CITIZENS, INC. 10-Q

Item 1. FINANCIAL STATEMENTS CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Balance Sheets (In thousands) September 30, 2021 December 31, 2020 Assets (Unaudited) Investments: Fixed maturity securities available-for-sale, at fair value (amortized cost: $ 1,324,307 and $ 1,321,487 in 2021 and 2020, respectively) $ 1,456,694 1,489,383 Equity securities, at fair value 22,335 22,102 Policy loans 80,102 83,318 Real estate held-for-sale — 2,571 Other long-term investments (portion measured at fair value $ 32,651 and $ 11,923 in 2021 and 2020, respectively; less allowance for losses of $ 11 in 2021 and 2020) 34,013 27,294 Total investments 1,593,144 1,624,668 Cash and cash equivalents 30,087 34,131 Accrued investment income 15,625 16,137 Receivable for securities 10,000 — Reinsurance recoverable 13,724 5,753 Deferred policy acquisition costs 115,093 104,913 Cost of insurance acquired 10,865 11,541 Goodwill and other intangible assets 13,567 13,570 Property and equipment, net 14,524 16,312 Due premiums 9,369 11,309 Other assets (less allowance for losses of $ 223 and $ 297 in 2021 and 2020, respectively) 5,500 5,086 Total assets $ 1,831,498 1,843,420 See accompanying Notes to Consolidated Financial Statements. September 30, 2021 | 10-Q 2 Table of Contents CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Balance Sheets, Continued (In thousands, except share amounts) September 30, 2021 December 31, 2020 Liabilities and Stockholders' Equity (Unaudited) Liabilities: Policy liabilities: Future policy benefit reserves: Life insurance $ 1,266,745 1,246,423 Annuities 83,223 78,304 Accident and health 779 761 Dividend accumulations 36,588 33,336 Premiums paid in advance 42,132 40,605 Policy claims payable 23,478 13,206 Other policyholders' funds 28,064 22,447 Total policy liabilities 1,481,009 1,435,082 Commissions payable 2,197 2,572 Current federal income tax payable 45,771 43,916 Deferred federal income tax payable 9,162 9,564 Payable for securities in process of settlement 560 5,265 Other liabilities 27,768 46,076 Total liabilities 1,566,467 1,542,475 Commitments and contingencies ( Note 7 ) Stockholders' Equity: Common stock: Class A, no par value, 100,000,000 shares authorized, 52,765,837 and 52,654,016 shares issued and outstanding in 2021 and 2020, respectively, including shares in treasury of 3,135,738 in 2021 and 2020 263,160 262,869 Class B, no par value, 2,000,000 shares authorized, 1,001,714 shares issued and outstanding in 2021 and 2020, including shares in treasury of 1,001,714 in 2021 3,184 3,184 Accumulated deficit ( 83,702 ) ( 82,352 ) Accumulated other comprehensive income: Net unrealized gains (losses) on fixed maturity securities, net of tax 102,490 128,255 Treasury stock, at cost ( 20,101 ) ( 11,011 ) Total stockholders' equity 265,031 300,945 Total liabilities and stockholders' equity $ 1,831,498 1,843,420 See accompanying Notes to Consolidated Financial Statements. September 30, 2021 | 10-Q 3 Table of Contents CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited) Three Months Ended September 30, Nine Months Ended September 30, (In thousands, except per share amounts) 2021 2020 2021 2020 Revenues: Premiums: Life insurance $ 43,239 42,732 122,319 122,863 Accident and health insurance 311 236 945 745 Property insurance ( 223 ) 1,140 1,921 3,313 Net investment income 15,454 14,997 46,018 45,081 Realized investment gains (losses), net 2,126 527 7,277 669 Other income 677 193 2,145 1,217 Total revenues 61,584 59,825 180,625 173,888 Benefits and Expenses: Insurance benefits paid or provided: Claims and surrenders 31,816 32,958 91,701 87,161 Increase in future policy benefit reserves 10,888 4,158 22,407 21,866 Policyholders' dividends 1,650 1,450 4,431 4,011 Total insurance benefits paid or provided 44,354 38,566 118,539 113,038 Commissions 9,115 7,712 26,073 22,279 Other general expenses 10,542 19,391 33,427 42,003 Capitalization of deferred policy acquisition costs ( 6,026 ) ( 4,892 ) ( 16,798 ) ( 13,632 ) Amortization of deferred policy acquisition costs 6,043 6,760 18,300 18,940 Amortization of cost of insurance acquired 283 459 959 1,228 Total benefits and expenses 64,311 67,996 180,500 183,856 Income (loss) before federal income tax ( 2,727 ) ( 8,171 ) 125 ( 9,968 ) Federal income tax expense (benefit) 72 ( 256 ) 1,475 2,558 Net income (loss) ( 2,799 ) ( 7,915 ) ( 1,350 ) ( 12,526 ) Per Share Amounts: Basic and diluted earnings (losses) per share of Class A common stock ( 0.06 ) ( 0.16 ) ( 0.03 ) ( 0.25 ) Basic and diluted earnings (losses) per share of Class B common stock — ( 0.07 ) ( 0.01 ) ( 0.12 ) Other Comprehensive Income (Loss): Unrealized gains (losses) on fixed maturity securities: Unrealized holding gains (losses) arising during period ( 1,564 ) 15,128 ( 25,706 ) 52,707 Reclassification adjustment for losses (gains) included in net income (loss) ( 102 ) 2 ( 91 ) 46 Unrealized gains (losses) on fixed maturity securities, net ( 1,666 ) 15,130 ( 25,797 ) 52,753 Income tax expense (benefit) on unrealized gains (losses) on fixed maturity securities ( 271 ) 1,020 ( 32 ) 4,067 Other comprehensive income (loss) ( 1,395 ) 14,110 ( 25,765 ) 48,686 Total comprehensive income (loss) $ ( 4,194 ) 6,195 ( 27,115 ) 36,160 See accompanying Notes to Consolidated Financial Statements. September 30, 2021 | 10-Q 4 Table of Contents CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Stockholders' Equity (Unaudited) 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, 2020 $ 262,869 3,184 ( 82,352 ) 128,255 ( 11,011 ) 300,945 Comprehensive income (loss): Net income (loss) — — ( 3,573 ) — — ( 3,573 ) Unrealized investment gains (losses), net — — — ( 56,518 ) — ( 56,518 ) Total comprehensive