CITIZENS, INC. 10-Q

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS This section and other parts of this Quarterly Report on Form 10-Q ("Form 10-Q") contain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Forward-looking statements can also be identified by words such as “future,” “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “will,” “would,” “could,” “can,” “may,” and similar terms. Forward-looking statements are not guarantees of future performance and the Company’s actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, statements concerning any potential future impact of the coronavirus disease (“COVID-19”) pandemic on our business, as well as factors discussed in the "Risk Factors" contained in our Annual Report on Form 10-K for the year ended December 31, 2020 which are incorporated herein by reference. The Company assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law. The following discussion should be read in conjunction with the consolidated financial statements and accompanying notes included in Part I, Item 1 of this Form 10-Q. The Company assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law. The U.S. Securities and Exchange Commission ("SEC") maintains a website that contains reports, proxy and information statements, and other information regarding issuers, including the Company, that file electronically with the SEC. The public can obtain any documents that the Company files with the SEC at http://www.sec.gov. We also make available, free of charge, through our Internet website (http://www.citizensinc.com), our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Section 16 Reports filed by officers and directors, news releases, and, if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable after we electronically file such reports with, or furnish such reports to, the SEC. We are not including any of the information contained on our website as part of, or incorporating it by reference into, this Form 10-Q. OVERVIEW Citizens, Inc. ("Citizens" or the "Company") is an insurance holding company incorporated in Colorado serving the life insurance needs of individuals in the United States since 1969 and internationally since 1975. Through our insurance subsidiaries, we provide insurance benefits to residents in 31 U.S. states and more than 75 different countries. We pursue a strategy of offering traditional insurance products in niche markets where we believe we are able to achieve competitive advantages. We operate in two business segments: • Life Insurance segment - U.S. dollar-denominated ordinary whole life insurance and endowment policies predominantly sold to non-U.S. residents, located principally in Latin America and the Pacific Rim through independent marketing consultants and whole life insurance sold domestically through independent agents; and • Home Service Insurance segment - final expense life insurance and limited liability property insurance policies marketed to middle- and lower-income households, as well as whole life products with higher allowable face values, in Louisiana, Mississippi and Arkansas, sold through independent agents and through funeral homes. IMPACT OF COVID-19 PANDEMIC The impacts of COVID-19 and related economic conditions on the Company's financial results, which began to affect the Company late in the first quarter of 2020, continue to be highly uncertain and outside the Company’s control. The scope, duration and magnitude of the direct and indirect effects of COVID-19 are difficult or impossible to anticipate. As a result, it is not possible to predict its impact on the Company's results for the remainder of 2021. June 30, 2021 | 10-Q 29 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS Currently, some of the most significant factors that could cause our future results to differ significantly from our prior results or forward-looking statements include: • decreased premium revenue due to disruption to our distribution channel and quarantines, travel limitations, business restrictions and decreased economic activity; • higher surrenders or lapses due to cash needs our policyholders may have due to concerns over COVID-19 economic impacts, particularly in our international business; and • a higher level of claims due to COVID-19 deaths. While we believe that the COVID-19 pandemic did not materially impact our results of operations during the first six months of 2021, the Delta variant of COVID-19, which is now becoming the predominant strain of COVID-19 globally, is leading to new or reinstated lock-downs and quarantines, and higher rates of transmission and deaths, particularly in unvaccinated individuals, and may materially impact future operations. We continue to monitor the impact of the COVID-19 pandemic on our operations. CURRENT FINANCIAL HIGHLIGHTS Net income increased by $6.0 million during both the three and six months ended June 30, 2021 to $5.0 million and $1.4 million, respectively, compared to the prior year periods due primarily to an increase in realized gains of $3.4 million and $5.0 million, respectively in the three and six months ended June 30, 2021. The realized gains primarily reflect changes in the fair value of our limited partnership investments during the second quarter of 2021. We did not sell these investments in the second quarter of 2021, but as discussed in Part I, Item 1, Note 5. Investments , changes in fair values of our equity securities are reflected in realized gains, in addition to executed transactions that result in a gain or loss. Net income in the three months ended June 30, 2021 was also positively impacted by an increase in premiums and more favorable mortality experience in our Home Service Insurance segment as compared to the three months ended June 30, 2020, and a $0.8 million reduction to increase in future policy benefit reserves due to the conversion of a block of business to our new actuarial valuation system as described in Part I, Item 1, Note 1. Financial Statements . Total benefits and expenses of $58.0 million and $116.2 million, respectively, in the three and six months ended June 30, 2021 were $0.1 million and $0.3 million higher than the respective periods in 2020. The increase was primarily due to increases in claims and surrender benefits paid in our Life Insurance segment. Death claim benefits paid in the Life Insurance Segment, increased by $0.6 million, or 48.8%, in the three months ended June 30, 2021 as compared to the 2020 period and increased by $1.6 million, or 52.7%, in the six months ended June 30, 2021 as compared to the 2020 period. The higher claim expense was a result of a higher volume of reported claims, including those COVID-19 related, in addition to an increase in the average death claim amount. We also continued to experience an increase in surrender benefits in the Life Insurance segment, which increased by 28.1% and 17.7%, respectively, in the three and six months ended June 30, 2021, as compared to the prior year periods. We believe the continued trend of higher surrenders is due primarily to the aging block of business, as the business ages, the surrender charges decrease, and to a lesser extent, global economic circumstances. June 30, 2021 | 10-Q 30 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS Consolidated Revenue Highlights Life insurance premiums and investment income are our primary sources of revenue. In the three months ended June 30, 2021 compared to the same period in 2020, total revenue increased by $5.2 million. • Insurance premiums increased by $1.3 million, or 3.2%, due to an increase in first year premiums