,621 1,626 2 496

2019 1,760 1,338 9 574

2020 2,804 199 1,405

Total $ 9,493

The following table presents paid claims development as of December 31, 2020, net of reinsurance.

Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance

Years ended December 31,

(In thousands) 2016 2017 2018 2019 2020

Accident Year:

2016 $ 1,680 2,061 2,061 2,061 2,061

2017 1,359 1,652 1,661 1,661

2018 1,507 1,618 1,623

2019 1,328 1,254

Total $ 8,753

All outstanding liabilities before 2016, net of reinsurance

Liabilities for claims and claim adjustment expenses, net of reinsurance $ 743

December 31, 2020 | 10-K 104

CITIZENS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The reconciliation of the net incurred and paid claims development tables to the liability for claims and claim adjustment expenses in the consolidated statement of financial position is as follows.

Years ended December 31,

(In thousands)

Net outstanding liabilities:

Special property $ 743 437

Other short duration insurance lines 214 147

Liabilities for unpaid claims and claim adjustment expenses, net of reinsurance 957 584

Reinsurance recoverable on unpaid claims:

Special property 2,955 4

Other short duration insurance lines 57 213

Total reinsurance recoverable on unpaid claims 3,012 217

Insurance lines other than short duration 9,237 7,258

Total gross liability for unpaid claims and claim adjustment expense $ 13,206 8,059

The following is supplementary information to the consolidated financial statements about average historical claims duration as of December 31, 2020.

Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance

Years 1 2 3 4 5

Special property 86.39 % 9.35 % 0.28 % — % — %

(5) REINSURANCE

3 unchanged sentences

Catastrophe reinsurance is in place for our property policies.

In 2019 and 2018 , this reinsurance provided $10.0 million of coverage above a $500,000 deductible.

In 2020 and 2019, this reinsurance provided $ 10.0 million of coverage above a $ 0.5 million deductible.

In consideration for a reinstatement premium, second event coverage is provided in excess of a $ 0.5 million deductible up to $ 10.0 million.

The annual premium was approximately $ 1.4 million in 2020 and $ 0.8 million in 2019 and 2018.

Our health insurance policies are substantially all reinsured on a 100 % coinsurance basis.

3 unchanged sentences

The ratings by A.M.

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

Best Company range from A (Excellent) to A+ (Superior).

December 31, 2020 | 10-K 105

6 unchanged sentences

Net life insurance in force $ 4,141,968 4,246,781

The Company's reinsurance recoverable on ceded reinsurance was $3.7 million in 2019 and 2018 .

The Company's reinsurance recoverable on ceded reinsurance was $ 5.8 million and $ 3.7 million in 2020 and 2019, respectively.

Premiums, claims and surrenders assumed and ceded for all lines of business for these years are summarized as follows:

1 unchanged sentence

(In thousands)

2020 2019 2018

Premiums from short-duration contracts:

Direct $ 6,448 6,804 6,839

Assumed — — —

Ceded ( 1,447 ) ( 808 ) ( 804 )

Net premiums earned 5,001 5,996 6,035

Premiums from long-duration contracts:

Direct 172,504 180,205 184,722

Assumed 91 99 99

Ceded ( 2,267 ) ( 1,953 ) ( 2,996 )

Net premiums earned 170,328 178,351 181,825

2 unchanged sentences

Claims and surrenders ceded $ ( 1,575 ) ( 940 ) ( 705 )

SPFIC has catastrophe reinsurance that covers the first event in excess of a $0.5 million deductible up to $10.0 million .

During the third and fourth quarters of 2020, SPFIC was impacted by Hurricanes Laura, Delta and Zeta, all of which caused varying levels of damage in Louisiana.

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

The reinsurance agreement specifies a maximum coverage per event of $ 10.0 million and a retention level of $ 0.5 million per event.

In consideration for a reinstatement premium, second event coverage is provided in excess of a $ 0.5 million deductible up to $ 10.0 million.

The annual premium was approximately $0.8 million in 2019 , 2018 and 2017 .

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

however, any claims in excess of $ 10.5 million would have to be paid by SPFIC.

All claims related to Zeta will be paid by SPFIC.

We expect the total of these claims to be less than $ 0.5 million.

(6) STOCKHOLDERS' EQUITY AND RESTRICTIONS

The two classes of our common stock are equal in all respects, except (a) each Class A share is entitled to receive twice the cash dividends paid on a per share basis to the Class B common stock, if any;

The two authorized classes of our common stock are equal in all respects, except (a) each Class A share is entitled to receive twice the cash dividends paid on a per share basis to the Class B common stock, if any;

and (b) the Class B common stock has the exclusive right to elect a simple majority of the Board of Directors of Citizens and the Class A common stock elects the remaining directors.

3 unchanged sentences

A summary of the change in number of shares of Class A and Class B common stock and treasury stock issued is as follows:

(In thousands)

(In thousands) Common Stock Treasury

Class A Class B Stock

Balance at December 31, 2017

52,216 1,002 ( 3,136 )

Balance at December 31, 2018

52,216 1,002 ( 3,136 )

Change 149 — —

Balance at December 31, 2019

52,365 1,002 ( 3,136 )

Change 289 — —

Balance at December 31, 2020

52,654 1,002 ( 3,136 )

EARNINGS PER SHARE

2 unchanged sentences

(In thousands, except per share amounts)

2020 2019 2018

Basic and diluted earnings per share:

Net loss $ ( 10,988 ) ( 1,370 ) ( 11,062 )

Net loss allocated to Class A common stock $ ( 10,878 ) ( 1,356 ) ( 10,950 )

Net loss allocated to Class B common stock ( 110 ) ( 14 ) ( 112 )

Net loss $ ( 10,988 ) ( 1,370 ) ( 11,062 )

Weighted average shares of Class A outstanding - basic 49,400 49,214 49,080

5 unchanged sentences

Basic and diluted loss per share of Class B common stock ( 0.11 ) ( 0.01 ) ( 0.11 )

December 31, 2019 | 10-K 92

CITIZENS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CAPITAL AND SURPLUS

The table below shows the combined total of all of our domestic insurance subsidiaries' capital and surplus and net income (loss) for life insurance operations and property insurance operations, although these amounts are not all available as dividends to Citizens because only CICA is directly owned by Citizens.

All other subsidiaries are owned by CICA.

STATUTORY CAPITAL AND SURPLUS

The table below shows the combined total of all of our domestic insurance subsidiaries' statutory capital and surplus and statutory net income (loss) for life insurance operations and property insurance operations, although these amounts are not all available as dividends to Citizens because only CICA is directly owned by Citizens.

All other domestic subsidiaries are owned by CICA.

Years ended December 31,

(In thousands)

Combined statutory stockholders' equity

Combined statutory capital and surplus

Life insurance operations $ 39,633 40,932

Property insurance operations 4,810 6,298

Total combined statutory stockholders' equity

Total combined statutory capital and surplus $ 44,443 47,230

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CITIZENS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31,

(In thousands)

2020 2019 2018

Combined statutory net income (loss)

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Generally, the net assets of the domestic insurance subsidiaries available for transfer to their immediate parent are limited to the lesser of the subsidiary's net gain from operations during the preceding year or 10 % of the subsidiary's net statutory surplus as of the end of the preceding year as determined in accordance with accounting practices prescribed or permitted by insurance regulatory authorities.