income (loss) — — ( 3,573 ) ( 56,518 ) — ( 60,091 ) Stock-based compensation ( 14 ) — — — — ( 14 ) Balance at March 31, 2021 262,855 3,184 ( 85,925 ) 71,737 ( 11,011 ) 240,840 Comprehensive income (loss): Net income (loss) — — 5,022 — — 5,022 Unrealized investment gains (losses), net — — — 32,148 — 32,148 Total comprehensive income (loss) — — 5,022 32,148 — 37,170 Acquisition of treasury stock — — — — ( 9,090 ) ( 9,090 ) Stock-based compensation 205 — — — — 205 Balance at June 30, 2021 263,060 3,184 ( 80,903 ) 103,885 ( 20,101 ) 269,125 Comprehensive income (loss): Net income (loss) — — ( 2,799 ) — — ( 2,799 ) Unrealized investment gains (losses), net — — — ( 1,395 ) — ( 1,395 ) Total comprehensive income (loss) — — ( 2,799 ) ( 1,395 ) — ( 4,194 ) Stock-based compensation 100 — — — — 100 Balance at September 30, 2021 $ 263,160 3,184 ( 83,702 ) 102,490 ( 20,101 ) 265,031 See accompanying Notes to Consolidated Financial Statements. September 30, 2021 | 10-Q 5 Table of Contents CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Stockholders' Equity, Continued (Unaudited) 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, 2019 $ 261,515 3,184 ( 70,969 ) 77,117 ( 11,011 ) 259,836 Accounting standards adopted January 1, 2020 — — ( 395 ) — — ( 395 ) Comprehensive income (loss): Net income (loss) — — ( 3,584 ) — — ( 3,584 ) Unrealized investment gains (losses), net — — — ( 40,070 ) — ( 40,070 ) Total comprehensive income (loss) — — ( 3,584 ) ( 40,070 ) — ( 43,654 ) Stock-based compensation ( 53 ) — — — — ( 53 ) Balance at March 31, 2020 261,462 3,184 ( 74,948 ) 37,047 ( 11,011 ) 215,734 Comprehensive income (loss): Net income (loss) — — ( 1,027 ) — — ( 1,027 ) Unrealized investment gains (losses), net — — — 74,647 — 74,647 Total comprehensive income (loss) — — ( 1,027 ) 74,647 — 73,620 Stock-based compensation 439 — — — — 439 Balance at June 30, 2020 261,901 3,184 ( 75,975 ) 111,694 ( 11,011 ) 289,793 Comprehensive income (loss): Net income (loss) — — ( 7,915 ) — — ( 7,915 ) Unrealized investment gains (losses), net — — — 14,110 — 14,110 Total comprehensive income (loss) — — ( 7,915 ) 14,110 — 6,195 Stock-based compensation 766 — — — — 766 Balance at September 30, 2020 $ 262,667 3,184 ( 83,890 ) 125,804 ( 11,011 ) 296,754 See accompanying Notes to Consolidated Financial Statements. September 30, 2021 | 10-Q 6 Table of Contents CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended September 30, (In thousands) 2021 2020 Cash flows from operating activities: Net income (loss) $ ( 1,350 ) ( 12,526 ) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Realized investment (gains) losses on sale of investments and other assets ( 7,277 ) ( 669 ) Net deferred policy acquisition costs 1,502 5,308 Amortization of cost of insurance acquired 959 1,228 Depreciation 954 771 Amortization of premiums and discounts on investments 4,065 6,616 Stock-based compensation 406 2,020 Deferred federal income tax expense (benefit) ( 370 ) ( 386 ) Change in: Accrued investment income 512 1,133 Reinsurance recoverable ( 7,971 ) ( 8,274 ) Due premiums 1,940 1,434 Future policy benefit reserves 22,292 21,654 Other policyholders' liabilities 20,668 15,364 Federal income tax payable 1,855 3,165 Commissions payable and other liabilities ( 14,342 ) 145 Other, net ( 73 ) ( 2,967 ) Net cash provided by (used in) operating activities 23,770 34,016 Cash flows from investing activities: Purchases of fixed maturity securities, available-for-sale ( 62,809 ) ( 187,267 ) Sales of fixed maturity securities, available-for-sale 8,238 17,524 Maturities and calls of fixed maturity securities, available-for-sale 40,395 154,873 Purchases of equity securities — ( 4,473 ) Principal payments on mortgage loans 7 9 Funding of mortgage loans ( 1,000 ) — (Increase) decrease in policy loans, net 3,216 ( 1,957 ) Sales of other long-term investments and real estate 20,893 — Purchases of other long-term investments ( 27,514 ) ( 19,115 ) Sales of property and equipment 14 — Purchases of property and equipment ( 847 ) ( 124 ) Maturities of short-term investments — 1,300 Net cash provided by (used in) investing activities ( 19,407 ) ( 39,230 ) See accompanying Notes to Consolidated Financial Statements. September 30, 2021 | 10-Q 7 Table of Contents CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Cash Flows, Continued (Unaudited) Nine Months Ended September 30, (In thousands) 2021 2020 Cash flows from financing activities: Annuity deposits $ 6,901 5,542 Annuity withdrawals ( 5,855 ) ( 3,403 ) Acquisition of treasury stock ( 9,090 ) — Other ( 363 ) ( 869 ) Net cash provided by (used in) financing activities ( 8,407 ) 1,270 Net increase (decrease) in cash and cash equivalents ( 4,044 ) ( 3,944 ) Cash and cash equivalents at beginning of year 34,131 46,205 Cash and cash equivalents at end of period $ 30,087 42,261 SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES: During the nine months ended September 30, 2021 and 2020, various fixed maturity issuers exchanged securities with book values of $ 10.9 million and $ 5.3 million, respectively, for securities of equal value. The Company had $ 9.4 million net unsettled security trades at September 30, 2021 and $ 6.0 million at September 30, 2020. The Company recognized right-of-use assets of $ 12.0 million in exchange for new operating lease liabilities during the nine months ended September 30, 2020. None were recognized during the nine months ended September 30, 2021. See accompanying Notes to Consolidated Financial Statements. September 30, 2021 | 10-Q 8 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) (1) FINANCIAL STATEMENTS BASIS OF PRESENTATION AND CONSOLIDATION 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". The