in our Life Insurance segment and an increase in both first year and renewal premiums in our Home Service Insurance segments. We believe these increases were driven by our focused marketing campaigns and improved sales practices, as well as lower sales in prior year period due to COVID 19 impacts previously described. • Net investment income increased by $0.4 million, or 2.7%, despite a lower average portfolio yield in the current year period due to a growing base of assets. In the six months ended June 30, 2021 as compared to the same period in 2020, total revenue increased by $5.0 million. • Insurance premiums declined by $1.0 million, or 1.2%. The decline was driven by our Life Insurance segment, as renewal premiums declined 6.4% to $52.0 million in the first quarter of 2021 from $55.6 million in the same period in 2020. The decrease in renewal premiums resulted primarily from a decline in our in force business in this segment, which is due in part to changes we made to our products and distribution over the last few years. • Net investment income increased by $0.5 million, or 1.6%, due to the growing asset base and the make-whole call redemption described below in the "Consolidated Results of Operations". Additionally, as discussed above, realized investment gains increased by $3.4 million and $5.0 million, respectively, in the three and six months ended June 30, 2021 as compared to the prior year periods. Other income consists primarily of policyholders in our Life Insurance segment selecting supplemental contracts upon maturity of their original policies, which has been increasing over the past few quarters. Consolidated Benefits and Expenses Highlights The primary use of our funds is the payment of insurance benefits for claims, surrenders and matured endowments. As discussed above, our claims and surrender benefits incurred increased by $1.5 million and $5.7 million, respectively, in the three and six months ended June 30, 2021 as compared to the same periods in the prior year; however, total insurance benefits paid or provided was essentially flat year-over-year, as the increase in claims and surrender benefits was offset by a decrease in future policy benefit reserves. Future policy benefit reserves decreased due to the decline in the in force block of business and the conversion of a block of policies to our new actuarial valuation system mentioned above. The other primary uses of funds are the costs related to selling our insurance products (e.g., commissions, underwriting, marketing expenses) and general expenses. Costs incurred related to selling our insurance products were higher for the three and six months ended June 30, 2021 as compared to the same period in the prior year. First year sales for both our Life Insurance and Home Service Insurance segments increased substantially in the second quarter of 2021 compared to the comparable period last year, when premiums were materially impacted by the COVID-19 pandemic as disclosed previously. Commissions on our first year sales are much higher than commissions on our renewal business. Other general expenses were slightly higher for the three and six months ended June 30, 2021 due to higher rent at our new headquarters and higher legal fees due to the various legal proceedings described in our Form 10-K for the year ended December 21, 2020. June 30, 2021 | 10-Q 31 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS Financial Condition at June 30, 2021 • Total investments of $1.6 billion; fixed maturity securities comprised 91.7% of total investments. • Total assets of $1.8 billion. • Total stockholders' equity of $0.3 billion. • $4.6 billion of direct insurance in force. • No debt. • Fully diluted earnings per share of Class A common stock of $0.03. OUR OPERATING SEGMENTS Our business is comprised of two operating business segments, as detailed below. • Life Insurance • Home Service Insurance Our insurance operations are the primary focus of the Company, as these operations generate most of our income. See the discussion under Segment Operations below for detailed analysis. The amount of insurance, number of policies, and average face amounts of ordinary life policies issued during the periods indicated are shown below. Six Months Ended June 30, 2021 2020 Amount of Insurance Issued Number of Policies Issued Average Policy Face Amount Issued Amount of Insurance Issued Number of Policies Issued Average Policy Face Amount Issued Life Insurance $ 108,680,985 1,803 $ 60,278 $ 84,017,811 1,315 $ 63,892 Home Service Insurance 99,978,080 13,868 7,209 65,239,577 9,230 7,068 Total $ 208,659,065 15,671 $ 149,257,388 10,545 Total insurance issued increased by 39.8% in the six months ended June 30, 2021, from $149.3 million in the first six months of 2020 to $208.7 million in 2021, as both our Life Insurance and Home Service Insurance segments experienced growth. We issued 15,671 new policies in the 2021 period, as compared to 10,545 new policies in the 2020 period. Our sales for the second quarter of 2020 were unusually low, especially for our Life Insurance segment due to the impact of the COVID-19 pandemic during this time. The number of policies issued in the six months ended June 30, 2021 increased 37.1% in the Life Insurance segment from the same period in 2020. We believe the increase in the first half of 2021 was primarily due to enhancements to our business operations and sales practices to account for the impact of the COVID-19 pandemic, new sales promotions and campaigns, focused training on virtual selling and strategically prioritizing selling lower face amount policies, which typically have less stringent underwriting requirements and, in some cases, may not require the completion of medical tests, as many of our top international markets remain in quarantine due to the COVID-19 pandemic. In addition, in order to address the decreasing first year premiums we have seen in recent years in this segment, we prioritized recruiting new independent contractors in the first quarter of 2021, and we began to see the impact of these efforts through June. Although applications increased during the first six months of 2021 compared to the same period last year due to these enhancements, average policy face amount declined, as we continued to emphasize the selling of lower face amount policies, as noted above. The number of policies issued in the six months ended June 30, 2021 increased 50.2% in the Home Service Insurance segment compared to the same period in 2020. We believe the increase in our Home Service Insurance segment was driven by the broadening of a sales campaign introduced during the third quarter of last year targeted at existing policyholders that emphasizes increased coverage as well as fewer applications received in the prior June 30, 2021 | 10-Q 32 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS year period as the onset of the COVID-19 pandemic and stay-at-home orders negatively impacted our business. During the first quarter of 2021, as part of the campaign, we increased the target face amount of insurance. As a result, the overall average face amount of policies issued for the Home Service Insurance segment increased during the six months ended June 30, 2021 compared to the same period last year. CONSOLIDATED RESULTS OF OPERATIONS A discussion of consolidated results is presented below, followed by a discussion of segment operations and financial results by segment. REVENUES Our revenues are generated primarily by insurance renewal premiums and investment income on invested assets. Three Months Ended Six Months