CITIZENS, INC. 10-K

Item 9A. CONTROLS AND PROCEDURES (a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES [To be updated] 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 communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosures. 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. Based on such evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of December 31, 2020. (b) MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING 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 December 31, 2020 | 10-K 66 Table of Contents CITIZENS, INC. 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. GAAP. 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. Management evaluated the design and operating effectiveness of internal control over financial reporting based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). Based on this evaluation, management concluded that our internal control over financial reporting as of December 31, 2020 was effective. Deloitte & Touche LLP, an independent registered public accounting firm, audited the effectiveness of our internal control over financial reporting as of December 31, 2020. Their attestation report is included in Item 9A(c) of this Annual Report. December 31, 2020 | 10-K 67 Table of Contents CITIZENS, INC. (c) ATTESTATION REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of Citizens, Inc. Opinion on Internal Control over Financial Reporting We have audited the internal control over financial reporting of Citizens, Inc. and consolidated subsidiaries (the “Company”) as of December 31, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the consolidated financial statements as of and for the year ended December 31, 2020, of the Company and our report dated March 10, 2021, expressed an unqualified opinion on those consolidated financial statements. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. 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 December 31, 2020 | 10-K 68 Table of Contents CITIZENS, INC. become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ DELOITTE & TOUCHE LLP Austin, Texas March 10, 2021 (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, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Item 9B. OTHER INFORMATION None. December 31, 2020 | 10-K 69 Table of Contents CITIZENS, INC. PART III 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. We plan to file our definitive proxy statement for our 2021 annual meeting of shareholders within 120 days after December 31, 2020. Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Item 10 of this Annual Report on Form 10-K incorporates by reference the information in the sections entitled "Corporate Governance," "Audit Matters," "Directors" and "Executive Officers" in our Proxy Statement. Item 11. EXECUTIVE COMPENSATION Item 11 of this Annual Report on Form 10-K incorporates by reference the information in the sections entitled "Directors - Director Compensation," "Executive Compensation" and "Corporate Governance - Compensation Committee Interlocks and Insider Participation" in our Proxy Statement. Item 12. 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 "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. See Note 11. Stock Compensation in the notes to our consolidated financial statements for additional information regarding our Omnibus Incentive Plan. Plan Category Number of securities to be issued upon exercise of outstanding options, warrants and rights Weighted-average exercise price of outstanding options, warrants and rights Number of securities remaining for future issuance under equity compensation plans Equity compensation plans approved by security holders 189,300 $ 6.03 2,561,836 Equity compensation plans not approved by security holders — — — Total 189,300 $ 6.03 2,561,836 Item 13. 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. December 31, 2020 | 10-K 70 Table of Contents CITIZENS, INC. Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES Item 14 of this Annual Report on Form 10-K incorporates by reference the information in the section entitled "Audit Matters" in our Proxy Statement. December 31, 2020 | 10-K 71 Table of Contents CITIZENS, INC. PART IV Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES (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 Page Reference Report of Independent Registered Public Accounting Firm 73 Consolidated Balance Sheets at December 31, 2020 and 2019 76 Consolidated Statements of Operations and Comprehensive Income (Loss) - years ended December 31, 2020, 2019 and 2018 78 Consolidated Statements of Stockholders' Equity - years ended December 31, 2020, 2019 and 2018 79 Consolidated Statements of Cash Flows - years ended December 31, 2020, 2019 and 2018 80 Notes to Consolidated Financial Statements 82 Schedule II – Condensed Financial Information of Registrant 124 Schedule III – Consolidated Supplementary Insurance Information 127 Schedule IV – Consolidated Statement of Reinsurance 128 All other schedules have been omitted because the required information is inapplicable or the information required is presented in the consolidated financial statements or the notes thereto filed elsewhere herein. (3) Exhibits See the Index of Exhibits . December 31, 2020 | 10-K 72 Table of Contents CITIZENS, INC. Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of Citizens, Inc. Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Citizens, Inc. 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. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 10, 2021, expressed an unqualified opinion on the Company’s internal control over financial reporting. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. 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) December 31, 2020 | 10-K 73 Table of Contents CITIZENS, INC. 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. December 31, 2020 | 10-K 74 Table of Contents CITIZENS, INC. 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 Austin, Texas March 10, 2021 We have served as the Company’s auditor since 2017. December 31, 2020 | 10-K 75 Table of Contents CITIZENS, INC. CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Balance Sheets December 31, (In thousands) 2020 2019 Assets Investments: 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 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) 27,294 385 Short-term investments — 1,301 Total investments 1,624,668 1,480,254 Cash and cash equivalents 34,131 46,205 Accrued investment income 16,137 17,453 Reinsurance recoverable 5,753 3,696 Deferred policy acquisition costs 104,913 149,249 Cost of insurance acquired 11,541 13,455 Goodwill and other intangible assets 13,570 13,575 Property and equipment, net 16,312 5,904 Due premiums 11,309 12,656 Other assets (less allowance for losses of $ 297 in 2020) 5,086 2,489 Total assets $ 1,843,420 1,744,936 See accompanying Notes to Consolidated Financial Statements. December 31, 2020 | 10-K 76 Table of Contents CITIZENS, INC. CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Balance Sheets December 31, continued (In thousands, except share amounts) 2020 2019 Liabilities and Stockholders' Equity Liabilities: Policy liabilities: Future policy benefit reserves: Life insurance $ 1,246,423 1,218,757 Annuities 78,304 76,380 Accident and health 761 1,031 Dividend accumulations 33,336 29,211 Premiums paid in advance 40,605 43,102 Policy claims payable 13,206 8,059 Other policyholders' funds 22,447 18,192 Total policy liabilities 1,435,082 1,394,732 Commissions payable 2,572 2,514 Deferred federal income tax liability, net 9,564 12,428 Current federal income tax payable 43,916 44,622 Payable for securities in process of settlement 5,265 — Other liabilities 46,076 30,804 Total liabilities 1,542,475 1,485,100 Commitments and contingencies (Notes 5 and 7) Stockholders' Equity: Common stock: 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 3,184 3,184 Accumulated deficit ( 82,352 ) ( 70,969 ) Accumulated other comprehensive income: Net unrealized gains on fixed maturity securities, net of tax 128,255 77,117 Treasury stock, at cost ( 11,011 ) ( 11,011 ) Total stockholders' equity 300,945 259,836 Total liabilities and stockholders' equity $ 1,843,420 1,744,936 See accompanying Notes to Consolidated Financial Statements. 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AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Operations and Comprehensive Income (Loss) Years Ended December 31, (In thousands, except share amounts) 2020 2019 2018 Revenues: Premiums Life insurance $ 170,328 178,351 181,825 Accident and health insurance 1,019 1,383 1,218 Property insurance 3,982 4,613 4,817 Net investment income 60,197 59,531 54,205 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 Benefits and Expenses: Insurance benefits paid or provided: Claims and surrenders 121,145 106,827 91,103 Increase in future policy benefit reserves 29,923 41,712 47,947 Policyholders' dividends 5,587 6,040 6,362 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 Capitalization of deferred policy acquisition costs ( 20,475 ) ( 22,255 ) ( 22,695 ) Amortization of deferred policy acquisition costs 27,439 28,268 34,235 Amortization of cost of insurance acquired 1,816 1,546 2,458 Total benefits and expenses 251,173 244,800 242,004 Income (loss) before federal income tax ( 12,317 ) 5,745 2,002 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 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 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 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 ) Total comprehensive income (loss) $ 40,150 70,381 ( 36,190 ) See accompanying Notes to Consolidated Financial Statements. 