consolidated balance sheets as of September 30, 2021, the consolidated statements of operations and comprehensive income (loss) and stockholders' equity for the three and nine months ended September 30, 2021 and September 30, 2020 and the consolidated statements of cash flows for the nine months ended September 30, 2021 and September 30, 2020 have been prepared by the Company without audit and are not subject to audit. In the opinion of management, all normal and recurring adjustments to present fairly the financial position, results of operations, and changes in cash flows at September 30, 2021 and for comparative periods have been made. The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q adopted by the Securities and Exchange Commission ("SEC"). Accordingly, the consolidated financial statements do not include all the information and footnotes required for complete financial statements and should be read in conjunction with the Company’s consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2020 ("Form 10-K"). Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period. 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. We have recently developed a whole life insurance product and have begun selling this product in Florida in 2021. 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 property insurance policies, which are named peril property policies covering dwelling and contents. CTI provides data processing systems and services to the Company. We converted the small block of ordinary whole life policies of CNLIC from a legacy platform to our new actuarial valuation software solution which provides enhanced modeling capabilities as of April 1, 2021. The impact of this system conversion reflected in the accompanying consolidated financial statements as of and for the nine months ended September 30, 2021 was an increase to pretax income of $ 0.7 million consisting of a reduced increase in future policy benefit reserves of $ 0.8 million and increased amortization of deferred policy acquisition costs of $ 0.1 million. September 30, 2021 | 10-Q 9 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) 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 the 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 from those estimates. Significant estimates include those used in the evaluation of credit allowances on fixed maturity securities, actuarially determined assets and liabilities and assumptions, tests of goodwill impairment and valuation allowance on deferred tax assets. 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. SIGNIFICANT ACCOUNTING POLICIES For a description of our significant accounting policies, see Part IV, Item 15, Note 1. Summary of Significant Accounting Policies in the notes to our consolidated financial statements included in our Form 10-K , which should be read in conjunction with these accompanying consolidated financial statements. (2) ACCOUNTING PRONOUNCEMENTS ACCOUNTING STANDARDS RECENTLY ADOPTED In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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 available-for-sale ("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. September 30, 2021 | 10-Q 10 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) 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 deferred acquisition costs ("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. While it is not possible to estimate the expected impact of adoption at this time, the Company believes there is a reasonable possibility that implementation of ASU No. 2018-12 may result in a material impact on our consolidated statements of stockholders' equity and future earnings patterns. 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. (3) SEGMENT 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. We restarted marketing domestically in Florida in 2021. 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 in Louisiana, Mississippi and Arkansas. Our policies are sold and serviced through funeral homes and independent agents who sell policies, collect premiums and service policyholders. To a lesser extent, our Home Service Insurance segment also sells property insurance policies in Louisiana. 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. The Company's Other Non-Insurance Enterprises are the only reportable difference between segments and consolidated operations. September 30, 2021 | 10-Q 11 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) 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 used in the preparation of the consolidated financial statements. The Company evaluates profit and loss performance based on U.S. GAAP income before federal income taxes for its two reportable segments. Life Insurance Home Service Insurance Other Non-Insurance Enterprises Consolidated Three Months Ended September 30, 2021 (In thousands) Revenues: Premiums $ 32,198 11,129 — 43,327 Net investment income 11,991 3,238 225 15,454 Realized investment gains (losses), net 1,205 ( 36 ) 957 2,126 Other income 676 1 — 677 Total revenues 46,070 14,332 1,182 61,584 Benefits and expenses: Insurance benefits paid or provided: Claims and surrenders 22,565 9,251 — 31,816 Increase in future policy benefit reserves 9,369 1,519 — 10,888 Policyholders' dividends 1,638 12 — 1,650 Total insurance benefits paid or provided 33,572 10,782 — 44,354 Commissions 4,854 4,261 — 9,115 Other general expenses 4,900 4,146 1,496 10,542 Capitalization of deferred policy acquisition costs ( 4,201 ) ( 1,825 ) — ( 6,026 ) Amortization of deferred policy acquisition costs 5,191 852 — 6,043 Amortization of cost of insurance acquired 68 215 — 283 Total benefits and expenses 44,384 18,431 1,496 64,311 Income (loss) before federal income tax expense $ 1,686 ( 4,099 ) ( 314 ) ( 2,727 ) September 30, 2021 | 10-Q 12 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) Life Insurance Home Service Insurance Other Non-Insurance Enterprises Consolidated Nine Months Ended September 30, 2021 (In thousands) Revenues: Premiums $ 89,399 35,786 — 125,185 Net investment income 35,468 9,826 724 46,018 Realized investment gains (losses), net 5,741 393 1,143 7,277 Other income 2,142 3 — 2,145 Total revenues 132,750 46,008 1,867 180,625 Benefits and expenses: Insurance benefits paid or provided: Claims and surrenders 69,366 22,335 — 91,701 Increase in future policy benefit reserves 17,081 5,326 — 22,407 Policyholders' dividends 4,400 31 — 4,431 Total insurance benefits paid or provided 90,847 27,692 — 118,539 Commissions 13,483 12,590 — 26,073 Other general expenses 15,273 12,024 6,130 33,427 Capitalization of deferred policy acquisition costs ( 11,578 ) ( 5,220 ) — ( 16,798 ) Amortization of deferred policy acquisition costs 15,739 2,561 — 18,300 Amortization of cost of insurance acquired 279 680 — 959 Total benefits and expenses 124,043 50,327 6,130 180,500 Income (loss) before federal income tax expense $ 8,707 ( 4,319 ) ( 4,263 ) 125 September 30, 2021 | 10-Q 13 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) Life Insurance Home Service Insurance Other Non-Insurance Enterprises Consolidated Three Months Ended September 30, 2020 (In thousands) Revenues: Premiums $ 32,265 11,843 — 44,108 Net investment income 11,507 3,200 290 14,997 Realized investment gains (losses), net 133 388 6 527 Other income 189 1 3 193 Total revenues 44,094 15,432 299 59,825 Benefits and expenses: Insurance benefits paid or provided: Claims and surrenders 25,023 7,935 — 32,958 Increase in future policy benefit reserves 3,274 884 — 4,158 Policyholders' dividends 1,443 7 — 1,450 Total insurance benefits paid or provided 29,740 8,826 — 38,566 Commissions 4,140 3,572 — 7,712 Other general expenses 1,915 4,524 12,952 19,391 Capitalization of deferred policy acquisition costs ( 3,512 ) ( 1,380 ) — ( 4,892 ) Amortization of deferred policy acquisition costs 6,190 570 — 6,760 Amortization of cost of insurance acquired 113 346 — 459 Total benefits and expenses 38,586 16,458 12,952 67,996 Income (loss) before federal income tax expense $ 5,508 ( 1,026 ) ( 12,653 ) ( 8,171 ) September 30, 2021 | 10-Q 14 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) Life Insurance Home Service Insurance Other Non-Insurance Enterprises Consolidated Nine Months Ended September 30, 2020 (In thousands) Revenues: Premiums $ 92,146 34,775 — 126,921 Net investment income 34,332 9,788 961 45,081 Realized investment gains (losses), net 1,259 ( 405 ) ( 185 ) 669 Other income 1,195 19 3 1,217 Total revenues 128,932 44,177 779 173,888 Benefits and expenses: Insurance benefits paid or provided: Claims and surrenders 66,071 21,090 — 87,161 Increase in future policy benefit reserves 18,804 3,062 — 21,866 Policyholders' dividends 3,987 24 — 4,011 Total insurance benefits paid or provided 88,862 24,176 — 113,038 Commissions 11,912 10,367 — 22,279 Other general expenses 11,309 13,431 17,263 42,003 Capitalization of deferred policy acquisition costs ( 10,149 ) ( 3,483 ) — ( 13,632 ) Amortization of deferred policy acquisition costs 16,927 2,013 — 18,940 Amortization of cost of insurance acquired 358 870 — 1,228 Total benefits and expenses 119,219 47,374 17,263 183,856 Income (loss) before federal income tax expense $ 9,713 ( 3,197 ) ( 16,484 ) ( 9,968 ) September 30, 2021 | 10-Q 15 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) (4) STOCKHOLDERS' EQUITY AND RESTRICTIONS EARNINGS PER SHARE The following tables set forth the computation of basic and diluted earnings (loss) per share. Three Months Ended September 30, 2021 2020 (In thousands, except per share amounts) Basic and diluted earnings (loss) per share: Numerator: Net income (loss) $ ( 2,799 ) ( 7,915 ) Net income (loss) allocated to Class A common stock $ ( 2,799 ) ( 7,836 ) Net income (loss) allocated to Class B common stock — ( 79 ) Net income (loss) $ ( 2,799 ) ( 7,915 ) Denominator: Weighted average shares of Class A outstanding - basic 49,630 49,437 Weighted average shares of Class A outstanding - diluted 50,263 49,832 Weighted average shares of Class B outstanding - basic and diluted — 1,002 Basic and diluted earnings (loss) per share of Class A common stock $ ( 0.06 ) ( 0.16 ) Basic and diluted earnings (loss) per share of Class B common stock — ( 0.07 ) Nine Months Ended September 30, 2021 2020 (In thousands, except per share amounts) Basic and diluted earnings (loss) per share: Numerator: Net income (loss) $ ( 1,350 ) ( 12,526 ) Net income (loss) allocated to Class A common stock $ ( 1,345 ) ( 12,401 ) Net income (loss) allocated to Class B common stock ( 5 ) ( 125 ) Net income (loss) $ ( 1,350 ) ( 12,526 ) Denominator: Weighted average shares of Class A outstanding - basic 49,594 49,365 Weighted average shares of Class A outstanding - diluted 50,226 49,760 Weighted average shares of Class B outstanding - basic and diluted 401 1,002 Basic and diluted earnings (loss) per share of Class A common stock $ ( 0.03 ) ( 0.25 ) Basic and diluted earnings (loss) per share of Class B common stock ( 0.01 ) ( 0.12 ) CAPITAL AND SURPLUS Each of our regulated insurance subsidiaries is required to meet stipulated regulatory capital requirements. These include capital requirements imposed by the U.S. National Association of Insurance Commissioners ("NAIC") and the Bermuda Monetary Authority ("BMA"). All insurance subsidiaries exceeded the minimum capital requirements at September 30, 2021. September 30, 2021 | 10-Q 16 