Ended June 30, June 30, (In thousands) 2021 2020 2021 2020 Revenues: Premiums: Life insurance $ 41,438 40,185 79,080 80,131 Accident and health insurance 291 248 634 509 Property insurance 1,097 1,063 2,144 2,173 Net investment income 15,320 14,915 30,564 30,084 Realized investment gains, net 4,859 1,448 5,151 142 Other income 553 482 1,468 1,024 Total revenues $ 63,558 58,341 119,041 114,063 Premium Income. Premium income derived from life, accident and health, and property insurance sales increased $1.3 million, or 3.2%, for the second quarter, and decreased $1.0 million, or 1.2% for the six months ended June 30, 2021 compared to the same periods in 2020. The increase in the three-month period was due to higher first year premiums in both our segments and slightly higher renewal premiums in our Home Services Insurance segment. First year premiums were negatively affected in the three and six months ended June 30, 2020 due to the impacts of the COVID-19 pandemic. Despite higher first year premiums in both our segments and slightly higher renewal premiums in our Home Services Insurance segment for the six months ended June 30, 2021, overall premiums declined due to lower renewal premiums in our Life Insurance segment. The decrease in renewal premiums in the Life Insurance segment is mainly due to a continuing decline in our in force business in this segment over the last several years as we have made changes to our products and distribution and as surrenders outpace new sales. Premium revenues continue to be negatively impacted by high levels of surrenders, which we believe are due not only to an aging block of business (i.e., maturities and surrenders of products where the surrender charges are close to expiring or have expired) and our decision to cease issuing new policies in Brazil in 2017 (where we see many policies lapsing), but also to economic circumstances in Latin America. See the detailed distribution of premiums within Segment Operations discussed below. June 30, 2021 | 10-Q 33 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS Net Investment Income. Our annualized net investment income performance is summarized as follows. June 30, December 31, June 30, (In thousands, except for %) 2021 2020 2020 Net investment income, annualized $ 61,128 60,197 60,168 Average invested assets, at amortized cost 1,447,241 1,420,129 1,403,295 Annualized yield on average invested assets 4.22 % 4.24 % 4.29 % Annualized net investment income increased by $1.0 million in the six months ended June 30, 2021 as compared to the same six months of 2020 despite a lower annualized yield. The increase is due to the growing asset base and the make-whole call redemptions described below. The annualized yield decreased by seven basis points during the first six months of 2021 compared to the same period in 2020, as we continue to face a challenging investment environment for fixed maturity assets, which account for the majority of our investment portfolio. As part of the ongoing process of managing our portfolio and optimizing performance, we are continuing to identify and invest in new asset classes, including limited partnerships. Investment income from fixed maturity securities accounted for approximately 87.5% and 87.7% of total investment income for the three and six months ended June 30, 2021, respectively. Three Months Ended Six Months Ended June 30, June 30, (In thousands) 2021 2020 2021 2020 Gross investment income: Fixed maturity securities $ 13,796 13,512 27,896 27,380 Equity securities 216 199 423 379 Policy loans 1,563 1,629 3,207 3,252 Long-term investments 180 18 253 19 Other investment income 5 16 20 84 Total investment income 15,760 15,374 31,799 31,114 Investment expenses (440) (459) (1,235) (1,030) Net investment income $ 15,320 14,915 30,564 30,084 Income from fixed maturity securities income increased 2.1% and 1.9% for the three and six months ended June 30, 2021, respectively, compared to the same periods in 2020, and our total investment income increased by 2.5% and 2.2% in the same periods. However, when adjusted for two non-recurring events, a "make-whole" call redemption and early distributions from our limited partnership investments, net investment income was flat year-over-year. Investment expenses primarily reflect investment in limited partnerships. Realized Investment Gains (Losses), Net. We recorded realized gains of $4.5 million related to fair value changes in our investments in limited partnerships during the second quarter of this year. We also recorded realized gains of $0.3 million and $0.6 million during the three and six months ended June 30, 2021, respectively, related to fair value changes in our equity securities owned at June 30, 2021. The fair value of our equity securities owned at June 30, 2020 was negatively impacted by the onset of the COVID-19 pandemic as discussed previously. June 30, 2021 | 10-Q 34 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS BENEFITS AND EXPENSES Three Months Ended Six Months Ended June 30, June 30, (In thousands) 2021 2020 2021 2020 Benefits and expenses: Insurance benefits paid or provided: Claims and surrenders $ 29,296 27,754 59,885 54,203 Increase in future policy benefit reserves 6,287 8,237 11,519 17,708 Policyholders' dividends 1,475 1,328 2,781 2,561 Total insurance benefits paid or provided 37,058 37,319 74,185 74,472 Commissions 8,801 6,714 16,958 14,567 Other general expenses 11,503 11,139 22,885 22,612 Capitalization of deferred policy acquisition costs (5,787) (3,731) (10,772) (8,740) Amortization of deferred policy acquisition costs 6,074 6,061 12,257 12,180 Amortization of cost of insurance acquired 309 401 676 769 Total benefits and expenses $ 57,958 57,903 116,189 115,860 Claims and Surrenders. Death claims and surrender benefits are our primary uses of cash. As reflected in the table below, death claim and surrender benefits combined increased 13.3% and 15.0%, respectively, in the three and six months ended June 30, 2021 as compared to the same periods in 2020. Three Months Ended Six Months Ended June 30, June 30, (In thousands) 2021 2020 2021 2020 Claims and Surrenders: Death claim benefits $ 6,544 7,046 15,484 13,635 Surrender benefits 13,529 10,675 26,336 22,730 Endowment benefits 2,251 2,619 4,652 5,358 Matured endowment benefits 5,662 6,148 10,784 9,901 Property claims 315 316 636 803 Accident and health benefits 43 61 102 114 Other policy benefits 952 889 1,891 1,662 Total claims and surrenders $ 29,296 27,754 59,885 54,203 • Death claim benefits decreased 7.1% and increased 13.6% for the three and six months ended June 30, 2021, respectively, compared to the same periods in 2020. Claims in our Life Insurance segment increased 48.8% during the second quarter and 52.7% during the first half of the year 2021 compared to the same periods in 2020. The increases were due to both a higher volume and a higher average amount of reported claims. Home Service Insurance segment claims decreased 19.1% and increased 2.7% for the three and six months ended June 30, 2021, respectively, as compared to the prior year periods. The increase during the first six months of the year compared to the same period last year was due primarily to COVID-19 related deaths during the first quarter of this year. • Surrender benefits increased 26.7% and 15.9% for the three and six months ended June 30, 2021, respectively, compared to the same periods in 2020. Surrender benefits represented less than 0.6% of total direct ordinary whole life insurance in force of $4.6 billion as of June 30, 2021. A June 30, 2021 | 10-Q 35 