Under these practices, total surplus at December 31, 2019 was $37.8 million and net loss from operations was $0.7 million for CICA.

Based upon statutory net loss from operations and surplus of CICA as of and for the year ended December 31, 2019 , no dividend could be paid to the Company without prior regulatory approval in 2020 .

Under these practices, total surplus at December 31, 2020 was $ 39.6 million and net gain from operations was $ 3.1 million for CICA.

Based upon statutory net gain from operations and surplus of CICA as of and for the year ended December 31, 2020, a $ 3.1 million dividend could be paid to the Company without prior regulatory approval in 2021.

Payments of dividends in excess of such amounts would generally require approval by regulatory authorities.

CICA, CNLIC, SPLIC, MGLIC and SPFIC have calculated their risk-based capital ("RBC") in accordance with the National Association of Insurance Commissioners' ("NAIC") Model Rule and the RBC rules as adopted by their respective states of domicile.

As part of the novation transaction with CICA Ltd., the Company agreed to infuse capital into CICA as required by the Colorado Department of Insurance to maintain CICA's RBC above 350% in any future calendar year-end periods.

All insurance subsidiaries exceeded RBC minimum levels at December 31, 2020.

Under the Bermuda Insurance Act 1978, an insurer is prohibited from declaring or paying a dividend if it is in breach of its Enhanced Capital Requirement (“ECR”) or Minimum Margin of Solvency (“MMS”) or if the declaration or payment of such dividend would cause such a breach.

Where an insurer fails to meet its MMS on the last day of any financial year, it is prohibited from declaring or paying any dividends during the next financial year without the approval of the Bermuda Monetary Authority (the “BMA”).

Insurers are also prohibited from paying a dividend in an amount exceeding 25 % of the prior year’s total statutory capital and surplus, unless at least two members of the board of directors and its principal representative sign and submit to the BMA an affidavit attesting that a dividend in excess of this amount would not cause such insurer to fail to meet its relevant margins.

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is also prohibited from declaring or paying any dividends unless the value of its long-term business assets exceeds its long-term business liabilities, as certified by its approved actuary, by the amount of the dividend and at least the MMS.

These restrictions

These restrictions on declaring or paying dividends and distributions under the Bermuda Insurance Act of 1978 are in addition to those under Bermuda’s Companies Act 1981 which apply to all Bermuda companies.

Based upon these rules, CICA Ltd.

can pay a dividend of $ 4.5 million without prior regulatory approval in 2021.

However, the BMA has requested that CICA Ltd.

notify the Authority in advance of any potential dividend payments and any intercompany related payments or transactions.

Years ended December 31,

(In thousands)

capital and surplus $ 158,447 94,322

December 31, 2020 | 10-K 108

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

on declaring or paying dividends and distributions under the Bermuda Insurance Act of 1978 are in addition to those under Bermuda’s Companies Act 1981 which apply to all Bermuda companies.

Based upon these rules, CICA Ltd.

can pay a dividend of $4.5 million without prior regulatory approval in 2020.

CICA Ltd.'s 2019 and 2018 net income was $7.6 million and $9.1 million , respectively.

CICA Ltd.'s 2019 and 2018 capital and surplus was $94.3 million and $34.3 million , respectively.

Years ended December 31,

(In thousands)

2020 2019 2018

net income (loss) $ 9,000 7,649 9,100

The BMA established risk-based regulatory capital adequacy and solvency margin requirements for Bermuda insurers that mandate that a Bermuda-domiciled subsidiary’s ECR be calculated by either:

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held capital in excess of the BSCR requirements at December 31, 2020.

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.

On June 10, 2016, the NAIC Executive Committee and Plenary voted to adopt a recommendation for January 1, 2017 as the operative date for the implementation of Principles-Based Reserves (“PBR”) as a national standard for life insurance products.

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Companies will be expected to develop “right-sized” reserves that better align with their specific product features, their observed actuarial experience, and their overall risk management procedures.

PBR is required effective January 1, 2020.

The Company expects to file a request for PBR exemption with the various state Departments of Insurance since all of our domestic insurance subsidiaries met the small company exemption outlined in the NAIC Valuation Manual, VM-20, for principle-based reserving.

PBR was required effective January 1, 2020.

The Company filed a request for PBR exemption with the various state Departments of Insurance since all of our domestic insurance subsidiaries met the small company exemption outlined in the NAIC Valuation Manual, VM-20, for principle-based reserving.

(7) COMMITMENT AND CONTINGENCIES

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federal income tax treatment afforded by Sections 7702 and 72(s) of the Internal Revenue Code ("IRC") of 1986.

Further, we have determined the structure of our policies sold to non-U.S.

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.

source income over time, which subjected the Company to certain tax withholding and information reporting requirements under Chapters 3 or 4 of the IRC.

For the novated policies sold to non-U.S.

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GAAP for financial reporting.

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 to remediate the noncompliance matter described above .

With the continued uncertainty that remains , including the acceptance of the submitted withholding tax returns, IRS review of our submission, and future negotiations , our estimated liability was approximately $10.0 million , after tax, as of December 31, 2019 and December 31, 2018 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 , after tax.

This estimated range includes projected taxes and interest and penalties payable to the IRS, as well as estimated increased payout obligations to current holders of non-compliant domestic life insurance policies expected to result from remediation of those policies.

Accruals for loss contingencies are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated.

The process of determining our best estimate and the estimated range was a complex undertaking including insight from external consultants and involved management’s judgment based upon a variety of factors known at the time.

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

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

To remediate the noncompliance matter for the novated policies sold to non-U.S.

persons as described above, the Company submitted withholding tax returns to the IRS in December 2019, followed by amended returns in August 2020.

These withholding tax returns establish a total tax liability for calendar years 2014 through 2019 ("the covered period") of $ 7.3 million for a failure to withhold tax and report the U.S.

source income generated by the novated policies, plus interest through August 28, 2020 in the amount of $ 0.7 million.

To date, the Company has paid $ 8.0 million to the IRS for the covered period , $ 6.0 million of which was paid during 2020.

Note that these payments do not represent closure of the matter or IRS acceptance of the tax liability shown on the submitted withholding tax returns.

The IRS is still reviewing our submission of the withholding tax returns relating to the novated policies and the IRS has the right to revise our total tax liability for the covered period.

Thus, the probability weighted range of estimated financial liabilities related to this issue remains at $ 7.3 million to $ 52.5 million, after tax.

This estimated range includes projected taxes and interest and penalties payable to the IRS, as

December 31, 2020 | 10-K 109

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

estimated range of liabilities and expenses.

well as estimated increased payout obligations to current holders of non-compliant domestic life insurance policies expected to result from remediation of those policies.

Accruals for loss contingencies are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated.

The process of determining our best estimate and the estimated range is a complex undertaking including insight from external consultants and involved management’s judgment based upon a variety of factors known at the time.

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

To the extent the amount reserved by the Company is insufficient to meet the actual amount of our liabilities and expenses, or if our estimates of those liabilities and expenses change in the future, our financial condition and results of operations may be materially adversely affected.

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LITIGATION AND REGULATORY ACTIONS

On November 7, 2018, Citizens, CICA Ltd.

and CICA filed a lawsuit in the District Court of Travis County, Texas (the “District Court”) against (i) Randall Riley (“Riley”), a former Citizens executive and son of Citizens’ founder Harold E.

Riley, (ii) Citizens American Life, LLC and Citizens American Life, Inc.

(collectively, “CALI”), copycat companies formed by Riley and (iii) Alexis Enrique Delgado, Carlos Nalsen Landa, Enrique Pinzon Ruiz, Johan Emilio Mikuski Silva and Esperanza Peralta de Delgado (collectively, the “Los Raudales Defendants,” and together with Riley and CALI, collectively the “Defendants”), former independent consultants of Citizens, for unfair competition, misappropriation of Citizens’ trade secrets, tortious interference with Citizens’ existing contracts with its independent consultants and, with respect to the Los Raudales Defendants, breach of their independent consultant contracts with Citizens.

The lawsuit sought (i) a declaration that Citizens had grounds to terminate the Los Raudales Defendants for cause under the independent consultant contracts and the Los Raudales Defendants are not entitled to future commissions under such contracts, (ii) injunctive relief, (iii) damages and (iv) attorneys’ fees and costs.

Among other things, the suit alleges that Riley formed CALI and misappropriated trade secrets during the time he was employed by Citizens, in violation of his contractual and other duties to Citizens, and that the Los Raudales defendants breached their independent consultant contracts with Citizens by inducing or attempting to induce other independent consultants to terminate or reduce service to Citizens and disclosing confidential information.

On January 25, 2019, the Defendants filed a motion to dismiss certain claims alleged in the suit, and on April 11, 2019, the District Court denied the Defendants’ motion in its entirety.

On May 29, 2019, Citizens, CICA Ltd.

and CICA filed a motion for a preliminary injunction to bar the Defendants from continuing to engage in unfair competition and misappropriation of Citizens’ trade secrets and tortious interference with Citizens’ existing contracts with its independent consultants.

A hearing for the preliminary injunction was held on August 12, 2019.

On August 13, 2019, the District Court denied the application for a temporary injunction, and on August 19, 2019, Citizens, CICA Ltd.

and CICA filed a notice of appeal in the Third Court of Appeals in Austin, Texas with respect to the District Court’s August 13, 2019 decision.

On September 10, 2019, Citizens, CICA Ltd.

and CICA filed an amended complaint and added additional defendants to the lawsuit, including (i) Michael P.

Buchweitz, Jonathan M.

Pollio, Jeffrey J.

Wood and Steven A.

Rekedal, former Citizens executives and employees and, in the case of Steven A.

Rekedal, a former Citizens independent consultant, (ii) First Trinity Financial Corporation, and Trinity American, Inc.

(collectively, “First Trinity”) and International Marketing Group S.A., LLC, entities that have founded a business on the exploitation of Citizens’ trade secrets and goodwill, and (iii) Gregg E.

Zahn, a First Trinity executive.

The amended complaint asserted additional claims for breach of contract, conspiracy and unjust enrichment.

The lawsuit is currently in discovery and is expected to proceed to trial in the fourth quarter of 2020.

While it is not possible at this time to predict with any degree of certainty the ultimate outcome of the appeal of the District Court’s denial of the preliminary injunction or this litigation, Citizens believes it has a basis for an injunctive

December 31, 2019 | 10-K 95

CITIZENS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

relief and intends to vigorously pursue its action against the Defendants and seek appropriate compensation and any other remedies to which it may be entitled.

From time to time we are subject to legal and regulatory actions relating to our business.

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CONTRACTUAL OBLIGATIONS

Effective January 1, 2019, the Company adopted the new lease accounting guidance in ASU No.

2016-02, Leases (Topic 842) .

We also elected the package of practical expedients, which among other things, does not require reassessment of lease classification.

As a result of the adoption of the new lease accounting guidance, the Company recognized on January 1, 2019 a lease liability of $1.8 million discounted using an incremental borrowing rate of 4.76% and a right-of-use asset of $1.8 million .

There was $1.2 million of undiscounted lease liability remaining as of December 31, 2019 .

The Company uses its estimated incremental borrowing rate, which is derived from information available at lease commencement date, in determining present value of lease payments.

The Company leases home office space in Austin, Texas for Citizens and in Bermuda for CICA Ltd.

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The exercise of lease renewal options is at our sole discretion when it is reasonably certain that we will exercise such option.

The Company also has a minimal amount of finance leases regarding equipment.

Leases with an initial term of 12 months or less are immaterial to the consolidated financial statements and are recognized as lease expense on a straight-line basis over the lease term and not recorded on the consolidated financial statements.

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

December 31, 2019

Weighted-average remaining lease term (years)

The table below summarizes the number of weighted-average years remaining in our operating lease liabilities as of December 31, 2020.

(In years) Lease Term

Weighted-average remaining lease term

Operating leases 9.9

Maturities of our remaining lease liabilities as of December 31, 2019 are as follows.

(In thousands)

Operating Lease Payments (a)

Maturity of lease liabilities

Total lease payments

Interest expense

Present value of lease liabilities

(a) Operating lease payments exclude $13.5 million of legally binding minimum lease payments for leases signed but not yet commenced.

We recorded the lease right-of-use asset in Other Assets and the lease liability in Other Liabilities.

Cash payments related to lease liabilities were $1.6 million for the year ended December 31, 2019 and were reported in operating cash flows.

December 31, 2020 | 10-K 110

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Maturities of our remaining operating lease liabilities as of December 31, 2020 are as follows.

(In thousands) Operating Lease Payments

Maturity of operating lease liabilities

After 2025 6,936

Total operating lease payments 13,546

Interest expense ( 1,577 )

Present value of operating lease liabilities $ 11,969

We recorded the lease right-of-use asset in Other Assets and the lease liability in Other Liabilities using a weighted average discount rate of 4.19 %.

Cash payments related to the operating lease liabilities were $ 1.3 million and $ 1.6 million for the years ended December 31, 2020 and 2019 and were reported in operating cash flows.

In January 2019, the Company entered into a long-term lease agreement with an unrelated party for its new home office in Austin, Texas.

The building in which we have leased office 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, and therefore is not included in the tables above.

Payments under the new long-term lease agreement will average approximately $0.1 million per month.

The Company recognized the related lease right-of-use asset and liability of $ 11.9 million during the second quarter of 2020 and moved into its new home office in November 2020.

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

As of December 31, 2020, CICA Ltd.

is committed to fund investments up to $40 million related to a private equity fund.

is committed to fund investments up to $ 68.6 million related to private equity funds.

We also paid $ 8.8 million to our former Chief Executive Officer, Geoffrey Kolander, in February 2021 representing the severance payments due to him under the terms of his employment agreement in connection with his resignation following a change in control of the Company.

(8) SEGMENT AND OTHER OPERATING INFORMATION

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Life Insurance and Home Service Insurance.

Our Life Insurance segment issues U.S.

Dollar-denominated endowment contracts internationally, which are principally accumulation contracts that incorporate an element of life insurance protection and ordinary whole life insurance in U.S.

Dollar-denominated amounts sold to foreign residents.

Our Life Insurance segment primarily issues endowment contracts, which are principally accumulation contracts that incorporate an element of life insurance protection and ordinary whole life insurance, to non-U.S.

residents through CICA Ltd.