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) In order to minimize the risk of a shortfall in capital arising from an unexpected adverse deviation or excess risk, the BMA has established a threshold capital level (termed the Target Capital Level ("TCL")), which is set at 120% of a company’s enhanced capital requirement. The TCL serves as an early warning tool for the BMA. As of September 30, 2021, CICA Ltd. was above the TCL threshold. At 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% (equal to the TCL). Since CICA Ltd.’s capital level currently exceeds 120 %, Citizens is not currently required to make a capital contribution. (5) INVESTMENTS The Company invests primarily in fixed maturity securities, which totaled 89.7 % of total cash and invested assets at September 30, 2021, as shown below. Carrying Value (In thousands, except for %) September 30, 2021 December 31, 2020 Amount % Amount % Cash and invested assets: Fixed maturity securities $ 1,456,694 89.7 % 1,489,383 89.8 % Equity securities 22,335 1.4 % 22,102 1.3 % Policy loans 80,102 4.9 % 83,318 5.0 % Real estate and other long-term investments 34,013 2.1 % 29,865 1.8 % Cash and cash equivalents 30,087 1.9 % 34,131 2.1 % Total cash and invested assets $ 1,623,231 100.0 % 1,658,799 100.0 % The following tables represent the amortized cost, gross unrealized gains and losses and fair value of fixed maturity securities as of the dates indicated. Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value September 30, 2021 (In thousands) Fixed maturity securities: Available-for-sale: U.S. Treasury securities $ 7,257 1,078 — 8,335 U.S. Government-sponsored enterprises 3,470 1,045 — 4,515 States and political subdivisions 353,653 29,186 517 382,322 Corporate: Financial 203,997 22,774 120 226,651 Consumer 212,805 23,842 787 235,860 Energy 79,442 8,147 89 87,500 All other 300,594 31,884 1,147 331,331 Residential mortgage-backed 117,845 16,681 4 134,522 Asset-backed 45,143 413 10 45,546 Foreign governments 101 11 — 112 Total fixed maturity securities $ 1,324,307 135,061 2,674 1,456,694 September 30, 2021 | 10-Q 17 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value December 31, 2020 (In thousands) 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 Most of the Company's equity securities are diversified stock and bond mutual funds. Fair Value (In thousands) September 30, 2021 December 31, 2020 Equity securities: Stock mutual funds $ 3,407 3,174 Bond mutual funds 12,512 12,354 Common stock 1,072 1,143 Non-redeemable preferred stock 272 281 Non-redeemable preferred stock fund 5,072 5,150 Total equity securities $ 22,335 22,102 VALUATION OF INVESTMENTS Available-for-sale 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 losses of $ 0.4 million and net realized gains of $ 0.2 million on equity securities held for the three and nine months ended September 30, 2021 and gains of $ 0.4 million and $ 0.6 million for the same periods ended September 30, 2020. The Company considers several factors in its review and evaluation of individual investments, using the process described in Part IV, Item 15, Note 2. Investments in the notes to the consolidated financial statements of our Form 10-K to determine whether a credit loss impairment exists. For the three and nine months ended September 30, 2021 and 2020, the Company recorded no credit valuation losses on fixed maturity securities. September 30, 2021 | 10-Q 18 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) The following tables present the fair values and gross unrealized losses of fixed maturity securities that are not deemed to have credit losses, aggregated by investment category and length of time that individual securities have been in a continuous loss position at September 30, 2021 and December 31, 2020. September 30, 2021 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 securities: U.S. Treasury securities $ 72 — 2 $ — — — $ 72 — 2 States and political subdivisions 22,636 517 17 — — — 22,636 517 17 Corporate: Financial 3,264 24 7 1,219 96 1 4,483 120 8 Consumer 26,204 651 28 2,410 136 1 28,614 787 29 Energy 6,778 89 8 — — — 6,778 89 8 All Other 32,946 1,147 29 — — — 32,946 1,147 29 Residential mortgage-backed 1,009 4 5 — — — 1,009 4 5 Asset-backed 9,215 9 14 664 1 1 9,879 10 15 Total fixed maturity securities $ 102,124 2,441 110 $ 4,293 233 3 $ 106,417 2,674 113 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 securities: 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 above, 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. We did not recognize credit losses on 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 September 30, 2021 | 10-Q 19 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) have little bearing on the recoverability of our investments. The fair value is expected to recover as the securities approach maturity. The amortized cost and fair value of fixed maturity securities at September 30, 2021 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. September 30, 2021 Amortized Cost Fair Value (In thousands) Fixed maturity securities: Due in one year or less $ 31,502 32,097 Due after one year through five years 120,606 130,861 Due after five years through ten years 199,687 218,519 Due after ten years 972,512 1,075,217 Total fixed maturity securities $ 1,324,307 1,456,694 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. Three Months Ended Nine Months Ended Fixed Maturity Securities, Available-for-Sale September 30, September 30, (In thousands) 2021 2020 2021 2020 Proceeds $ 984 11,221 8,238 17,524 Gross realized gains $ 89 25 189 148 Gross realized losses $ — 77 1 134 The Company sold 10 and 28 AFS fixed maturity securities during the three and nine months ended September 