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS significant portion of surrender benefits relates to international policies that have been in force for an extended period and have little or no associated surrender charges. In addition, we saw an unusually high number of policyholders in our Life Insurance segment who had outstanding loans on their policies select the reduced paid up insurance ("RPU") conversion option in the second quarter of this year. These loans are considered surrenders upon conversion. We believe that the higher RPU policy elections and increased surrenders are results of the continuing economic uncertainty in Latin America due to the COVID-19 pandemic. • Matured endowment benefits decreased 7.9% and increased 8.9% for the three and six months ended June 30, 2021, respectively, compared to the same periods in 2020. We anticipated this overall increase based upon the dates when our endowment contracts were sold and the maturity dates set forth in the contracts. Increase in Future Policy Benefit Reserves. The change in future policy benefit reserves decreased 23.7% and 35.0% for the three and six months ended June 30, 2021, respectively, compared to the same periods in 2020. Future policy benefit reserves decreased as our in force block of business decreased and also decreased by $0.8 million in the three months ended June 30, 2021 due to the conversion of a small block of policies to our new actuarial valuation system mentioned above. Commissions. Commission expenses are a cost of acquiring business, as commissions are the primary compensation paid to our independent consultants and independent agents for selling our products. First year commission rates are higher than renewal commission rates. Commissions fluctuate directly in relation to sales and were higher in the three and six months ended June 30, 2021. Other General Expenses. General expenses were generally consistent during the three and six months ended June 30, 2021 compared to the same periods in 2020. Capitalization and Amortization of Deferred Policy Acquisition Costs. Costs capitalized include certain commissions, policy issuance costs, and underwriting and agency expenses that relate to successful sales efforts for insurance contracts. Capitalized costs increased during the three and six months ended June 30, 2021 compared to the same periods in 2020 as we experienced an increase in first year premium production as previously discussed. Amortization of deferred policy acquisition costs was slightly higher during the three and six months ended June 30, 2021 compared to the same periods in the prior year. Amortization is impacted by persistency, surrenders, and new sales production and thus it may fluctuate from quarter to quarter. Federal Income Tax. Tax expense decreased for the three and six months ended June 30, 2021 resulting in effective tax rates of 10.4% and 49.2% compared to 334.6% and (156.7)% for the same periods in 2020, respectively. The Company's tax rate was impacted by differences between our effective tax rate and the statutory tax rate resulting from income and expense items that are treated differently for financial reporting and tax purposes. In addition, CICA Ltd., a wholly-owned Bermuda subsidiary of Citizens, is considered a controlled foreign corporation for federal tax purposes and CICA Ltd.'s activity gives rise to taxable income in the U.S. as Subpart F Income, which is treated as a permanent tax difference and therefore included in the Company's effective tax rate calculation. See Part I, Item 1, Note 8. Income Taxes in the notes to our consolidated financial statements herein. SEGMENT OPERATIONS Our business is comprised of two operating business segments, as detailed below. • Life Insurance • Home Service Insurance These segments are reported in accordance with U.S. GAAP. The Company's Other Non-Insurance enterprises include non-insurance operations such as IT and corporate-support functions, which are included in the table June 30, 2021 | 10-Q 36 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS presented below to properly reconcile the segment information with the consolidated financial statements of the Company. The following table shows income (loss) before federal income taxes by segments during the periods indicated. Three Months Ended Six Months Ended June 30, June 30, (In thousands) 2021 2020 2021 2020 Income (loss) before federal income tax expense: Segments: Life Insurance $ 7,127 2,119 7,021 4,205 Home Service Insurance 538 (26) (220) (2,171) Total segments 7,665 2,093 6,801 2,034 Other Non-Insurance enterprises (2,065) (1,655) (3,949) (3,831) Total income (loss) before federal income tax expense $ 5,600 438 2,852 (1,797) LIFE INSURANCE Our Life Insurance segment primarily operates through CICA Ltd. (a Bermuda company), which issues ordinary whole life insurance and endowment policies in U.S. Dollar-denominated amounts to non-U.S. residents in more than 75 different countries through independent marketing consultants. The whole life products are designed to provide a fixed amount of insurance coverage over the life of the insured and can include rider benefits to provide additional coverage and annuity benefits to enhance accumulations. The endowment contracts are principally accumulation contracts that incorporate an element of life insurance protection. For the majority of our business, we retain the first $0.1 million on any one life and reinsure the remainder of the risk. We operate the Life Insurance segment internationally through CICA Ltd. and domestically through our CICA and CNLIC insurance subsidiaries. June 30, 2021 | 10-Q 37 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS The results of operations for the Life Insurance segment for the periods indicated are as follows: Three Months Ended Six Months Ended June 30, June 30, (In thousands) 2021 2020 2021 2020 Revenues: Premiums $ 30,138 30,062 57,201 59,881 Net investment income 11,879 11,345 23,477 22,825 Realized investment gains, net 4,644 391 4,536 1,126 Other income 553 482 1,466 1,006 Total revenues 47,214 42,280 86,680 84,838 Benefits and expenses: Insurance benefits paid or provided: Claims and surrenders 23,531 20,888 46,801 41,048 Increase in future policy benefit reserves 4,054 7,384 7,712 15,530 Policyholders' dividends 1,466 1,319 2,762 2,544 Total insurance benefits paid or provided 29,051 29,591 57,275 59,122 Commissions 4,398 3,294 8,629 7,772 Other general expenses 5,147 4,446 10,373 9,394 Capitalization of deferred policy acquisition costs (3,816) (2,716) (7,377) (6,637) Amortization of deferred policy acquisition costs 5,200 5,419 10,548 10,737 Amortization of cost of insurance acquired 107 127 211 245 Total benefits and expenses 40,087 40,161 79,659 80,633 Income (loss) before federal income tax expense $ 7,127 2,119 7,021 4,205 As discussed above in Current Financial Highlights , net income increased in both the three and six months ended June 30, 2021 as compared to the same prior year periods primarily due to our realized investment gains from the increased fair value of our limited partnership investments. These gains were attributable to the Life Insurance segment. Life Insurance segment premium breakout is detailed below. Three Months Ended Six Months Ended June 30, June 30, (In thousands) 2021 2020 2021 2020 Premiums: First year $ 2,724 1,588 5,203 4,303 Renewal 27,414 28,474 51,998 55,578 Total premiums $ 30,138 30,062 57,201 59,881 Premiums. We derive most of our premium revenue in the Life Insurance segment from renewal premiums. Total premium revenues increased slightly for the three