These contracts are designed to provide a fixed amount of insurance coverage over the life of the insured and may utilize rider benefits to provide additional coverage and annuity benefits to enhance accumulations.

We operate our domestic business in this segment through CICA, CICA Ltd.

CICA and CNLIC issued ordinary whole-life, credit life and disability and accident and health related policies, throughout the Midwest and southern U.S.

until they ceased most domestic sales beginning January 1, 2017.

Our domestic Home Service Insurance segment operates through our subsidiaries SPLIC, MGLIC and SPFIC, and focuses on the life insurance needs of the middle- and lower-income markets, primarily in Louisiana, Mississippi and Arkansas.

Our policies are sold and serviced through a home service marketing distribution system of 223 employee-agents who work on a route system and through over 221 funeral homes and independent agents who sell policies, collect premiums and service policyholders.

Our policies are sold and serviced through over 175 funeral homes and 240 independent agents who sell policies, collect premiums and service policyholders.

To a lesser extent, our Home Service Insurance segment sells limited liability, named peril property policies covering dwelling and contents.

The Life Insurance and Home Service Insurance portions of the Company constitute separate businesses.

In addition to the Life Insurance and Home Service Insurance business, the Company also operates other non-insurance ("Other Non-Insurance Enterprises") portions of the Company, which primarily includes the Company’s IT and Corporate-support functions, which is included in the table presentation below to properly reconcile the segment information with the consolidated financial statements of the Company.

The accounting policies of the segments are in accordance with U.S.

GAAP and are the same as those described in the summary of significant accounting policies.

We evaluate profit and loss performance based on U.S.

GAAP net income before federal income taxes for our reportable segments.

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

December 31, 2020 | 10-K 111

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company's Other Non-insurance operations are the only difference between segments and reported consolidated operations.

The accounting policies of the reportable segments and Other Non-Insurance Enterprises are presented in accordance with U.S.

GAAP and are the same as those described in the summary of significant accounting policies.

The Company evaluates profit and loss performance based on U.S.

GAAP net income before federal income taxes for its two reportable segments.

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

Year ended December 31, 2020

(In thousands)

Service Insurance

Insurance Home

Service Insurance Other

Non-Insurance

Enterprises Consolidated

Life insurance $ 128,900 41,428 — 170,328

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Realized investment gains (losses), net 1,340 223 ( 61 ) 1,502

Other income 1,806 19 3 1,828

Total revenue 178,232 59,421 1,203 238,856

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Total insurance benefits paid or provided 125,192 31,463 — 156,655

Commissions 17,944 14,125 — 32,069

Other general expenses 16,323 17,402 19,944 53,669

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(In thousands)

Service Insurance

Insurance Home

Service Insurance Other

Non-Insurance

Enterprises Consolidated

Life insurance $ 136,941 41,410 — 178,351

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Realized investment gains (losses), net 6,795 1,470 ( 3,016 ) 5,249

Other income (loss)

Other income 1,412 4 2 1,418

Total revenue 190,652 61,213 ( 1,320 ) 250,545

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Total insurance benefits paid or provided 128,841 25,738 — 154,579

Commissions 20,128 14,094 — 34,222

Other general expenses 23,012 19,517 5,911 48,440

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(In thousands)

Service Insurance

Insurance Home

Service Insurance Other

Non-Insurance

Enterprises Consolidated

Life insurance $ 140,566 41,259 — 181,825

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Realized investment gains (losses), net 358 ( 46 ) ( 204 ) 108

Other income (loss) 1,833 ( 1 ) 1 1,833

Total revenue 183,322 59,792 892 244,006

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Total insurance benefits paid or provided 119,136 26,276 — 145,412

Commissions 20,079 14,883 — 34,962

Other general expenses 18,718 20,435 8,479 47,632

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Home Service Insurance 385,931 391,366

Other Non-Insurance Operations

Other Non-Insurance Enterprises 75,766 68,726

Total assets $ 1,843,420 1,744,936

December 31, 2020 | 10-K 114

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GEOGRAPHIC INFORMATION

The following table sets forth the Company's annual total of earned premiums from geographic area for the years indicated:

The following table sets forth, by country, the Company's annual total of earned premiums from geographic area for the years indicated:

Years ended December 31,

(In thousands)

2020 2019 2018

United States $ 52,667 53,656 53,836

Colombia 25,783 26,768 27,605

Venezuela 19,956 22,353 24,783

Taiwan 19,078 19,403 18,888

Ecuador 13,301 14,198 15,187

Argentina 9,175 10,069 9,960

Other foreign countries 38,993 40,562 41,302

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(9) INCOME TAXES

Beginning in 2018, the statutory tax rate is 21% .

Due to the reduced statutory tax rate under the Tax Cuts and Jobs Act ("Tax Act"), we were required to remeasure our deferred tax assets and liabilities using the lower rate at December 22, 2017, the date of enactment.

This re-measurement resulted in a reduction of net deferred tax assets of $35.7 million , which includes a $4.7 million benefit related to deferred taxes previously recognized in accumulated other comprehensive income.

In accordance with the SEC's Staff Accounting Bulletin No.

118 ("SAB 118"), the Company recorded provisional amounts related to the impacts of the Tax Act as of December 31, 2017, including but not limited to the change in corporate tax rate and immediate expensing of certain capital assets.

During 2018, the provisional amounts were adjusted and finalized during the measurement period allowed by SAB 118 and had an immaterial impact on the 2018 income tax expense.

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

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

For the years ended December 31, 2019 and 2018 , the Subpart F income inclusion generated $5.9 million and $18.4 million of federal income tax expense, respectively.

The December 31, 2018 Subpart F income inclusion was largely driven by the impact of the novation transaction.

The novation transaction also resulted in somewhat offsetting adjustments to the current tax liability for CICA, notably an increased amortization of DAC under Section 848 of the IRC, a reduction of premium income and a release of the $50.8 million uncertain tax position related to tax reserves on product qualification issues.

Our federal income tax expense was $7.1 million , $13.1 million and $35.1 million in 2019 , 2018 and 2017 , respectively.

This represents effective tax rates of 126.0% , 652.6% and (1,176.9)% , respectively.

The high positive rate in 2018 was primarily due to the large Subpart F income inclusion following the novation transaction.

The high negative effective tax rate in 2017 was primarily related to remeasurement of deferred income taxes under the Tax Act reform which went into effect on December 22, 2017.

For the years ended December 31, 2020, 2019 and 2018, the Subpart F income inclusion generated $ 2.2 million, $ 5.9 million and $ 18.4 million of federal income tax expense, respectively.

December 31, 2020 | 10-K 115

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A reconciliation of federal income tax expense computed by applying the federal income tax rate of 21% in 2019 and 2018 and 35% in 2017 to income (loss) before federal income tax is as follows:

A reconciliation between the U.S.

corporate income tax rate and the effective income tax rate is as follows:

Years ended December 31,

(In thousands, except for %)

2020 % 2019 % 2018 %

Expected tax expense (benefit) $ ( 2,586 ) 21.0 % $ 1,186 21.0 % $ 420 21.0 %

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Adjustment of prior year taxes 194 ( 1.6 ) ( 99 ) ( 1.8 ) 113 5.6

Effect of graduated rates

Effect of uncertain tax position 1 — 1,148 20.3 2,612 130.5

Nondeductible costs to remediate tax compliance issue ( 620 ) 5.0 ( 27 ) ( 0.5 ) ( 366 ) ( 18.3 )

162(m) compensation limitation

Compensation limitation under 162(m) and 280 (g) 2,386 ( 19.4 ) 480 8.5 53 2.6

Subpart F income 2,217 ( 18.0 ) 5,853 103.6 18,403 919.2

Rate differential on net operating loss carryback claim ( 999 ) 8.1 — — — —

Tax reform re-measurement — — — — 68 3.4

Goodwill impairment

Total federal income tax expense

Income tax expense consists of:

Other 41 ( 0.3 ) 281 5.2 121 6.2

Total federal income tax expense (benefit) $ ( 1,329 ) 10.8 % $ 7,115 126.0 % $ 13,064 652.6 %

Income tax expense (benefit) consists of:

Years ended December 31,

(In thousands)

Total income tax expense

2020 2019 2018

Current $ ( 927 ) 5,542 ( 49,569 )

Deferred ( 402 ) 1,573 62,633

Total income tax expense (benefit) $ ( 1,329 ) 7,115 13,064

December 31, 2020 | 10-K 116

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Net operating and capital loss carryforwards 1,395 230

Accrued policyholder dividends and expenses 124 —

Investments 147 702

Deferred intercompany loss 2,002 3,539

Accrued compensation 513 —

Lease liability 2,514 238

Other 584 700

Total gross deferred tax assets 9,936 8,050

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Right-of-use lease asset ( 2,514 ) ( 238 )

Other ( 35 ) ( 40 )

Total gross deferred tax liabilities ( 19,500 ) ( 20,478 )

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Balance January 1, $ ( 12,428 ) ( 5,709 )

Deferred tax benefit

Deferred tax benefit (expense) 402 ( 1,573 )

Investments available-for-sale 2,774 ( 5,129 )

Effects of unrealized gains on DAC, COIA and reserves ( 391 ) ( 17 )

Adoption of ASU 2016-13 79 —

Balance December 31, $ ( 9,564 ) ( 12,428 )

MGLIC, an entity that is not eligible to join the Company's consolidated tax return until 2020, had a $1.1 million net operating loss carryforward at December 31, 2019 , which will begin expiring in 2036 .

The Company and our subsidiaries had no capital loss carryforwards at December 31, 2019 , except MGLIC had a $21,000 capital loss carryforward at December 31, 2019, which will begin expiring in 2023 .

The Company and our subsidiaries have net operating loss carryforwards of $ 6.6 million at December 31, 2020 which will begin expiring in 2036.

MGLIC joined the Company's consolidated tax return filing group in 2020 and had a $ 1.1 million net operating loss carryforward at January 1, 2020, which will begin expiring in 2036.

The MGLIC net operating losses were incurred while it was owned by the Company;

thus, there will be no IRC Section 382 limit on the utilization of these net operating losses.

The Company and our subsidiaries had no capital loss carryforwards at December 31, 2020.

At December 31, 2020 and 2019, we determined that as a result of our taxable capital gain income in carryback periods, the expected reversal of existing deferred tax liabilities, and tax planning strategies, it was more likely than not that the deferred tax assets would be realized.

Thus, the Company holds no valuation allowance in operations or other comprehensive income at December 31, 2020 and 2019.

The Company recognizes only the impact of tax positions that, based on their technical merits, are more likely than not to be sustained upon an audit by the taxing authority.

December 31, 2020 | 10-K 117

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company recognizes only the impact of tax positions that, based on their technical merits, are more likely than not to be sustained upon an audit by the taxing authority.

A reconciliation of unrecognized tax benefits is as follows:

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(In thousands)

2020 2019 2018

Balance at January 1, $ 45,989 44,841 95,831

Additions based on tax positions related to the current year

Additions for tax positions of prior years 1 1,148 2,268

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Balance December 31, $ 45,990 45,989 44,841

This unrecognized tax benefit is reported net in current federal income tax payable in the consolidated balance sheets.

Included in these amounts is $9.9 million , $8.8 million and $6.5 million of interest expense with respect to unrecognized tax benefit as of December 31, 2019 , 2018 and 2017 , respectively.

This unrecognized tax benefit is reported net in current federal income tax payable on the consolidated balance sheets.

Included in these amounts are $ 9.9 million, $ 9.9 million and $ 8.8 million of interest expense with respect to unrecognized tax benefits as of December 31, 2020, 2019 and 2018, respectively.

The Company’s unrecognized tax benefits at December 31, 2020 would affect the effective tax rate if recognized.

The Company does not believe there is a reasonable possibility the total amount of uncertain tax benefits will significantly increase or decrease in the next twelve months.

The Company believes it is reasonably possible that all but $ 1.0 million of the total amount of uncertain tax benefits will decrease within the next twelve months.

The Company’s practice is to recognize interest and penalties related to income tax matters in income tax expense.

In the consolidated statements of operations and comprehensive income (loss), the amount of interest expense recorded was $ 0.0 million, $ 1.1 million and $ 2.3 million for the years ended December 31, 2020, 2019 and 2018, respectively.

The Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was enacted on March 27, 2020 in response to the COVID-19 pandemic.

The CARES Act, among other things, permits net operating losses incurred in 2018, 2019 and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes.

As a result of the CARES Act, it is anticipated that the Company will be able to claim a net refund for $ 1.0 million of taxes paid in preceding years.

The financial statements have been updated to reflect the benefit of the anticipated carryback claim accordingly.

The Consolidated Appropriations Act (the "CAA") was enacted on December 27, 2020.

The Company does not expect the CAA to have a material impact on the financial statements and will continue to analyze.

The Company's Federal income tax return is filed on a consolidated basis with the following entities:

1 unchanged sentence

CICA Life Insurance Company of America

Citizens National Life Insurance Company

Magnolia Guaranty Life Insurance Company

Security Plan Life Insurance Company

1 unchanged sentence

Computing Technology, Inc.

Citizens National Life Insurance Company

MGLIC files its Federal income tax return on a stand-alone basis as it is not eligible to join the consolidated group until 2020 .

is subject to separate tax reporting.

The method of allocation among companies is subject to a written tax sharing agreement, approved by the Board of Directors, whereby allocation is made primarily on a separate return basis pursuant to the wait-and-see method.

Under this method, consolidated group members are not given current credit or refunds for net operating losses until taxable income on a separate return basis is generated.

Intercompany tax balances are settled quarterly.

Intercompany tax balances are settled at least annually.

The Company and our subsidiaries file income tax returns in the U.S.

6 unchanged sentences

(10) OTHER COMPREHENSIVE INCOME (LOSS)

The changes in the components of other comprehensive income (loss) are reported net of the effects of income taxes of 21% in 2019 and 2018 due to the reduced statutory tax rate under the Tax Act, and 35% in 2017 , as indicated below.

(In thousands)

The changes in the components of other comprehensive income (loss) are reported net of the effects of income taxes of 21% in 2020, 2019 and 2018, as indicated below.

(In thousands) Amount Tax Effect Total

Year ended December 31, 2020

2 unchanged sentences

Reclassification adjustment for (gains) losses included in net income 111 ( 23 ) 88

Effects on DAC and COIA

Effects on DAC ( 37,372 ) 8,872 ( 28,500 )

Effects on COIA ( 98 ) 21 ( 77 )

Effects on unearned revenue reserves 2,102 ( 441 ) 1,661

Other comprehensive income (loss) $ 48,753 2,385 51,138

3 unchanged sentences

Reclassification adjustment for (gains) losses included in net income ( 1,927 ) 405 ( 1,522 )

Unrealized gain from held-to-maturity transferred to available-for-sale

Effects on DAC and COIA

Effects on DAC ( 484 ) 102 ( 382 )

Effects on COIA ( 224 ) 47 ( 177 )

Effects on unearned revenue reserves 789 ( 166 ) 623

Other comprehensive income (loss) $ 76,898 ( 5,147 ) 71,751

3 unchanged sentences

Reclassification adjustment for (gains) losses included in net income ( 953 ) 200 ( 753 )

Effects on DAC and COIA

Unrealized gain from held-to-maturity transferred to available-for-sale 3,588 ( 218 ) 3,370

Effects on DAC 223 ( 123 ) 100

Effects on COIA 184 ( 87 ) 97

Effects on unearned revenue reserves ( 277 ) 172 ( 105 )

Other comprehensive income (loss) $ ( 31,592 ) 6,464 ( 25,128 )

(11) STOCK COMPENSATION

In January 2018 and January 2019, the Company's Board of Directors approved awards of restricted stock units under the Citizens, Inc.

In 2020, 2019 and 2018, the Company's Board of Directors approved awards of restricted stock units under the Citizens, Inc.

Omnibus Incentive Plan for non-employee directors and the executive management team.

6 unchanged sentences

The following table provides a rollforward of restricted stock activity:

Restricted Stock Units

Weighted Average Exercise Price

Weighted Average Remaining Contractual Life

Aggregate Fair Value (1)

(In thousands)

Restricted Stock Units Units Weighted Average Exercise Price Weighted Average Remaining Contractual Life Aggregate Fair Value (1)

(In thousands) (In years) (In thousands)

Outstanding at December 31, 2018 119 $ 7.19 1.32 $ 854

Granted 446 7.20 3,212

Vested 201 7.36 1,479

Forfeited 89 7.17 640

Outstanding at December 31, 2019 275 7.09 0.50 1,947

Granted 350 6.59 1,948

Vested 435 6.65 2,753

Forfeited — 7.18 —

Outstanding at December 31, 2020 190 $ 6.03 0.88 $ 1,142

(1) Fair value per share of restricted stock units was equal to Grant Date fair value per share, which was calculated based on the closing price of the Company's Class A common stock on the NYSE on the grant date, in accordance with ASC Topic 718.

2 unchanged sentences

Forfeitures are recognized in the period they occur.

Compensation expense of $2.1 million and $0.4 million was recognized as of December 31, 2019 and 2018 , respectively, related to these awards.

Compensation expense of $ 2.2 million, $ 2.1 million and $ 0.4 million was recognized as of December 31, 2020, 2019 and 2018, respectively, related to these awards.

Under the terms of an employment agreement in connection with his resignation following a change in control of the Company, all of the outstanding restricted stock units granted to our former Chief Executive Officer, Geoffrey Kolander, immediately vested during 2020.

(12) BENEFIT PLANS

12 unchanged sentences

If more claims are made than were estimated or if the costs of actual claims increase beyond what was anticipated, reserves recorded may not be sufficient and additional accruals may be required in future periods.

December 31, 2020 | 10-K 120

CITIZENS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(13) RELATED PARTY TRANSACTIONS

2 unchanged sentences

to transfer the international policies from CICA to CICA Ltd., the newly formed Bermuda entity.

As part of this transaction, the Company agreed to infuse capital into CICA as required by the Colorado Department of Insurance to keep CICA's risk-based capital above 350% in any future calendar year-end periods.

There were no other changes related to these relationships during the year ended December 31, 2019 .

There were no changes related to these relationships during the year ended December 31, 2020.

CHANGE IN CONTROL

On July 29, 2020, a change in control of the Company occurred, and the Harold E.

Riley Foundation (the “Foundation”), a charitable organization established under 501(c)(3) of the Internal Revenue Code, is now the owner of 100% of the Company’s Class B common stock.

Prior to the change in control, the Harold E.

Riley Trust (the “Trust”) was the beneficial owner of 100% of the Company’s Class B common stock.

The Trust documents provided that upon Harold Riley’s death, which occurred in 2017, the Class B common stock would transfer from the Trust to the Foundation.

Because the Class B common stock elects a simple majority of the Board of Directors of the Company, this transfer constitutes an acquisition of control by the Foundation, which requires prior regulatory approvals by the insurance regulators of Colorado, Louisiana, Mississippi and Texas, the states in which the Company's insurance subsidiaries are domiciled.

RESIGNATION OF CHIEF EXECUTIVE OFFICER

On July 29, 2020, following the change in control of the Company, Mr.

Kolander notified the Company of his intention to resign from his position as Chief Executive Officer and President and as a member of the Board of Directors, and terminated the Employment Agreement by and between the Company and Mr.

Kolander dated January 1, 2019 (the “2019 Employment Agreement”).

Pursuant to Sections 1(e) and 6(g) of the 2019 Employment Agreement, Mr.

Kolander terminated the 2019 Employment Agreement due to a “change in control,” which occurred upon the regulatory approval of the transfer of the Company’s Class B Shares from the Trust to the Foundation.

Kolander’s resignation and separation from employment and a member of the Board of Directors was effective August 5, 2020.

In connection with Mr.

Kolander’s resignation and separation from employment, Mr.

Kolander signed a Chief Executive Officer Separation of Service and Consulting Agreement (the “Separation and Consulting Agreement”) with the Company and the Release attached as Exhibit “A” thereto, each dated July 29, 2020.

Kolander signed the Release, pursuant to Sections 6(g) and (h) of the 2019 Employment Agreement, Mr.

Kolander was entitled to the cash severance amount set forth in Sections 6(g) and (h) of the 2019 Employment Agreement (which equaled $ 8.8 million), less required withholdings and deductions.

Additionally, all outstanding Restricted Stock Units held by Mr.

Kolander were fully vested on August 5, 2020.

In accordance with the 2019 Employment Agreement, the cash severance amount was paid on February 8, 2021.

These amounts were expensed in 2020.

To assist in the orderly transition of his duties and responsibilities, Mr.

Kolander entered into the Separation and Consulting Agreement with the Company.

Under the Separation and Consulting Agreement, Mr.

Kolander agreed to provide leadership transition guidance and business continuity assistance to the Company as a consultant after the separation date through March 9, 2021.

Kolander provided no more than 14 hours of consulting services per week at a rate of $ 14,000 per week.

The above summary of the Separation and Consulting Agreement is qualified by reference in its entirety to the Separation and Consulting Agreement, which was filed as an exhibit to our Current Report on Form 8-K filed on July 30, 2020.

APPOINTMENT OF INTERIM CHIEF EXECUTIVE OFFICER

On July 29, 2020, the Board of Directors appointed Gerald W.

Shields, a member of the Company’s Board of Directors, as Interim Chief Executive Officer, which became effective upon Mr.

Kolander’s separation from employment.

Following his appointment, Mr.

Shields continues to serve as Vice Chairman of the Board of Directors,

December 31, 2020 | 10-K 121

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

but stepped down from the Audit Committee, the Compensation Committee and the Executive Committee as of such date.

(14) QUARTERLY FINANCIAL INFORMATION (Unaudited)

The following table contains selected unaudited financial data for each quarter.

(In thousands, except per share amounts)

(In thousands, except per share amounts) Fourth

Quarter Third

Quarter Second

Quarter First

Revenues $ 64,968 59,825 58,341 55,722

Benefits and expenses 67,317 67,996 57,903 57,957

4 unchanged sentences

Basic & Diluted earnings (losses) per share of Class B common stock 0.01 ( 0.07 ) ( 0.01 ) ( 0.04 )

(In thousands, except per share amounts)

(In thousands, except per share amounts) Fourth

Quarter Third

Quarter Second

Quarter First

Revenues $ 69,806 61,467 56,866 62,406

Benefits and expenses 64,878 59,335 60,189 60,398

4 unchanged sentences

Basic & Diluted earnings (losses) per share of Class B common stock 0.05 0.02 ( 0.04 ) ( 0.04 )

(a) On July 1, 2018, the Company novated all of the international policies issued by CICA to CICA Ltd., a newly established Bermuda entity that began operations in July 2018.

While this novation transaction has been eliminated in consolidation of affiliated entities, there are tax effects reflected in the consolidated financial statements as a result of the transaction being executed between our subsidiaries that reside in different tax jurisdictions.

is considered a controlled foreign corporation for federal tax purposes.

As a result, the insurance activity of CICA Ltd.

is subject to Subpart F of the IRC and is included in Citizens’s taxable income which generated $18.4 million of federal income tax expense in 2018.

In addition, as of July 1, 2018, we implemented a new actuarial valuation software solution that provides enhanced reporting and modeling capabilities for ordinary whole life and endowment policies of CICA and CICA Ltd., which are included in the Life Insurance segment.

The impact of this system conversion resulted in changes in estimates due to refinements based upon our accounting analysis of the circumstances and reflected as a decrease in reserves of $10.2 million and a decrease in DAC of $4.3 million , before tax.

(15) SUBSEQUENT EVENTS

We have evaluated for subsequent events as defined by the accounting guidance through the date of financial statement issuance and have no subsequent events to disclose.

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

On February 6, 2021, Baylor University and Southwestern Baptist Theological Seminary, the two sole charitable beneficiaries of the Foundation ( the “Foundation Beneficiaries”) gained control of the Foundation and entered into a Mutual Agreement for Compromise, Settlement and Release with the Company and its individual directors (the “Foundation Settlement Agreement”) to resolve the litigation that had been filed by the Foundation against the Company and its eight individual board members captioned Harold E.

Riley Foundation v.

Claus, et al.

in the District Court (the “Colorado Court”) for Arapahoe County, Colorado (the “Colorado Litigation”).

On February 10, 2021, the Colorado Court entered an order granting final approval of the Foundation Settlement Agreement.

The Foundation Settlement Agreement, among other things, provided for certain governance arrangements, including certifying the Company's board membership as it existed as of August 12, 2020, as well as the repurchase by the Company of all of the Company's shares of Class B common stock held by the Foundation.

December 31, 2020 | 10-K 122

CITIZENS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On February 5, 2021, the Company also entered into a Mutual Agreement for Compromise, Settlement and Release (the “Hughes-Hott-Boto Settlement Agreement”) with Michael C.

Hughes, Charles W.

Hott and David A.

Boto as officers or trustees of the Foundation.

The Hughes-Hott-Boto Settlement Agreement dismissed the counterclaims and third-party claims in the Colorado Litigation filed by the Company and resolved potential claims which could have been made against the Foundation, Mr.

Hughes and Mr.

On February 6, 2021, pursuant to the Foundation Settlement Agreement, the Company entered into an agreement with the Foundation to purchase all of the Company's shares of Class B common stock for a purchase price of $ 9.1 million (the “B Share Transaction”).

The Company and the Foundation are seeking the required regulatory approvals in order to consummate the Class B Share Transaction.

On March 5, 2021, the Company paid the purchase price to the Foundation to hold in escrow until such regulatory approvals are obtained.

December 31, 2020 | 10-K 123

CITIZENS, INC.

FINANCIAL SCHEDULES

5 unchanged sentences

Investment in subsidiaries (1)

Fixed maturities available-for-sale, at fair value

$ 231,992 191,869

Fixed maturity securities available-for-sale, at fair value 42,202 50,491

Equity securities, at fair value 1,347 1,167

Real estate held-for-sale 2,571 2,571

Other long-term investments 8,790 —

Short-term investments — 1,301

Cash 3,102 10,829

Accrued investment income 471 535

1 unchanged sentence

Property and equipment, net 12,666 817

Other assets 3,183 552

Total assets $ 311,235 264,902

Liabilities and Stockholders' Equity

3 unchanged sentences

Common stock:

Class A $ 262,869 261,515

Class B 3,184 3,184

Accumulated deficit ( 82,352 ) ( 70,969 )

6 unchanged sentences

Citizens, Inc.'s investments in consolidated subsidiaries are stated at cost plus equity in undistributed income of consolidated subsidiaries.

The Company includes in its Statement of Operations dividends from its subsidiaries and equity in undistributed income (loss) of consolidated subsidiaries, which represents the net income (loss) of each of its wholly-owned subsidiaries.

The Company includes in its Statement of Operations and Comprehensive Income (Loss) dividends from its subsidiaries and equity in income (loss) of consolidated subsidiaries, which represents the net income (loss) of each of its wholly-owned subsidiaries.

December 31, 2020 | 10-K 124

8 unchanged sentences

(In thousands)

2020 2019 2018

Comprehensive income (loss):

Management service fees (1)

$ 32,828 43,694 43,323

Investment income 11,253 1,685 1,086

Realized investment losses

Realized investment gains (losses) ( 62 ) ( 3,013 ) ( 196 )

Total revenues 44,022 42,368 44,214

2 unchanged sentences

Total expenses 49,936 46,166 44,770

Income (loss) before federal income tax expense (benefit) and equity in loss of consolidated subsidiaries

Income (loss) before federal income tax expense (benefit) and equity in income (loss) of consolidated subsidiaries ( 5,914 ) ( 3,798 ) ( 556 )

Federal income tax expense (benefit) ( 5,583 ) ( 4,491 ) ( 185 )

Income (loss) before equity in income of consolidated subsidiaries

Equity in loss of consolidated subsidiaries

Income (loss) before equity in income (loss) of consolidated subsidiaries ( 331 ) 693 ( 371 )

Equity in income (loss) of consolidated subsidiaries ( 10,657 ) ( 2,063 ) ( 10,691 )

Net loss ( 10,988 ) ( 1,370 ) ( 11,062 )

Other comprehensive income (loss) 51,138 71,751 ( 25,128 )

3 unchanged sentences

Citizens, Inc.'s investments in consolidated subsidiaries are stated at cost plus equity in undistributed income of consolidated subsidiaries.

The Company includes in its Statement of Operations and Comprehensive Income (Loss) dividends from its subsidiaries and equity in undistributed income (loss) of consolidated subsidiaries, which represents the net income (loss) of each of its wholly-owned subsidiaries.

December 31, 2020 | 10-K 125

8 unchanged sentences

(In thousands)

2020 2019 2018

Cash flows from operating activities:

Net income (loss) $ ( 10,988 ) ( 1,370 ) ( 11,062 )

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

Realized investment losses, net

Equity in loss of consolidated subsidiaries

Realized investment losses (gains), net 62 3,013 196

Equity in loss (income) of consolidated subsidiaries 10,657 2,063 10,691

Change in accrued expenses and other liabilities 11,629 ( 6,530 ) ( 2,036 )

Change in federal income tax payable ( 17,647 ) — —

Deferred federal income tax expense (benefit) 79 — —

Amortization of premiums and discounts on investments 535 496 567

Depreciation 133 267 356

Change in accrued investment income 64 ( 5 ) ( 46 )

1 unchanged sentence

Decrease (increase) in receivable from subsidiaries and other assets ( 141 ) 1,101 382

Other, net ( 3,896 ) ( 248 ) 22

Net cash provided by (used in) operating activities ( 7,290 ) 886 ( 930 )

Cash flows from investing activities:

Purchases of fixed maturities, available-for-sale

Maturities of fixed maturities, available-for-sale

Sales of fixed maturities, available-for-sale

Sales of other long-term investments and property and equipment

Purchases of other long-term investments and property and equipment

Purchases of fixed maturity securities, available-for-sale ( 4,628 ) ( 12,970 ) ( 11,871 )

Maturities of fixed maturity securities, available-for-sale 7,114 691 7,160

Purchase of equity securities ( 250 ) — —

Sales of fixed maturity securities, available-for-sale 5,735 4,268 1,366

Sales of property and equipment 11 14 103

Purchases of other long-term investments ( 8,790 ) — —

Purchases of property and equipment ( 60 ) ( 85 ) ( 60 )

Purchases of short-term investments — ( 2,456 ) ( 7,850 )

Maturities of short-term investments 1,300 9,090 —

Capital contribution to subsidiary

Net cash provided by (used in) investing activities 432 ( 1,448 ) ( 11,152 )

Cash flows from financing activities:

Net cash used in financing activities

Other ( 869 ) ( 377 ) —

Net cash provided by (used in) financing activities ( 869 ) ( 377 ) —

Net increase (decrease) in cash ( 7,727 ) ( 939 ) ( 12,082 )

3 unchanged sentences

Citizens, Inc.'s investments in consolidated subsidiaries are stated at cost plus equity in undistributed income of consolidated subsidiaries.

December 31, 2020 | 10-K 126

23 unchanged sentences

FINANCIAL SCHEDULES

For the Company's short duration premiums (property), written premium is not materially different from earned premium, therefore only earned premiums are detailed in Schedule IV.

For the Company's short duration contracts (property), written premium is not materially different from earned premium, therefore only earned premiums are detailed in Schedule IV.

Consolidated Statement of Reinsurance

(In thousands)

(In thousands) Direct

Amount Ceded to

Companies Assumed

Companies Net Amount % of

Year ended December 31, 2020

19 unchanged sentences

Restated and Amended Articles of Incorporation dated March 4, 2004 (incorporated herein by reference to Exhibit 3.1 to the Registrant's Annual Report on Form 10-K for the Year Ended December 31, 2003, filed on March 15, 2004)

Third Amended and Restated Bylaws dated November 2, 2017 (incorporated herein by reference to Exhibit 3.1 to the Registrant's Current Report on Form 8-K, filed on November 8, 2017)

Amended and Restated Bylaws dated February 6, 2021 (incorporated herein by reference to Exhibit 3.1 to the Registrant's Current Report on Form 8-K, filed on February 9, 2021)

Description of Securities of Citizens, Inc.

7 unchanged sentences

Non-employee Director Restricted Stock Unit Agreement

Employment Agreement, dated January 23, 2019, by and between Citizens, Inc.

and Geoffrey M.

Kolander (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed on January 25, 2019)

Form of Executive Change in Leadership Agreement entered into by and between the Company and each of the following:

Conklin, James A.

Eliasberg, Robert M.

Mauldin III, Chad M.

Mellon and Harvey J.

Waite (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed on April 16, 2020)

Chief Executive Officer Separation of Service and Consulting Agreement dated July 29, 2020 by and between the Company and Geoffrey M.

Kolander (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed on July 30, 2020)

Consulting Agreement by and between the Company and Gerald W.

Shields dated August 5, 2020 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed on August 11, 2020)

Amendment to Consulting Agreement by and between the Company and Gerald W.

Shields effective as of January 1, 2021

Mutual Agreement for Compromise, Settlement and Release with the Harold D.

Riley Foundation dated February 6 , 2021 (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on February 9, 2021)

Mutual Agreement for Compromise, Settlement and Release with Michael C.

Hughes, Charles W.

Hott and David August Boto dated February 5, 2021 (incorporated herein by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on February 9, 2021)

Purchase and Sale Agreement dated February 6, 2021 (incorporated herein by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed on February 9, 2021)

Subsidiaries of the Registrant

2 unchanged sentences

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act

December 31, 2020 | 10-K 129

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act

1 unchanged sentence

Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act

XBRL Instance Document

XBRL Taxonomy Extension Schema

XBRL Taxonomy Extension Calculation Linkbase

XBRL Taxonomy Extension Definition Linkbase

XBRL Taxonomy Extension Label Linkbase

XBRL Taxonomy Extension Presentation Linkbase

101.INS XBRL Instance Document

101.SCH XBRL Taxonomy Extension Schema

101.CAL XBRL Taxonomy Extension Calculation Linkbase

101.DEF XBRL Taxonomy Extension Definition Linkbase

101.LAB XBRL Taxonomy Extension Label Linkbase

101.PRE XBRL Taxonomy Extension Presentation Linkbase

104 Inline XBRL for the cover page of this Annual Report on Form 10-K for the year ended December 31, 2020, filed electronically herewith, included in the Exhibit 101 Inline XBRL Document Set.

† Indicates management contract or compensatory plan or arrangement.

3 unchanged sentences

CITIZENS, INC.

March 11, 2020

/s/ Geoffrey M.

President, Chief Executive Officer and Director

March 10, 2021 By:

/s/ Gerald W.

Interim Chief Executive Officer and President

(Principal Executive Officer)

3 unchanged sentences

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Geoffrey M.

Kolander and James A.

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Gerald W.

Shields and James A.

Eliasberg, jointly and severally, his or her attorneys-in-fact, each with the power of substitution, for him or her in any and all capacities, to sign any amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.

2 unchanged sentences

/s/ Christopher W.

Claus /s/ Dr.

Christopher W.

Claus, Director

Claus, Director Dr.

Maness, Director

/s/ Gerald W.

Davis, Jr., Chairman of the Board and Director

Davis, Jr., Chairman of the Board and Director Gerald W.

Shields, Vice Chairman of the Board and Director

Dean Gage, Director

Dean Gage /s/ Dr.

Dean Gage, Director Dr.

Sloan, Jr., Director

/s/ Francis A.

/s/ Constance K.

Keating II, Director

Keating II /s/ Constance K.

Keating II, Director Constance K.

Weaver, Director

/s/ Geoffrey M.

Kolander, President, Chief Executive Officer and Director

December 31, 2020 | 10-K 131

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 9A. Controls and Procedures