30, 2021 and 18 and 24 during the three and nine months ended September 30, 2020, respectively. The Company sold its former training facility near Austin, Texas during the third quarter 2021 for a gross sale price of $ 3.8 million, resulting in a gain on the sale of $ 1.0 million. The facility was owned by Citizens and was held in Other Non-Insurance Enterprises. (6) 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 September 30, 2021 | 10-Q 20 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) 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. September 30, 2021 | 10-Q 21 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) The following tables set forth our assets that are measured at fair value on a recurring basis as of the dates indicated. September 30, 2021 Level 1 Level 2 Level 3 Total Fair Value (In thousands) Financial Assets Fixed maturity securities available-for-sale U.S. Treasury and U.S. Government-sponsored enterprises $ 8,335 4,515 — 12,850 States and political subdivisions — 382,322 — 382,322 Corporate 51 881,291 — 881,342 Residential mortgage-backed — 134,522 — 134,522 Asset-backed — 45,546 — 45,546 Foreign governments — 112 — 112 Total fixed maturity securities available-for-sale 8,386 1,448,308 — 1,456,694 Equity securities Stock mutual funds 3,407 — — 3,407 Bond mutual funds 12,512 — — 12,512 Common stock 1,072 — — 1,072 Non-redeemable preferred stock 272 — — 272 Non-redeemable preferred stock fund 5,072 — — 5,072 Total equity securities 22,335 — — 22,335 Other long-term investments (1) — — — 32,651 Total financial assets $ 30,721 1,448,308 — 1,511,680 (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 are not 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 consolidated balance sheet. September 30, 2021 | 10-Q 22 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) December 31, 2020 Level 1 Level 2 Level 3 Total Fair Value (In thousands) 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 are not 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 consolidated balance sheet. FINANCIAL INSTRUMENTS VALUATION FINANCIAL INSTRUMENTS CARRIED AT FAIR VALUE Fixed maturity securities, available-for-sale. At September 30, 2021, our fixed maturity securities, valued using a third-party pricing source, totaled $ 1.4 billion for Level 2 assets and comprised 95.8 % 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 at September 30, 2021. For the nine months ended September 30, 2021, 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. Limited partnerships. 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 tables include information related to our investments in limited partnerships that calculate NAV per share. For these investments, which are measured at fair value on a recurring basis, we use the NAV per share to measure fair value. Changes in the NAV of our limited partnerships are recorded through net income. The Company recognized net realized gains September 30, 2021 | 10-Q 23 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) of $ 1.3 million and $ 5.8 million on limited partnerships held for the three and nine months ended September 30, 2021 and gains of $ 0.2 million for both the three and nine months ended September 30, 2020. These investments are included in other long-term investments on the consolidated balance sheets. September 30, 2021 December 31, 2020 Fair Value Using NAV Per Share Unfunded Commit- ments Life in years Fair Value Using NAV Per Share Unfunded Commit- ments Life in years (In thousands, except years) Limited partnerships Middle market Investments in privately-originated, performing senior secured debt primarily in North America-based companies $ 13,847 26,645 10 $ 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 — — 0 1,381 — 3 Late-stage growth Investments in private late-stage, established companies seeking capital to accelerate growth prior to an IPO or sale 16,864 8,525 7 — 16,291 7 Infrastructure Investments in climate infrastructure assets, focusing on renewable power generation in wind and solar energy 1,940 17,784 12 — 17,497 12 Total limited partnerships $ 32,651 52,954 $ 11,923 63,571 Our limited partnership investments are not redeemable because distributions will be received when the underlying investments of the partnerships 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. We initially estimate the fair value of investments in limited partnerships 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. We carried no limited partnership investments at cost at September 30, 2021 and $ 6.2 million of limited partnership investments at cost at December 31, 2020. 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 nine months ended September 30, 2021 or 2020. 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 fair values of financial instruments presented below are not necessarily indicative of the amounts the Company might realize in actual market transactions. September 30, 2021 | 10-Q 24 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) The carrying amount and fair value for the financial assets and liabilities on the consolidated balance sheets not otherwise disclosed for the periods indicated are as follows: September 30, 2021 December 31, 2020 (In thousands) Carrying Value Fair Value Carrying Value Fair Value Financial Assets: Policy loans $ 80,102 80,102 83,318 83,318 Commercial mortgage loan 1,000 1,000 — — Residential mortgage loans 150 169 157 195 Cash and cash equivalents 30,087 30,087 34,131 34,131 Financial Liabilities: Annuity - investment contracts 63,690 69,603 60,861 71,547 Policy loans. Policy loans had a weighted average annual interest rate of 7.7 % at September 30, 2021 and December 31, 2020, and