months and declined 4.5% for the six months ended June 30, 2021 compared to the same periods in 2020. While first year premiums increased in both periods in 2021, renewal June 30, 2021 | 10-Q 38 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS premiums declined by 3.7% and 6.4% for the same three and six periods, respectively. See “Consolidated Results of Operations” above for a discussion regarding the increase in first year premiums and the decline in renewal premiums in this segment. First year policies issued increased by 37.1% in the six months ended June 30, 2021, but due to lower issued face amounts, first year premiums during the period rose more modestly at 20.9%. Endowment sales totaled approximately $4.5 million of first year premiums in the six months ended June 30, 2021, as compared to $2.3 million in the prior year period. The following graph sets forth, for our top five producing countries, our direct premiums from our international life insurance business for the six months ended June 30, 2021 and 2020. Three Months Ended Six Months Ended June 30, June 30, (In thousands) 2021 2020 2021 2020 Country: Colombia $ 6,023 5,981 11,267 11,869 Taiwan 4,743 3,882 9,227 8,856 Venezuela 4,496 4,937 8,864 9,890 Ecuador 3,346 3,227 6,267 6,338 Argentina 2,408 2,433 4,236 4,256 Other Non-U.S. 10,083 9,347 18,188 17,548 Total $ 31,099 29,807 58,049 58,757 Sales from Colombia, Taiwan and Venezuela continued to represent the majority of the new and renewal business premiums in our international business in the three and six months ended June 30, 2021. DOMESTIC SALES Domestic premiums in our Life Insurance segment were $1.3 million and $2.5 million in the three and six months ended June 30, 2021, compared to $1.3 million and $2.6 million, respectively, in the prior year periods. Our domestic in force business results from blocks of business of insurance companies we have acquired over the years. We discontinued new sales of domestic ordinary whole life and endowment life insurance products within our Life Insurance segment in 2017 while we evaluated our domestic life strategy; therefore, the majority of the premium recorded is related to renewal business. We began marketing our products again domestically in early June 30, 2021 | 10-Q 39 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS 2021, beginning in Florida. We believe that our experience in developing and selling products in Latin America will help us expand into the large Hispanic market in the U.S. Net Investment Income . Annualized net investment income in our Life Insurance segment was as follows: June 30, December 31, June 30, (In thousands, except for %) 2021 2020 2020 Net investment income, annualized $ 46,954 45,885 45,714 Average invested assets, at amortized cost 1,106,589 1,071,792 1,052,500 Annualized yield on average invested assets 4.24 % 4.28 % 4.34 % Annualized net investment income in our Life Insurance segment increased in the six months ended June 30, 2021 compared to the same period annualized in 2020 and the twelve months ended December 31, 2020, due to continued growth in average invested assets and $0.7 million in non-recurring income as noted previously. The annualized yield in the first six months of 2021 decreased compared to the same period in 2020 and from December 31, 2020 as a substantial portion of our fixed maturity investments were called or matured during the past year and we have faced challenges in finding investments with comparable yields in the continued low interest rate environment. See the Investments section below for more detailed information on our investments. Realized Investment Gains (Losses), Net. The realized gain for the six months ended June 30, 2021 was due to the change in estimated fair market value for our limited partnerships, as previously discussed. Claims and Surrenders. The following table shows the claims and surrender benefits paid within the Life Insurance segment for the six months ended June 30, 2021 compared to the same period in 2020. June 30, 2021 | 10-Q 40 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS Three Months Ended Six Months Ended June 30, June 30, (In thousands) 2021 2020 2021 2020 Claims and Surrenders: Death claim benefits $ 1,849 1,243 4,533 2,968 Surrender benefits 12,978 10,132 25,229 21,435 Endowment benefits 2,248 2,617 4,647 5,353 Matured endowment benefits 5,489 5,969 10,469 9,569 Accident and health benefits 18 41 39 68 Other policy benefits 949 886 1,884 1,655 Total claims and surrenders $ 23,531 20,888 46,801 41,048 The majority of our claims and surrender benefits in our Life Insurance segment are related to payment of surrender and matured endowment benefits. Policy surrenders increased 28.1% and 17.7% in the three and six months ended June 30, 2021 as compared to the prior year period and matured endowment benefits decreased by 8.0% and increased 9.4%, respectively, during the same period. These expenses have been increasing over the last several years, which is expected, due in part to the aging of this block of business - a significant portion of surrenders relates to policies that have been in force and have little to no associated surrender charges and endowment products reaching their stated maturities. In addition, as discussed in Consolidated Results of Operations above, the COVID-19 pandemic and higher RPU policy elections by policyholders in the second quarter of this year have contributed to the higher surrenders in 2021. However, these expenses are within expected levels. The other key component of claims and surrender benefits in the Life Insurance segment is death claim benefits, which increased 48.8% and 52.7% in the three and six months ended June 30, 2021 due to both a higher volume and a higher average amount of reported claims. Increase in future policy benefit reserves. The change in future policy benefit reserves decreased 45.1% and 50.3%% for the three and six months ended June 30, 2021, respectively, compared to the same periods in 2020. Future policy benefit reserves decreased as our in force block of business decreased. In addition, the change in future policy reserves for the three and six months ended June 30, 2021 was lower due to an $0.8 million adjustment for the conversion of a small block of policies to our new actuarial valuation system for our Life Insurance segment during the second quarter. HOME SERVICE INSURANCE We operate in the Home Service Insurance market through our subsidiaries SPLIC, MGLIC and SPFIC, and focus on the life insurance needs of the middle- and lower-income markets, primarily in Louisiana, Mississippi and Arkansas. Premium revenue of 88.7% and 89.9% in the six months ended June 30, 2021 and 2020, respectively, were from policyholders in Louisiana. Our policies have historically been sold and serviced through a home service insurance marketing distribution system of independent agents who work on a debit route system and through funeral homes that sell policies, collect premiums and service policyholders. In June 2021, we added a new whole life product to this market that has higher allowable face values. June 30, 2021 | 10-Q 41 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS The results of operations for the Home Service Insurance segment for the periods indicated are as follows: Three Months Ended Six Months Ended June 30, June 30, (In thousands) 2021 2020 2021 2020 Revenues: Premiums $ 12,688 11,434 24,657 22,932 Net investment income 3,243 3,256 6,588 6,588 Realized investment gains (losses), net 206 924 429 (793) Other income — — 2 18 Total revenues 16,137 15,614 31,676 