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AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Stockholders' Equity Common Stock Accumulated deficit Accumulated other comprehensive income (loss) Treasury stock Total Stock-holders' equity (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): 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 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): 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 Stock-based compensation 1,354 — — — — 1,354 Balance at December 31, 2020 $ 262,869 3,184 ( 82,352 ) 128,255 ( 11,011 ) 300,945 (1) See Note 1 in the Notes to Consolidated Financial Statements for more details. See accompanying Notes to Consolidated Financial Statements. December 31, 2020 | 10-K 79 Table of Contents CITIZENS, INC. CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Cash Flows Years Ended December 31, (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 (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 (benefit) ( 402 ) 1,573 62,633 Change in: 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 Other policyholders' liabilities 11,030 5,387 940 Federal income tax payable ( 706 ) 3,341 ( 52,079 ) Commissions payable and other liabilities 3,702 2,924 3,609 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 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 Increase in policy loans, net ( 1,313 ) ( 1,180 ) ( 7,090 ) Sales of other long-term investments and real estate 3,671 6,983 14 Purchases of other long-term investments ( 30,256 ) ( 187 ) — Purchases of property and equipment ( 221 ) ( 511 ) ( 724 ) Sales of property and equipment 11 16 89 Maturities of short-term investments 1,300 9,090 — Purchases of short-term investments — ( 2,456 ) ( 7,850 ) 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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AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Cash Flows Years Ended December 31, (In thousands) 2020 2019 2018 Cash Flows from Financing Activities: Annuity deposits $ 7,532 6,717 7,265 Annuity withdrawals ( 5,759 ) ( 8,505 ) ( 7,323 ) Other ( 869 ) ( 377 ) — Net cash provided by (used in) financing activities 904 ( 2,165 ) ( 58 ) Net increase (decrease) in cash and cash equivalents ( 12,074 ) 713 ( 572 ) Cash and cash equivalents at beginning of year 46,205 45,492 46,064 Cash and cash equivalents at end of year $ 34,131 46,205 45,492 Supplemental Disclosure of Operating Activities: Cash paid during the year for income taxes $ — 2,200 2,510 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. December 31, 2020 | 10-K 81 Table of Contents CITIZENS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION AND CONSOLIDATION The accompanying consolidated financial statements of Citizens, Inc. and its wholly-owned subsidiaries have been prepared in conformity with U.S. generally accepted accounting principles ("U.S. GAAP"). The consolidated financial statements include the accounts and operations of Citizens, Inc. ("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. ("CTI"). All significant inter-company accounts and transactions have been eliminated. 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 non-U.S. residents. These contracts are designed to provide a fixed amount of insurance coverage over the life of the insured and may utilize rider benefits to provide additional increasing or decreasing coverage and annuity benefits to enhance accumulations. Our domestic life insurance business, which operates through CICA and CNLIC, primarily focused on living needs and provided benefits toward accumulating financial benefits for the policyowners throughout the Midwest and southern U.S. until they ceased most domestic sales beginning January 1, 2017. 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, 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 INVESTMENTS 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 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 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. December 31, 2020 | 10-K 82 Table of Contents CITIZENS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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 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. 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 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 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 Table of Contents CITIZENS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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 Reinsurance recoverable includes expected reimbursements for policyholder claim amounts in excess of the Company's retention, as well as profit sharing and experience refund accruals. Reinsurance recoverable is reduced for estimated uncollectible amounts, if any. Reinsurance premiums, benefits and expenses are accounted for on a basis consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. The cost of reinsurance related to long duration contracts is accounted for over the life of the underlying reinsured policies using assumptions consistent with those used to account for the underlying policies. The cost of reinsurance related to short duration contracts is accounted for over the coverage period. Profit-sharing and similar adjustable provisions are accrued based on the experience of the underlying policies. DEFERRED POLICY ACQUISITION COSTS 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. Traditional life insurance and accident and health insurance acquisition costs are amortized over the premium-paying period of the related policies using assumptions consistent with those used in computing future policy benefit liabilities. For universal life type contracts and investment contracts that include significant surrender charges or that yield significant revenues from sources other than the investment contract holders' funds, the deferred contract acquisition cost amortization is matched to the recognition of gross profit. The effect on the DAC asset that would result from realization of unrealized gains or losses is recognized with an offset to accumulated other comprehensive income in consolidated stockholders' equity. If an internal replacement of insurance or investment contract modification substantially changes a contract as defined in current accounting guidance, then the DAC is written off immediately through income and any new deferrable costs associated with the new replacement are deferred. If a contract modification does not substantially change the contract, the DAC amortization on the original contract will continue and any acquisition costs associated with the related modification are immediately expensed. The ending DAC asset balance is calculated at a seriatim level for policies in force at the end of each reporting period based on the remaining unamortized asset. The assumptions used to calculate DAC are set when a policy is issued and do not change with changes in actual experience, unless a loss recognition event occurs. The seriatim method ensures that policies lapsed or surrendered during the reporting period are no longer included in the DAC calculation. This method limits the amount of deferred costs to its estimated realizable value, provided actual experience is comparable to that contemplated in the locked-in assumptions. 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 93.3 % 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. December 31, 2020 | 10-K 84 Table of Contents CITIZENS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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. If loss recognition or impairment is necessary, DAC would be written off to the extent that anticipated future premiums and investment income is insufficient to cover expected future policy benefits and expenses. Loss recognition testing that considers, among other things, actual experience and projected future experience calculates the available premium (gross premium less the benefit and expense portion of premium) for the next 50 years. DAC is evaluated for recoverability using best estimate assumptions. Based on the results of DAC recoverability testing and loss recognition testing, management believes that our DAC as of the years ended December 31, 2020 and 2019 limits the amount of deferred costs to its estimated recoverable value. 