no specified maturity dates. The aggregate fair value of policy loans approximates the carrying value 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. Commercial mortgage loan. We financed $ 1.0 million of the sale of our training facility at a 6.0 % interest rate. The loan is due in less than 1 year. Due to the short-term nature of the loan, the carrying value approximates fair value. Residential mortgage loans. Mortgage loans are secured principally by residential properties. Weighted average interest rates for these loans were approximately 6.4 % at September 30, 2021 and December 31, 2020. At September 30, 2021, maturities ranged from 5 to 18 years. Management estimated the fair value using an annual interest rate of 6.25 % at September 30, 2021. Our mortgage loans are considered Level 3 assets in the fair value hierarchy and are included in other long-term investments on the consolidated balance sheets. Cash and cash equivalents. The fair value of 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 September 30, 2021 and December 31, 2020 using discounted cash flows based upon spot rates adjusted for various risk adjustments ranging from 0.19 % to 2.59 % and 0.22 % to 2.34 %, 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. September 30, 2021 | 10-Q 25 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) Other long-term investments. Financial instruments included in other long-term investments are classified in various levels of the fair value hierarchy. The following table summarizes the carrying amounts of these investments. Carrying Value (In thousands ) September 30, 2021 December 31, 2020 Other long-term investments: Limited partnerships $ 32,651 18,135 FHLB common stock 191 190 Mortgage loans 1,150 157 All other investments 21 8,811 Total other long-term investments $ 34,013 27,293 We are a member of the Federal Home Loan Bank ("FHLB") of Dallas and such membership requires members to own stock in FHLB. Our FHLB stock is carried at amortized cost, which approximates fair value. Included in all other investments at December 31, 2020 was a Rabbi Trust holding $ 8.8 million for the benefit of our former Chief Executive Officer, which we were required to hold for his severance payment under the terms of his employment agreement in connection with his resignation following a change in control of the Company. This amount was paid to him during the first quarter of 2021 and thus is not reflected in all other investments at September 30, 2021. (7) COMMITMENTS AND CONTINGENCIES QUALIFICATION 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 , inadvertently generated U.S. source income over time, which subjected the Company to certain tax withholding and information reporting requirements for the Company under Chapters 3 or 4 of the IRC. The products have been and continue to be appropriately reported as life insurance under U.S. GAAP for financial reporting. To satisfy the Internal Revenue Service ("IRS") tax withholding and information reporting requirements 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, and amended returns in August 2020 and paid the associated withholding tax. The IRS processed these withholding tax returns in 2021, and the Company considers this matter closed. LITIGATION AND REGULATORY ACTIONS From time to time, we are subject to legal and regulatory actions relating to our business. We may incur defense costs, including attorneys' fees, and other direct litigation costs associated with defending claims. 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 As of September 30, 2021, CICA Ltd. is committed to fund investments up to $ 63.0 million related to limited partnerships previously described and other investments. September 30, 2021 | 10-Q 26 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) CREDIT FACILITY On May 5, 2021 , the Company entered into a $ 20 million senior secured revolving credit facility (the “Credit Facility”) with Regions Bank ("Regions"). The Credit Facility has a three -year term, maturing on May 5, 2024 , and allows the Company to borrow up to $ 20 million for working capital purposes, capital expenditures and other corporate purposes. Revolving loans may be requested by the Company in aggregate minimum principal amounts of $ 0.5 million per loan. At the Company's election, the revolving loans may either bear a base rate, which is 1.75 % plus a base rate (a fluctuating rate per annum) equal to the greatest of (a) Regions' prime rate, (b) the federal funds rate plus 0.50 %, (c) the one-month LIBOR rate plus 1 %, and (d) 0.75 %; or an adjusted LIBOR rate, which is 2.75 % plus an adjusted LIBOR rate but cannot be less than 0.75 %. The Company is required to pay Regions a quarterly commitment fee of 0.375 % of the unused portion of the Credit Facility, which the Company expenses as it is incurred. Obligations under the Credit Facility are secured by substantially all of the assets of the Company other than the equity interests in all of the regulated insurance subsidiaries, real estate owned by the Company, and other limited exceptions. The Credit Facility contains customary events of default and financial, affirmative and negative covenants, including but not limited to restrictions on indebtedness, liens, investments, asset dispositions and restricted payments. As of September 30, 2021, the Company had no t borrowed any funds against the Credit Facility and was not in violation of any covenants. CHANGE IN CONTROL As previously disclosed, on February 5, 2021, Citizens, Inc. (the “Company”) entered into a Purchase and Sale Agreement (the “Purchase Agreement”) with the Harold E. Riley Foundation (the “Foundation”) to purchase 100% of the Company’s