28,745 Benefits and expenses: Insurance benefits paid or provided: Claims and surrenders 5,765 6,866 13,084 13,155 Increase in future policy benefit reserves 2,233 853 3,807 2,178 Policyholders' dividends 9 9 19 17 Total insurance benefits paid or provided 8,007 7,728 16,910 15,350 Commissions 4,403 3,420 8,329 6,795 Other general expenses 4,084 4,591 7,878 8,907 Capitalization of deferred policy acquisition costs (1,971) (1,015) (3,395) (2,103) Amortization of deferred policy acquisition costs 874 642 1,709 1,443 Amortization of cost of insurance acquired 202 274 465 524 Total benefits and expenses 15,599 15,640 31,896 30,916 Income (loss) before federal income tax expense $ 538 (26) (220) (2,171) Premiums. Premiums increased by 11.0% and 7.5% in the three and six months ended June 30, 2021, respectively, compared to the same periods in 2020, with increases in both first year premiums and renewal premiums. First year premiums increased due mainly to the broadening of an automatic issue product offered to existing policyholders as discussed in Our Operating Segments , which contributed to a higher number of policies issued as well as a higher average face amount for policies issued during the first six months of 2021, compared to the same period last year. The 2020 period was negatively impacted by the COVID-19 pandemic. Renewal premiums increased during the six months ended June 30, 2021 primarily due to strong collection efforts by our independent agents as we believe disposable income of our insureds increased as a result of government stimulus and assistance programs related to the COVID-19 pandemic. Net Investment Income. Net investment income for the three and six months ended June 30, 2021 remained consistent to the same periods in 2020. Realized Investment Gains (Losses), Net. Changes in realized gains/losses, which reflect changes in fair values of our equity securities, were primarily due to the stock market decline and subsequent increase in the previous year due to the COVID-19 pandemic. June 30, 2021 | 10-Q 42 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS Claims and Surrenders. Claims and surrender benefits for the Home Service Insurance segment is summarized as follows: Three Months Ended Six Months Ended June 30, June 30, (In thousands) 2021 2020 2021 2020 Claims and Surrenders: Death claim benefits $ 4,695 5,803 10,951 10,667 Surrender benefits 551 543 1,107 1,295 Endowment benefits 3 2 5 5 Matured endowment benefits 173 179 315 332 Property claims 315 316 636 803 Accident and health benefits 25 20 63 46 Other policy benefits 3 3 7 7 Total claims and surrenders $ 5,765 6,866 13,084 13,155 The vast majority of claims and surrender benefits in our Home Service Insurance segment relate to death claim benefits. Death claim benefits decreased 19.1% and increased 2.7% in the three and six months ended June 30, 2021, respectively, compared to the 2020 periods. The increase during the first six months of the year compared to the same period last year was due primarily to COVID-19 related deaths during the first quarter of this year for reasons discussed above in “Current Financial Highlights”. Mortality experience is closely monitored by the Company as a key performance indicator and can fluctuate based on reported claims. Increase in future policy benefit reserves. The increase in reserves was higher during the three and six months ended June 30, 2021 compared to the same period last year is due to higher sales and better policyholder retention in 2021. Other general expenses. Other general expenses decreased for the three and six months ended June 30, 2021 due to changes we made to our distribution structure in the prior year. OTHER NON-INSURANCE ENTERPRISES Three Months Ended Six Months Ended June 30, June 30, (In thousands) 2021 2020 2021 2020 Income (loss) before income tax expense $ (2,065) (1,655) (3,949) (3,831) This operating unit represents the administrative support entities to the insurance operations whose revenues are primarily intercompany and have been eliminated in consolidation under U.S. GAAP, which typically results in a segment loss. Revenue in this operating unit consists primarily of net investment income and realized investment gains or losses, while expenses consist of other general expenses. In the three and six months ended June 30, 2021, the Other Non-Insurance Enterprises had a loss of $2.1 million and $3.9 million, respectively, compared to a loss of $1.7 million and $3.8 million for the same periods 2020, as other general expenses increased. June 30, 2021 | 10-Q 43 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS INVESTMENTS Our investments are an integral part of our business success. Our cash and invested assets at June 30, 2021 were $1.6 billion, of which 90.1% was invested in fixed maturity securities, all of which are classified as available-for-sale. We closely monitor the duration of our fixed maturity investments, and investment purchases and sales are executed with the objective of having adequate funds available to satisfy our insurance obligations. The following table shows the carrying value of our investments by investment category and cash, cash equivalents and the percentage of each to total cash and invested assets. Carrying Value June 30, 2021 December 31, 2020 (In thousands, except for %) Amount % Amount % Cash, Cash Equivalents and Invested Assets Fixed maturity securities: U.S. Treasury and U.S. Government-sponsored enterprises $ 15,564 1.0 % $ 16,117 1.0 % Corporate 883,182 54.2 % 877,208 52.8 % States and political subdivisions (1) 387,970 23.8 % 409,665 24.7 % Mortgage-backed (2) 136,630 8.4 % 140,184 8.5 % Asset-backed 44,307 2.7 % 46,091 2.8 % Foreign governments 114 — % 118 — % Total fixed maturity securities 1,467,767 90.1 % 1,489,383 89.8 % Cash and cash equivalents 30,125 1.8 % 34,131 2.1 % Other investments: Policy loans 80,621 4.9 % 83,318 5.0 % Equity securities 22,657 1.4 % 22,102 1.3 % Real estate and other long-term investments 28,959 1.8 % 29,865 1.8 % Total cash, cash equivalents and invested assets $ 1,630,129 100.0 % $ 1,658,799 100.0 % (1) Includes $160.6 million and $164.0 million of securities guaranteed by third parties at June 30, 2021 and December 31, 2020, respectively. (2) Includes $136.5 million and $139.8 million of U.S. Government-sponsored enterprises at June 30, 2021 and December 31, 2020, respectively. The carrying value of the Company’s fixed maturity securities investment portfolio at June 30, 2021 was $1.5 billion. The distribution of the credit ratings of our portfolio of fixed maturity securities by carrying value as of June 30, 2021 did not materially change from December 31, 2020 – the weighted average was “A” at both dates. Our portfolio mix did not materially change during the six months. Cash and cash equivalents decreased as of June 30, 2021 compared to December 31, 2020 due primarily to the purchase of 100% of the Company’s Class B common stock from the Foundation for $9.1 million, but increased from March 31, 2021 due to the timing of reinvestment of available cash as we search for suitable investments in the ongoing low interest rate environment. Real estate and other long-term investments decreased by $0.9 million as of June 30, 2021 to December 31, 2020. Although we paid $8.8 million from a Rabbi Trust (which was considered a long-term investment) to our former Chief Executive Officer, Geoffrey Kolander in February 2021, investments in our limited partnerships increased by $9.0 million in the second quarter of 2021. June 30, 2021 | 10-Q 44 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS Obligations of States and Political Subdivisions The Company’s fixed maturity securities investment portfolio at June 30, 2021 and December 31, 2020 included $388.0 million and $409.7 million, respectively, of securities that are obligations of states and political subdivisions, including municipalities (collectively referred to as the municipal bond portfolio). The Company's municipal bond portfolio includes third-party guarantees. Detailed below is a presentation by the Nationally Recognized Statistical Rating Organization ("NRSRO") rating of these holdings by funding type as of June 30, 2021. General Obligation Special Revenue Other Total % Based on Amortized Cost (In thousands, except for %) Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost State and political subdivision fixed maturity securities including third-party guarantees AAA $ 21,602 20,723 3,369 3,087 — — 24,971 23,810 6.7 % AA 56,082 52,196 122,019 113,852 12,234 10,834 190,335 176,882 49.5 % A 16,567 15,062 117,862 106,204 5,085 4,415 139,514 125,681 35.2 % BBB 4,036 3,664 13,706 12,972 1,543 1,450 19,285 18,086 5.1 % BB and other 4,832 4,422 9,033 8,585 — — 13,865 13,007 3.5 % Total $ 103,119 96,067 265,989 244,700 18,862 16,699 387,970 357,466 100.0 % State and political subdivision fixed maturity securities excluding third-party guarantees AAA $ 3,212 3,138 — — — — 3,212 3,138 0.9 % AA 39,237 37,729 48,288 44,586 7,588 6,534 95,113 88,849 24.9 % A 28,041 25,945 143,448 130,439 8,024 7,143 179,513 163,527 45.7 % BBB 7,395 6,655 36,304 34,040 57 55 43,756 40,750 11.4 % BB and other 25,234 22,600 37,949 35,635 3,193 2,967 66,376 61,202 17.1 % Total $ 103,119 96,067 265,989 244,700 18,862 16,699 387,970 357,466 100.0 % The table below shows the categories in which the Company held investments in special revenue bonds that were greater than 10% of fair value based upon the Company's municipal bond portfolio at June 30, 2021. (In thousands) Fair Value Amortized Cost % of Total Fair Value Education $ 70,516 65,120 18.2 % Utilities 67,788 60,431 17.5 % Transportation 40,421 38,568 10.4 % The Company's municipal bond portfolio is spread across many states, however, municipal bonds from Texas and California comprise the most significant concentration of the total municipal bond portfolio as of June 30, 2021. The Company holds 21.8% and 10.4% of its municipal bond portfolio in Texas and California issuers, respectively, as of June 30, 2021. There were no other states or individual issuer holdings that represented or exceeded 10% of the total municipal bond portfolio as of June 30, 2021. June 30, 2021 | 10-Q 45 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS The table below represents the Company's detailed exposure to municipal bond portfolio in Texas at June 30, 2021. June 30, 2021 General Obligation Special Revenue Other Total (In thousands) Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Texas state and political subdivision fixed maturity securities including third-party guarantees AAA $ 21,014 20,215 3,369 3,087 — — 24,383 23,302 AA 21,699 21,378 13,613 12,800 57 55 35,369 34,233 A — — 22,311 21,844 — — 22,311 21,844 BBB — — 1,971 1,827 — — 1,971 1,827 BB and other — — 548 506 — — 548 506 Total $ 42,713 41,593 41,812 40,064 57 55 84,582 81,712 Texas state and political subdivision fixed maturity securities excluding third-party guarantees AAA $ 3,212 3,138 — — — — 3,212 3,138 AA 32,348 31,499 3,286 3,052 — — 35,634 34,551 A 5,957 5,806 29,929 29,011 — — 35,886 34,817 BBB 1,196 1,150 5,637 5,205 57 55 6,890 6,410 BB and other — — 2,960 2,796 — — 2,960 2,796 Total $ 42,713 41,593 41,812 40,064 57 55 84,582 81,712 The table below represents the Company's detailed exposure to municipal bond portfolio in California at June 30, 2021. June 30, 2021 General Obligation Special Revenue Other Total (In thousands) Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost California state and political subdivision fixed maturity securities including third-party guarantees AA $ — — 25,912 24,322 2,939 2,728 28,851 27,050 A 1,693 1,650 4,936 4,720 — — 6,629 6,370 BBB — — 4,841 4,663 — — 4,841 4,663 Total $ 1,693 1,650 35,689 33,705 2,939 2,728 40,321 38,083 California state and political subdivision fixed maturity securities excluding third-party guarantees AA $ — — 2,715 2,632 — — 2,715 2,632 A 1,693 1,650 10,816 10,289 2,939 2,728 15,448 14,667 BBB — — 8,545 7,956 — — 8,545 7,956 BB and other — — 13,613 12,828 — — 13,613 12,828 Total $ 1,693 1,650 35,689 33,705 2,939 2,728 40,321 38,083 June 30, 2021 | 10-Q 46 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS IMPAIRMENT CONSIDERATIONS RELATED TO INVESTMENTS IN FIXED MATURITY AND EQUITY SECURITIES For the three and six months ended June 30, 2021 and 2020, the Company recorded no credit valuation losses on fixed maturity securities. Information on both unrealized and realized gains and losses by category is set forth in Part I, Item 1, Note 5. Investments of the notes to our consolidated financial statements herein. LIQUIDITY AND CAPITAL RESOURCES Liquidity refers to a company's ability to generate sufficient cash flows to meet the needs of its operations. We manage our insurance operations as described herein in order to ensure that we have stable and reliable sources of cash flows to meet our obligations. We expect to meet our cash needs for the next 12 months with cash generated by our insurance operations and from our invested assets. At June 30, 2021, we had $30.1 million in cash and cash equivalents and $1.6 billion in invested assets. PARENT COMPANY LIQUIDITY AND CAPITAL RESOURCES Liquidity is the ability to generate amounts of cash adequate to meet our cash needs. Citizens is a holding company and has minimal operations of its own. Our assets consist of the capital stock of our subsidiaries, cash and investments. Our liquidity requirements are met primarily from two sources: cash generated from our operating subsidiaries and our invested assets. Our ability to obtain cash from our insurance subsidiaries depends primarily upon the availability of statutorily permissible payments, including payments Citizens receives from service agreements with our life insurance subsidiaries and dividends from the subsidiaries. The ability to make payments to the holding company is limited by applicable laws and regulations of Bermuda and U.S. states of domicile which subject insurance operations to significant regulatory restrictions. These laws and regulations require, among other things, that our insurance subsidiaries maintain minimum solvency requirements, which limit the amount of dividends that can be paid to the holding company. The regulations also require approval of our service agreements with the applicable regulatory authority in order to prevent insurance subsidiaries from moving large amounts of cash to the unregulated holding company. Our cash and cash equivalents decreased from $34.1 million at December 31, 2020 to $30.1 million at June 30, 2021, but increased by $10.6 million from March 31, 2021. The decrease was primarily due to the following uses of cash in the first quarter of 2021: • $8.8 million severance payment in February 2021 to our former Chief Executive Officer, Geoffrey Kolander, following his resignation pursuant to the terms of his employment agreement and the Chief Executive Officer Separation of Service and Consulting Agreement dated July 29, 2020 (See Part I, Item 1, Note 6. Fair Value Measurements – "Other Long-Term Investments”, herein, and our Form 10-K for additional discussion about the severance payment to Mr. Kolander); and • $9.1 million payment to the Harold E. Riley Foundation ("Foundation") in March 2021 for the purchase of 100% of the outstanding Class B common stock. Cash and cash equivalents increased by $10.6 million from March 31, 2021 to June 30, 2021 due to cash received from maturing securities and operations not yet reinvested as we search for suitable investment opportunities in the ongoing low interest rate environment. On May 5, 2021, we entered into a Credit Facility with Regions Bank. See Part I, Item 1, Note 7. Commitments and Contingencies in the notes to our consolidated financial statements, herein, for a description of the Credit Facility. The Credit Facility provides additional liquidity to the Company for short-term and longer-term needs. As of June 30, 2021, we have not borrowed any money under the Credit Facility and have no immediate plans to do so. June 30, 2021 | 10-Q 47 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS INSURANCE COMPANY SUBSIDIARY LIQUIDITY AND CAPITAL RESOURCES The liquidity requirements of our insurance operations are primarily met by premium revenues, investment income and investment maturities. Primary cash needs relate to payments of policy benefits to policyholders, investment purchases and operating expenses. Historically, we have not had to liquidate a material amount of investments to provide cash flow for our insurance operations and we did not do so in the six months ended June 30, 2021. We believe that we have adequate capital resources to support the liquidity requirements of our insurance operations if the cash flow from our insurance operations is insufficient to meet our cash needs. See Contractual Obligations and Off-balance Sheet Arrangements in our Form 10-K and below for a discussion of known and estimated cash needs. In the six months ended June 30, 2021, our operations provided $9.0 million in net cash as compared to $28.6 million provided by operations in the same period in 2020. As mentioned above, we used $8.8 million in cash in the first quarter to pay Mr. Kolander’s severance. Cash provided by operations was also lower, as first year premiums continued to be outpaced by increased surrenders and decreased renewal premiums in our international business. Additionally, increased first year premiums, which have higher costs associated with them than renewal premiums, such as commissions, led to lower cash provided by operations. We have traditionally also had significant cash flows from investing activities due to both scheduled and unscheduled investment security maturities, redemptions, and prepayments. These cash flows, for the most part, are reinvested in fixed income securities and to a lesser extent limited partnerships and other alternative investments. Net cash used in investing activities totaled $4.2 million for the six months ended June 30, 2021 as opposed to $22.8 million used in investing activities for the six months ended June 30, 2020. The investing activities fluctuate from period to period due to timing of securities activities such as calls and maturities and reinvestment of those funds. Cash used in financing activities was $8.8 million in the six months ended June 30, 2021, due primarily to the purchase of the Class B common stock from the Foundation for $9.1 million in March 2021. Because claims and surrender benefits are our largest expense, a primary liquidity concern is the risk of an extraordinary level of early policyholder surrenders. While surrender benefit expenses increased in the six months ended June 30, 2021 and have been increasing over the last several years, the increases are within expected levels due to the aging of this block of business - a significant portion of surrenders relates to policies that have been in force and have little to no associated surrender charges and endowment products reaching their stated maturities. Death claims also increased in 2021 for the reasons discussed above, which included payment of COVID related death claims that materially impacted our operations. We continue to closely monitor claim volumes to evaluate whether there is a delay in reporting or filing for benefits as a result of the COVID-19 pandemic. As discussed above, we are subject to regulatory capital requirements that could affect the Company’s ability to access capital from our insurance operations or cause the Company to have to put additional cash in our wholly-owned subsidiaries. Our domestic companies are subject to minimum capital requirements set by the NAIC in the form of risk-based capital ("RBC"). RBC considers the type of business written by an insurance company, the quality of its assets, and various other aspects of an insurance company's business to develop a minimum level of capital called "Authorized Control Level Risk-Based Capital". This level of capital is then compared to an adjusted statutory capital that includes capital and surplus as reported under statutory accounting principles, plus certain investment reserves. Should the ratio of adjusted statutory capital to control level RBC fall below 200% for our domestic companies, a series of remedial actions by the affected company would be required. Additionally, we have a parental guarantee between Citizens and CICA, Citizens' wholly-owned subsidiary domiciled in Colorado, to maintain a RBC level above 350%. At June 30, 2021, our domestic insurance subsidiaries were above the required minimum RBC levels. CICA Ltd. is a Bermuda domiciled company. The BMA requires Bermuda insurers to maintain available statutory economic capital and surplus at a level equal to or in excess of the BMA's Enhanced Capital Requirement, which requires a certain Target Capital Level ("TCL"). As of June 30, 2021, CICA Ltd. was above the TCL threshold. At June 30, 2021 | 10-Q 48 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS the request of the BMA, on April 15, 2021, Citizens and CICA Ltd. entered into a Keep Well Agreement. The Keep Well Agreement requires Citizens to contribute up to $10 million in capital to CICA Ltd. as necessary to ensure that CICA Ltd. has a minimum capital level of 120%. Since CICA Ltd.’s capital level currently exceeds 120%, Citizens is not currently required to make a capital contribution. Any capital injection that Citizens is required to make under the parental guarantee with CICA or under the Keep Well Agreement with CICA Ltd. could negatively impact the Company’s capital resources and liquidity. CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS As of June 30, 2021, we have no additional contractual obligations or off-balance sheet arrangements other than those described in Part I . Item 1 , Note 7. Commitments and Contingencies in the notes to our consolidated financial statements herein and in Part II, Item 7, Contractual Obligations and Off-Balance Sheet Arrangements in our Form 10-K . We do not utilize special purpose entities as investment vehicles, nor are there any such entities in which we have an investment that engage in speculative activities of any nature, and we do not use such investments to hedge our investment positions. CRITICAL ACCOUNTING POLICIES We believe that the accounting policies set forth in Part I, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations - "Critical Accounting Policies" and Part IV, Item 15, Note 1. Summary of Significant Accounting Policies of our consolidated financial statements in our Form 10-K continue to describe the significant judgments and estimates used in the preparation of our consolidated financial statements. June 30, 2021 | 10-Q 49 Table of Contents CITIZENS, INC.