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: Years ended December 31, (In thousands) 2020 2019 2018 Balance at beginning of period $ 149,249 155,747 167,063 Capitalization of deferred policy acquisition costs 20,475 22,255 22,695 Amortization of deferred policy acquisition costs ( 27,439 ) ( 28,268 ) ( 34,235 ) Effects of unrealized (gains) losses ( 37,372 ) ( 485 ) 224 Balance at end of period $ 104,913 149,249 155,747 We converted to a new actuarial valuation software solution that provided enhanced modeling capabilities for the ordinary whole life policies of SPLIC as of July 1, 2019 and the ordinary whole life and endowment policies of CICA and CICA Ltd. as of July 1, 2018. The total impact of these system conversions, which impacted both the Home Service Insurance and Life Insurance segments, reflect changes in actuarial valuation estimates associated with the December 31, 2020 | 10-K 85 Table of Contents CITIZENS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) conversion. The impact is reflected in the accompanying consolidated financial statements and summarized in the table below. (In thousands) 2019 2018 Increase (Decrease) Consolidated Balance Sheets DAC $ ( 1,396 ) ( 4,339 ) Future policy benefit reserves: Life insurance ( 2,299 ) ( 10,197 ) Consolidated Statements of Operations and Comprehensive Income (Loss) Decrease in future policy benefit reserves ( 2,299 ) ( 10,197 ) Amortization of deferred policy acquisition costs 1,396 4,339 Income before federal income tax 903 5,858 Federal income tax expense 190 1,230 Net income $ 713 4,628 COST OF INSURANCE ACQUIRED Cost of insurance acquired ("COIA") is established when we purchase a block of insurance. COIA is amortized over the emerging profit of the related policies using the same assumptions as were used in computing liabilities for future policy benefits. Inherent in the amortization of COIA are certain management judgments used in the estimation of the ending asset balance and the annual amortization. The key assumptions used in management's estimates are based upon interest, mortality and lapses at the time of purchase. A recoverability test that considers, among other things, actual experience and projected future experience is performed at least annually. These annual recoverability tests are based initially on an estimate of the available premium (gross premium less the benefit and expense portion of premium) for the next 50 years. Management believes that our COIA is recoverable for the years ended December 31, 2020 and 2019. This belief is based upon the analysis performed on estimated future results of the block and our annual recoverability testing. COIA relative to purchased blocks of insurance is summarized as follows: Years ended December 31, (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 December 31, 2020 | 10-K 86 Table of Contents CITIZENS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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) Amount Cost of insurance acquired: Year: 2021 $ 760 2022 691 2023 633 2024 582 2025 536 Thereafter 8,823 12,025 Effects of unrealized (gains) losses on COIA ( 484 ) Total cost of insurance acquired $ 11,541 The value of COIA resulting from our various acquisitions was determined based on the present value of future profits discounted at annual rates ranging from 3.7 % to 8.5 %. GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill is the difference between the purchase price in a business combination and the fair value of assets and liabilities acquired and is not amortized. Other intangible assets include various state insurance licenses, which have been determined to have indefinite useful lives and, therefore, are not amortized. Both goodwill and other intangible assets with indefinite useful lives are subject to annual impairment analysis. Goodwill is tested for impairment on an annual basis or more frequently if indicators of potential impairment exist. The goodwill testing requires us to compare the estimated fair value of a reporting unit to its carrying value. If the carrying value of the reporting unit is lower than its estimated fair value, no further evaluation is required. If the carrying value of the reporting unit exceeds its estimated fair value, an impairment charge is recorded for that excess, limited to the total amount of goodwill allocated to that reporting unit. We have the option of performing an assessment of certain qualitative factors to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying value or proceeding directly to a quantitative impairment test. 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 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 Table of Contents CITIZENS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Goodwill is summarized as follows: Years ended December 31, (In thousands) 2020 2019 2018 Life Insurance Segment: Balance at January 1, $ 12,624 12,624 12,624 Impairment — — — Balance at December 31, $ 12,624 12,624 12,624 PROPERTY AND EQUIPMENT Property and equipment are carried at cost less accumulated depreciation. Depreciation of property and equipment is computed using the straight-line method over the useful lives of the assets, ranging from three to thirty years. The following is a summary of property and equipment. December 31, (In thousands) 2020 2019 Property and equipment: Home office, land and buildings $ 4,136 4,136 Furniture and equipment 1,618 881 Electronic data processing equipment and computer software 7,179 8,215 Automobiles 50 91 Real estate and equipment leases (See Note 7 ) 11,973 1,136 Total property and equipment 24,956 14,459 Accumulated depreciation ( 8,644 ) ( 8,555 ) 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 Future policy benefit reserves for traditional life insurance are established based on methods and underlying assumptions in accordance with U.S. GAAP and applicable actuarial standards. 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. Annuity interest crediting rates range from 2.5 % to 5.5 % annually. Benefits and expenses are charged against the account balance to recognize costs as incurred over the estimated lives of the contracts. Expenses include interest credited to contract account balances and benefits paid in excess of contract account balances. Unpaid claims on accident and health and specialty property insurance policies represent the estimated liability for benefit expenses, both reported but not paid and incurred but not reported to the Company. The liability for incurred but not reported claims includes estimates for additional claim amounts due related to reported claims. Liabilities for December 31, 2020 | 10-K 88 Table of Contents CITIZENS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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. Anticipated investment income is not considered in determining whether a premium deficiency exists with respect to short-duration contracts. Premium deposits accrue interest at rates ranging from 2.5 % to 6.0 % per annum. The cost of insurance is included in the premium when collected and interest is credited annually to deposit accounts. The development of liabilities for future policy benefits requires management to make estimates and assumptions regarding mortality, persistency, expense, and investment experience based on historical experience and future expectations of those assumptions. Actual results could differ materially from estimates. An additional provision is made on most products to allow for possible adverse deviation from the assumptions assumed. We monitor actual experience and revise assumptions as necessary. PARTICIPATING POLICIES At December 31, 2020 and 2019, participating business approximated 60.8 % and 62.2 % of direct life insurance in force, respectively. Future policy benefits on participating policies are estimated based on net level premium reserves for death and endowment policy benefits with interest rates ranging from 3.2 % to 9.0 %, and the cash surrender values described in such contracts. The scaling rate used for the 2020 portfolio ranged between 3.25 % for 1 year and then going up to 4.36 % over 20 years and remaining there for the duration. Earnings and dividends on participating policies are allocated based on policies in force. Policyholder dividends are determined based on the discretion of the Board of the policy issuing subsidiary. Policyholder dividends are accrued over the premium paying periods of the insurance contract. CONTINGENCIES An estimated loss from a contingency is accrued and charged to results of operations only if both of the following conditions are met: 1. Information available prior to the issuance of the consolidated financial statements indicates that it is probable (virtual certainty is not required) that an asset has been impaired or a liability incurred as of the date of the consolidated financial statements; and 2. The amount of the loss can be reasonably estimated. Reasonable estimation of a possible loss does not require estimating a single amount of the loss. It requires that a loss be accrued if it can be estimated within a range. If an amount within the range is a better estimate than any other amount within the range, that amount is accrued. If no amount within the range is a better estimate than any other amount, the minimum amount in the range is accrued. A gain contingency is an uncertain situation that will be resolved in the future, possibly resulting in a gain. We do not allow the recognition of a gain contingency prior to settlement of the underlying event. If we were to have a material gain contingency, we would disclose it in the notes to the consolidated financial statements. PREMIUM REVENUE AND RELATED EXPENSES Premiums on life policies are recognized as earned when due. Premiums paid in advance on the consolidated balance sheets are held on deposit and accrue interest at rates ranging from 2.5 % to 6.0 % until such time as the premiums become due. 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 December 31, 2020 | 10-K 89 Table of Contents CITIZENS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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. Annuity policies, primarily flexible premium fixed annuity products, are accounted for in a manner consistent with accounting for interest bearing financial instruments. Premium receipts are not reported as revenue, rather as deposit liabilities to annuity contracts. The annuity products issued do not include fees or other such charges. INCOME TAXES Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered. A deferred tax asset is recorded only if a determination is made that it is more-likely-than-not that the tax treatment on which the deferred tax asset depends will be sustained in the event of an audit. These determinations inherently involve management's judgment. In addition, the Company must record a tax valuation allowance with respect to deferred tax assets if it is more-likely-than-not that the tax benefit will not be realized. EARNINGS PER SHARE Basic earnings per share are computed by dividing income available to common stockholders by the weighted average number of shares of common stock outstanding during each period. Diluted earnings per share are computed under the if-converted method for convertible securities and the treasury stock method for warrants, giving effect to all potential dilutive common stock, including options, warrants and convertible/redeemable preferred stock. The basic and diluted earnings per share of Class B common stock are one half the earnings per share of the Class A common stock. USE OF ESTIMATES The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ 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 Certain amounts presented in prior years have been reclassified to conform to the current presentation. No individual amounts were material. ACCOUNTING PRONOUNCEMENTS ACCOUNTING STANDARDS RECENTLY ADOPTED In January 2016, the Financial Accounting Standards Board ("FASB") released Accounting Standards Update ("ASU") No. 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 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 December 31, 2020 | 10-K 90 Table of Contents CITIZENS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) recognized in net income. A qualitative assessment for impairment is required for equity investments without readily determinable fair values. The updated guidance also eliminates the requirement to disclose the method and significant assumptions used to estimate the fair value of financial instruments measured at amortized cost on the consolidated financial statements. 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 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. 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 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. The Company adopted the updated guidance effective January 1, 2018 and elected to reclassify the income tax effects of the Tax Act from AOCI to accumulated deficit as of January 1, 2018. This reclassification resulted in an increase in accumulated deficit of $ 4.7 million as of January 1, 2018 and an increase in AOCI by the same amount. The Company’s accounting policy for the release of stranded tax effects in AOCI is on an aggregate portfolio basis. 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 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 AFS fixed maturity securities should be measured in a manner similar to current U.S. GAAP; however, the credit losses are recorded through an allowance for credit losses rather than as a write-down. 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. Prior U.S. 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. December 31, 2020 | 10-K 91 Table of Contents CITIZENS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ACCOUNTING STANDARDS NOT YET ADOPTED In August 2018, the FASB issued ASU No. 2018-12, Financial Services-Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts. This ASU amends four key areas of the accounting and impacts disclosures for long-duration insurance and investment contracts: • Requires updated assumptions for liability measurement. Assumptions used to measure the liability for traditional insurance contracts, which are typically determined at contract inception, will now be reviewed at least annually, and, if there is a change, updated, with the effect recorded in net income; • Standardizes the liability discount rate. The liability discount rate will be a market-observable discount rate (upper-medium grade fixed-income instrument yield), with the effect of rate changes recorded in other comprehensive income; • Provides greater consistency in measurement of market risk benefits. The two previous measurement models have been reduced to one measurement model (fair value), resulting in greater uniformity across similar market-based benefits and better alignment with the fair value measurement of derivatives used to hedge capital market risk; • Simplifies amortization of DAC. Previous earnings-based amortization methods have been replaced with a more level amortization basis; and • Requires enhanced disclosures. 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, 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. 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 89.8 % of total cash and invested assets at December 31, 2020. Carrying Value as of December 31, (In thousands, except for %) 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 Short-term investments — — 1,301 0.1 Cash and cash equivalents 34,131 2.1 46,205 3.0 Total cash and invested assets $ 1,658,799 100.0 % $ 1,526,459 100.0 % December 31, 2020 | 10-K 92 Table of Contents CITIZENS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Fixed maturity securities: Available-for-sale: U.S. Treasury securities $ 9,529 1,797 — 11,326 U.S. Government-sponsored enterprises 3,490 1,301 — 4,791 States and political subdivisions 377,462 32,751 548 409,665 Corporate 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 December 31, 2019 (In thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Fixed maturity securities: Available-for-sale: U.S. Treasury securities $ 9,709 1,638 — 11,347 U.S. Government-sponsored enterprises 3,516 1,015 — 4,531 States and political subdivisions 512,239 24,285 240 536,284 Corporate 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 December 31, 2020 | 10-K 93 Table of Contents CITIZENS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Most of the Company's equity securities are diversified stock and bond mutual funds. Fair Value as of December 31, (In thousands) 2020 2019 Equity securities: Stock mutual funds $ 3,174 3,274 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; (c) changes in the financial condition, credit rating and near-term prospects of the issuer; 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. December 31, 2020 | 10-K 94 Table of Contents CITIZENS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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, 2020 Less than 12 months Greater than 12 months Total (In thousands, except for # of securities) Fair Value Unrealized Losses # of Securities Fair Value Unrealized Losses # of Securities Fair Value Unrealized Losses # of Securities Fixed maturity securities: Available-for-sale: States and political subdivisions $ 32,487 548 27 — — — 32,487 548 27 Corporate 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 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. Corporate. 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 Table of Contents CITIZENS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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 Losses # of Securities Fair Value Unrealized Losses # of Securities Fair Value Unrealized Losses # of Securities Fixed maturity securities: Available-for-sale: States and political subdivisions $ 24,064 163 24 1,961 77 6 26,025 240 30 Corporate 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 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 final stated maturity. (In thousands) Amortized Cost Fair Value Fixed maturity securities: Due in one year or less $ 15,515 15,726 Due after one year through five years 120,268 129,853 Due after five years through ten years 229,281 253,168 Due after ten years 956,423 1,090,636 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. In addition, there were no investments that were non-income producing for the years ended December 31, 2020 or 2019. December 31, 2020 | 10-K 96 Table of Contents CITIZENS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Major categories of net investment income are summarized as follows: Years ended December 31, (In thousands) 2020 2019 2018 Gross investment income: 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 Investment expenses ( 2,212 ) ( 1,829 ) ( 2,277 ) Net investment income $ 60,197 59,531 54,205 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 Gross realized losses $ 351 973 653 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. There were no sales of equity securities in 2020, 2019 and 2018. Realized investment gains (losses) are as follows: Years ended December 31, (In thousands) 2020 2019 2018 Realized investment gains (losses): Sales, calls and maturities: Fixed maturity securities $ ( 112 ) 1,927 1,792 Real estate — 5,513 — Property and equipment 9 ( 48 ) ( 80 ) 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 maturity securities — — ( 776 ) Real estate held for sale — ( 3,105 ) — Realized loss on OTTI — ( 3,105 ) ( 776 ) Net realized investment gains (losses) $ 1,502 5,249 108 December 31, 2020 | 10-K 97 Table of Contents CITIZENS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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 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. (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 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. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our view of market assumptions in the absence of observable market information. We utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. All assets and liabilities carried at fair value are required to be classified and disclosed in one of the following three categories: • Level 1 - Quoted prices for identical instruments in active markets. • Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active and model-derived valuations whose inputs or whose significant value drivers are observable. • Level 3 - Instruments whose significant value drivers are unobservable. Level 1 primarily consists of financial instruments whose value is based on quoted market prices such as U.S. Treasury securities and actively traded mutual fund and stock investments. Level 2 includes those financial instruments that are valued by independent pricing services or broker quotes. 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, 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 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 Table of Contents CITIZENS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The following tables set forth our assets that are measured at fair value on a recurring basis as of the dates indicated. December 31, 2020 (In thousands) Level 1 Level 2 Level 3 Total Fair Value Financial assets: Fixed maturity securities available-for-sale: U.S. Treasury and U.S. Government-sponsored enterprises $ 11,326 4,791 — 16,117 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 maturity securities available-for-sale 11,378 1,478,005 — 1,489,383 Equity securities: Stock mutual funds 3,174 — — 3,174 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) — — — 11,923 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 Table of Contents CITIZENS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2019 (In thousands) Level 1 Level 2 Level 3 Total Fair Value Financial assets: Fixed maturity securities available-for-sale: U.S. Treasury and U.S. Government-sponsored enterprises $ 11,348 4,530 — 15,878 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 maturity securities available-for-sale 11,400 1,366,559 — 1,377,959 Equity securities: Stock mutual funds 3,274 — — 3,274 Bond mutual funds 12,311 — — 12,311 Common stock 134 — — 134 Non-redeemable preferred stock 314 — — 314 Total equity securities 16,033 — — 16,033 Total financial assets $ 27,433 1,366,559 — 1,393,992 FINANCIAL INSTRUMENTS VALUATION Fixed maturity securities, available-for-sale. 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. 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 Table of Contents CITIZENS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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 Estimates of fair values are made at a specific point in time, based on relevant market prices and information about the financial instruments. The estimated fair values of financial instruments presented below are not necessarily indicative of the amounts the Company might realize in actual market transactions. 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, 2020 December 31, 2019 (In thousands) Carrying Value Fair Value Carrying Value Fair Value Financial assets: Policy loans $ 83,318 83,318 82,005 82,005 Mortgage loans 157 195 177 210 Short-term investments — — 1,301 1,301 Cash and cash equivalents 34,131 34,131 46,205 46,205 Financial liabilities: 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 December 31, 2020 | 10-K 101 Table of Contents CITIZENS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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. 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. Other. 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) 2020 2019 Other long-term investments: Private equity funds $ 18,135 — FHLB common stock 190 187 Mortgage loans 157 177 All other investments 8,811 21 Total other long-term investments $ 27,293 385 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 Table of Contents CITIZENS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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. Years ended December 31, (In thousands) 2020 2019 2018 Policy claims payable: Balance at January 1 $ 8,059 7,614 8,610 Less: reinsurance recoverable 796 511 367 Net balance at January 1 7,263 7,103 8,243 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 Plus: reinsurance recoverable 3,012 796 511 Balance at December 31 $ 13,206 8,059 7,614 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 Table of Contents CITIZENS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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. As of 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: (Unaudited) 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: (Unaudited) 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 2020 2,154 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 Table of Contents CITIZENS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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) 2020 2019 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 (Unaudited) Years 1 2 3 4 5 Special property 86.39 % 9.35 % 0.28 % — % — % (5) REINSURANCE In the normal course of business, the Company reinsures portions of certain policies that we underwrite to limit disproportionate risks. During 2020 and 2019, we retained varying amounts of individual insurance up to a maximum retention of $ 100,000 on any life. The Company also reinsures 100 % of our accidental death benefit rider coverage. Catastrophe reinsurance is in place for our property policies. 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. We remain contingently liable to the extent that the reinsuring companies cannot meet their obligations under these reinsurance treaties. Our amounts recoverable from reinsurers represent receivables from and reserves ceded to reinsurers. We obtain reinsurance from multiple reinsurers, and we monitor concentration as well as financial strength ratings of our principal reinsurers. The ratings by A.M. Best Company range from A (Excellent) to A+ (Superior). December 31, 2020 | 10-K 105 Table of Contents CITIZENS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Assumed and ceded life reinsurance activity as of December 31, 2020 and 2019 is summarized as follows: December 31, (In thousands) 2020 2019 Aggregate assumed life insurance in force $ 4,615 4,892 Aggregate ceded life insurance in force $ 474,792 486,937 Net life insurance in force $ 4,141,968 4,246,781 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: Years ended December 31, (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 Total premiums earned $ 175,329 184,347 187,860 Claims and surrenders assumed $ 174 141 159 Claims and surrenders ceded $ ( 1,575 ) ( 940 ) ( 705 ) 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. 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 STOCK 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. December 31, 2020 | 10-K 106 Table of Contents CITIZENS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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) Common Stock Treasury Class A Class B Stock Balance at December 31, 2017 52,216 1,002 ( 3,136 ) Change — — — 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 The following table sets forth the computation of basic and diluted earnings per share. Years ended December 31, (In thousands, except per share amounts) 2020 2019 2018 Basic and diluted earnings per share: Numerator: 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 ) Denominator: Weighted average shares of Class A outstanding - basic 49,400 49,214 49,080 Weighted average shares of Class A outstanding - diluted 49,938 49,347 49,139 Weighted average shares of Class B outstanding - basic and diluted 1,002 1,002 1,002 Total weighted average shares outstanding - basic 50,402 50,216 50,082 Total weighted average shares outstanding - diluted 50,940 50,349 50,141 Basic and diluted loss per share of Class A common stock $ ( 0.22 ) ( 0.03 ) ( 0.22 ) Basic and diluted loss per share of Class B common stock ( 0.11 ) ( 0.01 ) ( 0.11 ) 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) 2020 2019 Combined statutory capital and surplus Life insurance operations $ 39,633 40,932 Property insurance operations 4,810 6,298 Total combined statutory capital and surplus $ 44,443 47,230 December 31, 2020 | 10-K 107 Table of Contents CITIZENS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, (In thousands) 2020 2019 2018 Combined statutory net income (loss) Life insurance operations $ 9,458 ( 1,200 ) 17,872 Property insurance operations ( 1,985 ) ( 451 ) ( 269 ) Total combined statutory net income (loss) $ 7,473 ( 1,651 ) 17,603 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, 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” or the "Authority"). 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. In certain instances, the insurer would also be required to provide prior notice to the BMA in advance of the payment of dividends. In the event that such an affidavit is submitted to the BMA in accordance with the Bermuda Insurance Act, and further subject to CICA Ltd. meeting its MMS and ECR requirements, CICA Ltd. would be permitted to distribute a dividend not exceeding 25 % of its prior year's total statutory capital and surplus. Distributions in excess of this amount require the approval of the BMA. Further, CICA Ltd. must obtain the BMA’s prior approval before reducing its total statutory capital as shown in its previous financial year statutory balance sheet by 15 % or more. CICA Ltd. 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 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) 2020 2019 CICA Ltd. capital and surplus $ 158,447 94,322 December 31, 2020 | 10-K 108 Table of Contents CITIZENS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Years ended December 31, (In thousands) 2020 2019 2018 CICA Ltd. 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: (a) Bermuda Solvency Capital Requirement ("BSCR"); or (b) an internal capital model that the BMA has approved for use for this purpose. CICA Ltd. uses the BSCR in calculating its solvency requirements. The Economic Balance Sheet ("EBS") framework is embedded as part of the BSCR and forms the basis of its ECR. CICA Ltd. 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. Although this NAIC standard does not change the reserving requirements under U.S. GAAP, it can be significant for many life insurers. PBR replaces the current formulaic approach to determining policy reserves with an approach that more closely reflects the risks of highly complex products. 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 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 QUALIFICATIONS OF LIFE PRODUCTS We have previously reported that a portion of the life insurance policies issued by our subsidiary insurance companies failed to qualify for the favorable U.S. federal income tax treatment afforded by Sections 7702 and 72(s) of the Internal Revenue Code ("IRC") of 1986. Further, we have determined that the structure of our policies sold to non-U.S. persons, which were novated to CICA Ltd. effective July 1, 2018, may have inadvertently generated U.S. source income over time, which 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. persons, we expect to settle any liabilities with the Internal Revenue Service ("IRS") related to tax withholding and information reporting failures. The Company has continued to refine its estimate of the tax, penalty and interest exposure and expenses related to these tax issues, as described below for the current reporting period. The products have been and continue to be appropriately reported as life insurance under U.S. GAAP for financial reporting. 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 Table of Contents CITIZENS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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. The amount of our liabilities and expenses depends on a number of uncertainties, including the number of prior tax years for which we may be liable to the IRS and the methodology applicable to the calculation of the tax liabilities for policies. Given the range of potential outcomes and the significant variables assumed in establishing our estimates, actual amounts incurred may exceed our reserve and could exceed the high end of our estimated range of liabilities and expenses. To the extent the amount reserved by the Company is insufficient to meet the actual amount of our liabilities and expenses, or if our estimates of those liabilities and expenses change in the future, our financial condition and results of operations may be materially adversely affected. Management believes that based upon current information, we have recorded the best estimate liability to date. On May 17, 2017, we submitted an offer to enter into Closing Agreements with the IRS covering certain CICA and CNLIC domestic life insurance policies (the "Closing Agreements"), which was accepted by the IRS on June 7, 2019. Pursuant to the Closing Agreements, CICA and CNLIC agreed to pay the IRS $ 123,779 and $ 4,118 , respectively, by August 6, 2019, and follow the corrective steps for the policies outlined in the Closing Agreements by September 5, 2019. These payments were made to the IRS on July 12, 2019. For certain life insurance policies that failed to satisfy the requirements of the cash value accumulation test of Section 7702 ("CVAT") of the IRC, we agreed to amend such policies retroactively to their original dates of issue by adding an endorsement (which provides that the death benefit of such policies will not be less than the amount of life insurance necessary to maintain CVAT compliance). For the life insurance policies that failed to satisfy the premium requirements of the guideline premium test of Section 7702 of the IRC, we agreed as needed to refund each policyholder the amount of premiums paid that exceeded the guideline premium limitation plus interest thereon. We completed these corrective steps prior to September 5, 2019, the deadline set forth in the Closing Agreements. LITIGATION AND REGULATORY ACTIONS From time to time we are subject to legal and regulatory actions relating to our business. We defend all claims vigorously. As a result, we incur defense costs, including attorneys' fees, other direct litigation costs and the expenditure of management time that otherwise would be devoted to our business. If we suffer an adverse judgment as a result of litigation claims, it could have a material adverse effect on our business, results of operations and financial condition. CONTRACTUAL OBLIGATIONS The Company leases home office space in Austin, Texas for Citizens and in Bermuda for CICA Ltd. as well as several district office locations related to our Home Service Insurance segment across Louisiana, Mississippi and Arkansas, which are classified as operating leases. Certain operating leases include renewal options that extend the lease term. 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 operating lease liabilities as of December 31, 2020. (In years) Lease Term Weighted-average remaining lease term Operating leases 9.9 December 31, 2020 | 10-K 110 Table of Contents CITIZENS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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 2021 $ 1,430 2022 1,272 2023 1,271 2024 1,302 2025 1,335 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 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 $ 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 The Company has two reportable segments: Life Insurance and Home Service Insurance. 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. 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 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 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 Table of Contents CITIZENS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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) Life Insurance Home Service Insurance Other Non-Insurance Enterprises Consolidated Revenues: Premiums Life insurance $ 128,900 41,428 — 170,328 Accident and health insurance 301 718 — 1,019 Property insurance — 3,982 — 3,982 Net investment income 45,885 13,051 1,261 60,197 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 Benefits and expenses: Insurance benefits paid or provided: Claims and surrenders 93,813 27,332 — 121,145 Increase in future policy benefit reserves 25,825 4,098 — 29,923 Policyholders' dividends 5,554 33 — 5,587 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 Capitalization of deferred policy acquisition costs ( 15,568 ) ( 4,907 ) — ( 20,475 ) Amortization of deferred policy acquisition costs 23,987 3,452 — 27,439 Amortization of cost of insurance acquired 460 1,356 — 1,816 Total benefits and expenses 168,338 62,891 19,944 251,173 Income (loss) before income tax expense $ 9,894 ( 3,470 ) ( 18,741 ) ( 12,317 ) December 31, 2020 | 10-K 112 Table of Contents CITIZENS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Year ended December 31, 2019 (In thousands) Life Insurance Home Service Insurance Other Non-Insurance Enterprises Consolidated Revenues: Premiums Life insurance $ 136,941 41,410 — 178,351 Accident and health insurance 725 658 — 1,383 Property insurance — 4,613 — 4,613 Net investment income 44,779 13,058 1,694 59,531 Realized investment gains (losses), net 6,795 1,470 ( 3,016 ) 5,249 Other income 1,412 4 2 1,418 Total revenue 190,652 61,213 ( 1,320 ) 250,545 Benefits and expenses: Insurance benefits paid or provided: Claims and surrenders 82,964 23,863 — 106,827 Increase in future policy benefit reserves 39,873 1,839 — 41,712 Policyholders' dividends 6,004 36 — 6,040 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 Capitalization of deferred policy acquisition costs ( 17,448 ) ( 4,807 ) — ( 22,255 ) Amortization of deferred policy acquisition costs 23,832 4,436 — 28,268 Amortization of cost of insurance acquired 492 1,054 — 1,546 Total benefits and expenses 178,857 60,032 5,911 244,800 Income (loss) before income tax expense $ 11,795 1,181 ( 7,231 ) 5,745 December 31, 2020 | 10-K 113 Table of Contents CITIZENS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Year ended December 31, 2018 (In thousands) Life Insurance Home Service Insurance Other Non-Insurance Enterprises Consolidated Revenues: Premiums Life insurance $ 140,566 41,259 — 181,825 Accident and health insurance 580 638 — 1,218 Property insurance — 4,817 — 4,817 Net investment income 39,985 13,125 1,095 54,205 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 Benefits and expenses: Insurance benefits paid or provided: Claims and surrenders 69,149 21,954 — 91,103 Increase in future policy benefit reserves 43,671 4,276 — 47,947 Policyholders' dividends 6,316 46 — 6,362 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 Capitalization of deferred policy acquisition costs ( 17,194 ) ( 5,501 ) — ( 22,695 ) Amortization of deferred policy acquisition costs 29,915 4,320 — 34,235 Amortization of cost of insurance acquired 583 1,875 — 2,458 Total benefits and expenses 171,237 62,288 8,479 242,004 Income (loss) before income tax expense $ 12,085 ( 2,496 ) ( 7,587 ) 2,002 The table below summarizes assets by segment. December 31, (In thousands) 2020 2019 Assets: Life Insurance $ 1,381,723 1,284,844 Home Service Insurance 385,931 391,366 Other Non-Insurance Enterprises 75,766 68,726 Total assets $ 1,843,420 1,744,936 December 31, 2020 | 10-K 114 Table of Contents CITIZENS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) GEOGRAPHIC INFORMATION 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 Area: 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 Net reinsurance ( 3,624 ) ( 2,662 ) ( 3,701 ) Total premiums $ 175,329 184,347 187,860 (9) INCOME TAXES CICA Ltd., a wholly-owned subsidiary of Citizens, is considered a controlled foreign corporation for federal income tax purposes. As a result, the insurance activity of CICA Ltd. 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, 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 Table of Contents CITIZENS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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 % Foreign income tax rate differential ( 1,817 ) 14.8 ( 1,562 ) ( 27.7 ) ( 8,133 ) ( 406.3 ) Tax-exempt interest and dividends-received deduction ( 146 ) 1.2 ( 145 ) ( 2.6 ) ( 227 ) ( 11.3 ) Adjustment of prior year taxes 194 ( 1.6 ) ( 99 ) ( 1.8 ) 113 5.6 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 ) 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 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) 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 Table of Contents CITIZENS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The components of deferred federal income taxes are as follows: December 31, (In thousands) 2020 2019 Deferred tax assets: Future policy benefit reserves $ 2,657 2,641 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 Deferred tax liabilities: DAC, COIA and intangible assets ( 8,693 ) ( 8,417 ) Unrealized gains on investments available-for-sale ( 4,522 ) ( 7,300 ) Tax reserves transition liability ( 3,736 ) ( 4,483 ) Right-of-use lease asset ( 2,514 ) ( 238 ) Other ( 35 ) ( 40 ) Total gross deferred tax liabilities ( 19,500 ) ( 20,478 ) Net deferred tax liability $ ( 9,564 ) ( 12,428 ) A summary of the changes in the components of deferred federal and state income taxes is as follows: December 31, (In thousands) 2020 2019 Deferred federal and state income taxes: Balance January 1, $ ( 12,428 ) ( 5,709 ) 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 ) 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. December 31, 2020 | 10-K 117 Table of Contents CITIZENS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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: Years ended December 31, (In thousands) 2020 2019 2018 Balance at January 1, $ 45,989 44,841 95,831 Additions for tax positions of prior years 1 1,148 2,268 Reductions for tax positions of prior years — — ( 53,258 ) Balance December 31, $ 45,990 45,989 44,841 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 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: Citizens, Inc. CICA Life Insurance Company of America Citizens National Life Insurance Company Magnolia Guaranty Life Insurance Company Security Plan Life Insurance Company Security Plan Fire Insurance Company Computing Technology, Inc. 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 at least annually. The Company and our subsidiaries file income tax returns in the U.S. Federal jurisdiction and various U.S. states. None of our subsidiaries are subject to examination by U.S. tax authorities for years prior to 2017. December 31, 2020 | 10-K 118 Table of Contents CITIZENS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (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 2020, 2019 and 2018, as indicated below. (In thousands) Amount Tax Effect Total Year ended December 31, 2020 Unrealized gains (losses): Unrealized holding gains (losses) arising during the period $ 84,010 ( 6,044 ) 77,966 Reclassification adjustment for (gains) losses included in net income 111 ( 23 ) 88 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 Year ended December 31, 2019 Unrealized gains (losses): Unrealized holding gains (losses) arising during the period $ 78,744 ( 5,535 ) 73,209 Reclassification adjustment for (gains) losses included in net income ( 1,927 ) 405 ( 1,522 ) 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 Year ended December 31, 2018 Unrealized gains (losses): Unrealized holding gains (losses) arising during the period $ ( 34,357 ) 6,520 ( 27,837 ) Reclassification adjustment for (gains) losses included in net income ( 953 ) 200 ( 753 ) 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 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. Vesting of the units is subject to the recipient’s continued service or employment with the Company through the applicable vesting date, which is one year for directors and two years for employees. In addition, the Board also approved equity grants for other employees with a delegation to the President and Chief Executive Officer to determine the participant and values to be awarded. There are three million shares that may be granted under the plan. December 31, 2020 | 10-K 119 Table of Contents CITIZENS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The following table provides a rollforward of restricted stock activity: 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 Less: 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 Less: 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. As of December 31, 2020, we recognized $ 2.4 million of expense, while $ 0.5 million was unrecognized and is expected to be amortized up to 1.30 years. Restricted stock unit awards give the participant the right to receive common stock in the future, subject to certain restrictions and a risk of forfeiture. Forfeitures are recognized in the period they occur. 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 The Company sponsors a defined contribution retirement plan. The plan was initially established as the Citizens, Inc. Profit Sharing Plan and was restated as the Citizens, Inc. 401(k) Retirement and Profit Sharing Plan effective March 1, 2016. There have been no profit sharing contributions since 2014. On January 1, 2019, the 401(k) plan was amended to allow employees who have completed three months of service to participate in the plan. Prior to that date, a year of service was required before participation. Contributions are made by employees and the Company provides a matching contribution based upon the employee's level of contribution. The Company's expense was $ 0.8 million, $ 0.8 million and $ 0.7 million in 2020, 2019 and 2018, respectively. The Company is primarily self-insured for employee health benefits. The Company records its self-insurance liability based on an estimate of claims incurred but not yet reported. There is stop-loss coverage for amounts in excess of $ 120,000 per individual per year. 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 Table of Contents CITIZENS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (13) RELATED PARTY TRANSACTIONS The Company has various routine related party transactions in conjunction with our holding company structure, such as a management service agreement related to costs incurred, a tax sharing agreement between entities, and inter-company dividends and capital contributions. A reinsurance assumption and novation transaction was completed effective July 1, 2018 between CICA and CICA Ltd. to transfer the international policies from CICA to CICA Ltd., the newly formed Bermuda entity. 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. Mr. 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. Because Mr. 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. Mr. 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 Table of Contents CITIZENS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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) Fourth Quarter Third Quarter Second Quarter First Quarter 2020 Revenues $ 64,968 59,825 58,341 55,722 Benefits and expenses 67,317 67,996 57,903 57,957 Federal income tax expense (benefit) ( 3,887 ) ( 256 ) 1,465 1,349 Net income (loss) 1,538 ( 7,915 ) ( 1,027 ) ( 3,584 ) Net income (loss) available to common shareholders 1,538 ( 7,915 ) ( 1,027 ) ( 3,584 ) Basic & Diluted earnings (losses) per share of Class A common stock 0.03 ( 0.16 ) ( 0.02 ) ( 0.07 ) 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) Fourth Quarter Third Quarter Second Quarter First Quarter 2019 Revenues $ 69,806 61,467 56,866 62,406 Benefits and expenses 64,878 59,335 60,189 60,398 Federal income tax expense (benefit) ( 23 ) 86 1,242 5,810 Net income (loss) 4,951 2,046 ( 4,565 ) ( 3,802 ) Net income (loss) available to common shareholders 4,951 2,046 ( 4,565 ) ( 3,802 ) Basic & Diluted earnings (losses) per share of Class A common stock 0.10 0.04 ( 0.09 ) ( 0.08 ) Basic & Diluted earnings (losses) per share of Class B common stock 0.05 0.02 ( 0.04 ) ( 0.04 ) (15) SUBSEQUENT EVENTS 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 Table of Contents CITIZENS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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. Hott, Mr. Hughes and Mr. Boto. 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 Table of Contents CITIZENS, INC. FINANCIAL SCHEDULES Schedule II Condensed Financial Information of Registrant CITIZENS, INC. (Parent Company) Balance Sheets December 31, (In thousands) 2020 2019 Assets Investment in subsidiaries (1) $ 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 Accounts receivable from subsidiaries (1) 4,911 4,770 Property and equipment, net 12,666 817 Other assets 3,183 552 Total assets $ 311,235 264,902 Liabilities and Stockholders' Equity Liabilities: Accrued expense and other liabilities $ 10,290 5,066 Total liabilities $ 10,290 5,066 Stockholders' equity: Common stock: Class A $ 262,869 261,515 Class B 3,184 3,184 Accumulated deficit ( 82,352 ) ( 70,969 ) Unrealized investment gains on securities held by parent and subsidiaries, net of tax 128,255 77,117 Treasury stock ( 11,011 ) ( 11,011 ) Total stockholders' equity 300,945 259,836 Total liabilities and stockholders' equity $ 311,235 264,902 (1) Eliminated in consolidation. Note to Schedule II : 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 income (loss) of consolidated subsidiaries, which represents the net income (loss) of each of its wholly-owned subsidiaries. December 31, 2020 | 10-K 124 Table of Contents CITIZENS, INC. FINANCIAL SCHEDULES Schedule II, Continued Condensed Financial Information of Registrant CITIZENS, INC. (Parent Company) Statements of Operations and Comprehensive Income (Loss) Years ended December 31, (In thousands) 2020 2019 2018 Comprehensive income (loss): Revenues: Management service fees (1) $ 32,828 43,694 43,323 Investment income 11,253 1,685 1,086 Other 3 2 1 Realized investment gains (losses) ( 62 ) ( 3,013 ) ( 196 ) Total revenues 44,022 42,368 44,214 Expenses: General expenses 49,747 46,020 44,009 Taxes, licenses and fees 189 146 761 Total expenses 49,936 46,166 44,770 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 (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 ) Total comprehensive income (loss) $ 40,150 70,381 ( 36,190 ) (1) Eliminated in consolidation. Note to Schedule II : 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 income (loss) of consolidated subsidiaries, which represents the net income (loss) of each of its wholly-owned subsidiaries. December 31, 2020 | 10-K 125 Table of Contents CITIZENS, INC. FINANCIAL SCHEDULES Schedule II, Continued Condensed Financial Information of Registrant CITIZENS, INC. (Parent Company) Statements of Cash Flows Years ended December 31, (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 (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 ) Stock-based compensation 2,223 2,099 — 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 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 — Net cash provided by (used in) investing activities 432 ( 1,448 ) ( 11,152 ) Cash flows from 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 ) Cash at beginning of year 10,829 11,768 23,850 Cash at end of year $ 3,102 10,829 11,768 Note to Schedule II : 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 income (loss) of consolidated subsidiaries, which represents the net income (loss) of each of its wholly-owned subsidiaries. December 31, 2020 | 10-K 126 Table of Contents CITIZENS, INC. FINANCIAL SCHEDULES Schedule III Consolidated Supplementary Insurance Information Years ended December 31, (In thousands) 2020 2019 Deferred policy acquisition costs: Life Insurance $ 94,771 111,461 Home Service Insurance 10,142 37,788 Total consolidated deferred policy acquisition costs $ 104,913 149,249 Future policy benefit reserves and policy claims payable: Life Insurance $ 1,052,638 1,025,128 Home Service Insurance 286,056 279,099 Total consolidated future policy benefit reserves and policy claims payable $ 1,338,694 1,304,227 Unearned premiums: Life Insurance $ 1,446 1,145 Home Service Insurance 262 224 Total consolidated unearned premiums $ 1,708 1,369 Other policy claims and benefits payable: Life Insurance $ 92,758 87,359 Home Service Insurance 1,922 1,777 Total consolidated other policy claims and benefits payable $ 94,680 89,136 December 31, 2020 | 10-K 127 Table of Contents CITIZENS, INC. FINANCIAL SCHEDULES 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. Schedule IV Consolidated Statement of Reinsurance (In thousands) Direct Amount Ceded to Other Companies Assumed From Other Companies Net Amount % of Amount Assumed to Net Year ended December 31, 2020 Life insurance in force $ 4,612,145 474,792 4,615 4,141,968 0.1 % Premiums: Life insurance 172,503 2,266 91 170,328 Accident and health insurance 1,033 14 — 1,019 Property insurance 5,416 1,434 — 3,982 Total premiums $ 178,952 3,714 91 175,329 0.1 % Year ended December 31, 2019 Life insurance in force $ 4,728,826 486,937 4,892 4,246,781 0.1 % Premiums: Life insurance 180,204 1,952 99 178,351 Accident and health insurance 1,400 17 — 1,383 Property insurance 5,405 792 — 4,613 Total premiums $ 187,009 2,761 99 184,347 0.1 % Year ended December 31, 2018 Life insurance in force $ 4,835,631 490,295 5,202 4,350,538 0.1 % Premiums: Life insurance 184,722 2,996 99 181,825 Accident and health insurance 1,232 14 — 1,218 Property insurance 5,607 790 — 4,817 Total premiums $ 191,561 3,800 99 187,860 0.1 % December 31, 2020 | 10-K 128 Table of Contents EXHIBITS Exhibit No. The following exhibits are filed herewith: 3.1 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) 3.2 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) 4.1* Description of Securities of Citizens, Inc. 10.1 Form of Indemnification Agreement for Executive Officers (incorporated herein by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed on November 8, 2017) 10.2 Form of Indemnification Agreement for Directors (incorporated herein by reference to Exhibit 10.2 to the Registrant's Current Report on Form 8-K filed on November 8, 2017) 10.3† Citizens, Inc. Omnibus Incentive Plan (incorporated herein by reference to Exhibit 4.3 to the Registration Statement on Form S-8 filed by the Registrant on December 5, 2017) 10.4† Form of Citizens, Inc. Employee Restricted Stock Unit Agreement 10.5† Form of Citizens, Inc. Non-employee Director Restricted Stock Unit Agreement 10.6† Form of Executive Change in Leadership Agreement entered into by and between the Company and each of the following: Jeffery P. Conklin, James A. Eliasberg, Robert M. Mauldin III, Chad M. Mellon and Harvey J. L. Waite (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed on April 16, 2020) 1 0.7† 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) 10.8† 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) 10.9† * Amendment to Consulting Agreement by and between the Company and Gerald W. Shields effective as of January 1, 2021 10.10 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) 10.11 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) 10.12 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) 21* Subsidiaries of the Registrant 23.1* Consent of Independent Registered Public Accounting Firm - Deloitte & Touche LLP 24 Power of Attorney (included on signature page enclosed herein) 31.1* Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act December 31, 2020 | 10-K 129 Table of Contents 31.2* Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act 32.1* Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act 32.2* Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act 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. * Filed herewith. December 31, 2020 | 10-K 130 Table of Contents SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized. CITIZENS, INC. Date: March 10, 2021 By: /s/ Gerald W. Shields Gerald W. Shields, Interim Chief Executive Officer and President (Principal Executive Officer) By: /s/ Jeffery P. Conklin Jeffery P. Conklin, Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) POWER OF ATTORNEY 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. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated and on March 10, 2021. Dated: March 10, 2021 /s/ Christopher W. Claus /s/ Dr. Terry S. Maness Christopher W. Claus, Director Dr. Terry S. Maness, Director /s/ Jerry D. Davis, Jr. /s/ Gerald W. Shields Jerry D. Davis, Jr., Chairman of the Board and Director Gerald W. Shields, Vice Chairman of the Board and Director /s/ Dr. E. Dean Gage /s/ Dr. Robert B. Sloan, Jr. Dr. E. Dean Gage, Director Dr. Robert B. Sloan, Jr., Director /s/ Francis A. Keating II /s/ Constance K. Weaver Francis A. Keating II, Director Constance K. Weaver, Director December 31, 2020 | 10-K 131