Class B common stock (the “Class B Shares”) from the Foundation at an aggregate purchase price of $ 9.1 million (the “Class B Transaction”). Because the Class B Shares have the right to elect a simple majority of the Board, the Foundation was able to exercise control over the Company as the holder of 100% of the Class B Shares. Thus, in order to consummate the Class B Transaction, the Company and the Foundation were required to obtain regulatory approvals by the insurance regulators in Colorado, Louisiana, Mississippi, Texas and Bermuda, the jurisdictions in which the Company and its insurance subsidiaries are domiciled. On April 12, 2021, the Company and the Foundation received the last of the regulatory approvals required for the Foundation to divest control of the Company and thus all of the Foundation’s Class B Shares were transferred to the Company as of such date. In accordance with Colorado law, the Class B Shares are now classified as authorized, but unissued shares. On March 9, 2021, the Board passed a resolution stating that as long as the Class B Shares are being held as unissued shares, the Company will not vote, nor permit any other person or entity to exercise any voting rights or other rights, with respect to the Class B Shares. September 30, 2021 | 10-Q 27 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) (8) INCOME TAXES Our provision for income taxes may not have the customary relationship of taxes to income. CICA Ltd., a wholly owned subsidiary of Citizens, is considered a controlled foreign corporation for federal tax purposes. As a result, the insurance activity of CICA Ltd. is subject to Subpart F of the IRC and is included in Citizens’ taxable income. For the nine months ended September 30, 2021, the Subpart F income inclusion generated $ 1.3 million of federal income tax expense. A reconciliation between the U.S. corporate income tax rate and the effective income tax rate is as follows: Nine Months Ended September 30, 2021 2020 (In thousands, except for %) Amount % Amount % Federal income tax expense: Expected tax expense (benefit) $ 26 21.0 % $ ( 2,093 ) 21.0 % Foreign income tax rate differential ( 1,904 ) ( 1,523.2 ) % ( 1,726 ) 17.3 % Tax-exempt interest and dividends-received deduction ( 88 ) ( 70.4 ) % ( 113 ) 1.1 % Annualized effective tax rate adjustment 77 61.6 % 200 ( 2.0 ) % Adjustment of prior year taxes ( 7 ) ( 5.6 ) % 10 ( 0.1 ) % Effect of uncertain tax position 1,842 1,473.6 % 2,673 ( 26.8 ) % Nondeductible costs to remediate tax compliance issue — — % ( 620 ) 6.2 % CICA Ltd. Subpart F income 1,310 1,048.0 % 2,180 ( 21.9 ) % Rate differential on net operating loss carryback claim 296 236.8 % — — % Nondeductible officer compensation — — % 2,042 ( 20.5 ) % Other ( 77 ) ( 61.8 ) % 5 ( 0.1 ) % Total federal income tax expense (benefit) $ 1,475 1,180.0 % $ 2,558 ( 25.8 ) % Income tax expense consists of: Nine Months Ended September 30, (In thousands) 2021 2020 Federal income tax expense: Current $ 1,845 2,944 Deferred ( 370 ) ( 386 ) Total federal income tax expense $ 1,475 2,558 The Company previously accrued an uncertain tax position, most of which will be released during the fourth quarter of 2021 following the expiration of the statute of limitations on the tax year ended December 31, 2017. This release will increase the carrying value of our Life Insurance segment and could potentially result in an impairment of goodwill in that segment upon the completion of our annual impairment analysis during the fourth quarter of 2021. September 30, 2021 | 10-Q 28 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) (9) OTHER COMPREHENSIVE INCOME The changes in the components of other comprehensive income (loss) are reported net of the effects of income taxes of 21% as of the three and nine months ended September 30, 2021 and 2020, as indicated below. Three Months Ended September 30, 2021 2020 (In thousands) Amount Tax Effect Total Amount Tax Effect Total Unrealized gains (losses): Unrealized holding gains (losses) arising during the period $ ( 9,561 ) 781 ( 8,780 ) 15,077 ( 1,009 ) 14,068 Reclassification adjustment for (gains) losses included in net income ( 102 ) 22 ( 80 ) 2 — 2 Effects on deferred policy acquisition costs 7,975 ( 528 ) 7,447 ( 104 ) 22 ( 82 ) Effects on cost of insurance acquired 7 ( 1 ) 6 ( 30 ) 6 ( 24 ) Effects on unearned revenue reserves 15 ( 3 ) 12 185 ( 39 ) 146 Other comprehensive income (loss) $ ( 1,666 ) 271 ( 1,395 ) 15,130 ( 1,020 ) 14,110 Nine Months Ended September 30, 2021 2020 (In thousands) Amount Tax Effect Total Amount Tax Effect Total Unrealized gains (losses): Unrealized holding gains (losses) arising during the period $ ( 35,749 ) 2,736 ( 33,013 ) 52,557 ( 4,025 ) 48,532 Reclassification adjustment for (gains) losses included in net income ( 91 ) 19 ( 72 ) 46 ( 10 ) 36 Effects on deferred policy acquisition costs 11,681 ( 3,068 ) 8,613 ( 419 ) 88 ( 331 ) Effects on cost of insurance acquired 284 ( 59 ) 225 ( 143 ) 30 ( 113 ) Effects on unearned revenue reserves ( 1,922 ) 404 ( 1,518 ) 712 ( 150 ) 562 Other comprehensive income (loss) $ ( 25,797 ) 32 ( 25,765 ) 52,753 ( 4,067 ) 48,686 (10) 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. There were no changes related to these relationships during the nine months ended September 30, 2021. See our Form 10-K for a comprehensive discussion of related party transactions. (11) SUBSEQUENT EVENTS The Company has evaluated the impact of subsequent events as defined by the accounting guidance through the date this report was issued and determined that no significant subsequent events need to be recognized or disclosed. September 30, 2021 | 10-Q 29 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS