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 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. While the Company has implemented new strategies and processes to mitigate this impact, 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 September 30, 2021 | 10-Q 30 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS impact on the Company's results for the remainder of 2021 or beyond. 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 overall operations resulting from quarantines, travel limitations, business restrictions and decreased economic activity; • higher surrenders and lapses due to cash needs our policyholders may have due to concerns over COVID-19 economic impacts, particularly in our international business; • a higher level of claims due to COVID-19 deaths; and • the vulnerability of our Home Service Insurance business in particular to any future increase in the intensity of the pandemic, and any related or unrelated material health crisis or negative health trend, especially if concentrated in or directly impacting the southeastern part of the United States. We believe that in the third quarter of 2021, we experienced higher than normal death claims due to the impact of COVID-19. As we previously disclosed, the Delta variant of COVID-19, which has become the predominant strain of COVID-19 globally, is associated with higher rates of transmission and deaths, particularly in unvaccinated individuals. We continue to monitor the impact of the COVID-19 pandemic on our operations. IMPACT OF HURRICANE IDA Hurricane Ida was a destructive Category 4 hurricane that made landfall in Louisiana on August 29, 2021 and became the second-most damaging and intense hurricane in the U.S. state of Louisiana on record, behind Hurricane Katrina in 2005. We sell property insurance through Security Plan Fire Insurance Company in the state of Louisiana. Hurricane Ida negatively affected our income in the third quarter by approximately $2.3 million. For hurricanes, we pay the first $0.5 million in claims and our non-affiliated catastrophic reinsurance carriers pay the next $10.5 million in claims. We expect claims from Hurricane Ida to exceed our reinsurance by approximately $0.8 million and thus the total claim impact to us is expected to be approximately $1.2 million. In addition, due to Hurricane Ida, we incurred a reinstatement premium for reinsurance coverage in case of a second major storm this year, resulting in an additional premium charge during the third quarter of 2021 of approximately $1.1 million, which offsets premium revenue for the Home Service Insurance segment. Our catastrophic event reinsurance agreement allows coverage on a maximum of two catastrophic events per calendar year per reinsurance layer. September 30, 2021 | 10-Q 31 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS CURRENT FINANCIAL HIGHLIGHTS Our net loss decreased by $5.1 million in the three months ended September 30, 2021 and $11.2 million in the nine months ended September 30, 2021, to $2.8 million and $1.4 million, respectively, compared to $7.9 million and $12.5 million in prior year periods. The decrease in our net loss in both periods was primarily due to a decrease in other general expenses of $8.8 million and $8.6 million, respectively, in the current year periods, due to executive severance costs and professional fees paid in 2020 in connection with a change in control of the Company. The decrease in our net loss was also due to an increase in realized gains of $1.6 million and $6.6 million, respectively in the three and nine months ended September 30, 2021. The realized gains primarily reflect changes in the fair value of our limited partnership investments and the sale of our offsite training facility located near Austin, Texas, which resulted in a gain of $1.0 million during the third quarter of 2021. We did not sell any of our limited partnership investments or receive any distributions in the third 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. As discussed above, decreases in general expenses and increases in realized gains in the three and nine-months ended September 30, 2021 as compared to the same periods in 2020, were offset by higher death claims due to COVID-19 and the impact of Hurricane Ida on our premiums and claims in the current year. Consolidated Revenue Highlights Life insurance premiums and investment income are our primary sources of revenue. In the three months ended September 30, 2021 compared to the same period in 2020, total revenue increased by $1.8 million. • Life insurance premiums increased by $0.5 million due primarily to an increase in first year premiums in our Life Insurance and Home Service Insurance segments and an increase in renewal premiums in our Home Service Insurance segment. Total first year premiums increased by 35.5% year over year during the third quarter. We believe this increase was driven by our focused marketing campaigns, as well as lower sales in the prior year period due to COVID 19 impacts as previously described. Total premiums, however, decreased by $0.8 million due to decreased property insurance premiums related to the reinstatement of catastrophic reinsurance as a result of Hurricane Ida, as discussed above. • Net investment income increased by $0.5 million, or 3.0%, despite a lower average portfolio yield in the current year period due to a growing asset base and strong results from our Middle market private equity investment. • As mentioned above, realized investment gains increased by $1.6 million. In the nine months ended September 30, 2021 as compared to the same period in 2020, total revenue increased by $6.7 million. • Insurance premiums declined by $1.7 million, or 1.4%. The $2.4 million increase in first year premiums was offset by a decline in renewal premiums in our Life Insurance segment to $81.2 million in the first nine months of 2021 from $85.6 million in the same period in 2020. The decrease September 30, 2021 | 10-Q 32 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS in renewal premiums resulted primarily from a decline in our in force business in this segment, due in part to changes we made to our products and distribution over the last several years, which offset the positive impact from reduced COVID-related impact and the Company's premium retention efforts. • Net investment income increased by $0.9 million, or 2.1%. • As mentioned above, realized investment gains increased by $6.6 million. Other income consists primarily of policyholders in our Life Insurance segment selecting supplemental contracts upon the surrender or 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 endowment as well as our general operating expenses. In the three months ended September 30, 2021 compared to the same period in 2020, total benefits and expenses decreased by $3.7 million. Other general expenses decreased by $8.8 million for the reasons discussed above. Decreased general expenses were offset primarily by: • $5.8 million increase in total insurance benefits paid or provided due to an increase in future policy benefit reserves as a result of higher sales production and better persistency; and • Higher commissions paid in 2021 due to higher sales of new insurance policies in both of our segments in the third 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. In the nine months ended September 30, 2021 compared to the same period in 2020, total benefits and expenses decreased by $3.4 million. Other general expenses decreased by $8.6 million for the reasons discussed above. Decreased general expenses were offset primarily by: • $4.5 million increase in claims and surrender benefits due primarily to a higher volume of reported claims, including those COVID-19 related, in addition to an increase in the average death claim amount; and • Higher commissions paid in 2021 for the reasons discussed above. Financial Condition at September 30, 2021 • Total investments of $1.6 billion; fixed maturity securities comprised 91.4% 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 loss 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 September 30, 2021 | 10-Q 33 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS 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. Nine Months Ended September 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 $ 172,645,808 2,873 $ 60,093 $ 142,390,980 2,214 $ 64,314 Home Service Insurance 142,678,954 18,533 7,699 103,456,413 20,261 5,106 Total $ 315,324,762 21,406 $ 245,847,393 22,475 Total insurance issued increased by 28.3% in the nine months ended September 30, 2021, from $245.8 million in the first nine months of 2020 to $315.3 million in 2021, as both our Life Insurance and Home Service Insurance segments experienced growth. We issued 21,406 new policies in the 2021 period, compared to 22,475 new policies in the 2020 period. The number of policies issued in the nine months ended September 30, 2021 increased 29.8% in the Life Insurance segment from the same period in 2020. We believe the increase was primarily due to enhancements to our business operations and sales practices to account for the impact of the COVID-19 pandemic as well as continued sales promotions and campaigns, focused training on virtual selling, and strategically prioritizing selling lower face amount policies 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 have seen the impact of these efforts through September. Although applications increased during the first nine 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 nine months ended September 30, 2021 decreased 8.5% in the Home Service Insurance segment compared to the same period in 2020; however, the amount of insurance issued increased by 38% due to higher average policy face amounts. We believe the higher average policy face amounts issued are attributable to sales campaigns that focused on increasing the face amount of insurance sold as well as the introduction of our new whole life product in this segment, which has a higher maximum face value. September 30, 2021 | 10-Q 34 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS 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 from invested assets. Three Months Ended Nine Months Ended September 30, September 30, (In thousands) 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, 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 Premium Income. Total premium income decreased $0.8 million, or 1.8%, for the third quarter, and decreased $1.7 million, or 1.4% for the nine months ended September 30, 2021 compared to the same periods in 2020. • Three months ended September 30, 2021 : Life insurance premiums increased by $0.5 million 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 segment; however, total premiums decreased due to a $1.4 million decline in property insurance premiums primarily related to the reinstatement of catastrophic reinsurance as a result of Hurricane Ida, as discussed above. • Nine months ended September 30, 2021: Despite higher first year premiums in both our segments and slightly higher renewal premiums in our Home Service Insurance segment, total premiums declined due to lower renewal premiums in our Life Insurance segment and the decrease in property insurance premiums in the third quarter as discussed above. The decrease in renewal premiums in the Life Insurance segment in both the three and nine months ended September 30, 2021, as compared to the prior year periods, is mainly due to a continuing decline in our in force business in this segment over the last several years due to an aging block of business and changes we made to our products and distribution beginning in 2017. The prior-year surrenders negatively impacted the current period renewal premiums even though total surrender benefits paid declined in the current three-month period as compared to the prior year period and were basically flat in the current nine-month period as compared to the same period in 2020. We believe that first year premiums were negatively affected in the three and nine months ended September 30, 2020 due to the impacts of the COVID-19 pandemic, especially the initial global stay-at-home orders. September 30, 2021 | 10-Q 35 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS Net Investment Income. Our annualized net investment income performance is summarized as follows: September 30, December 31, September 30, (In thousands, except for %) 2021 2020 2020 Net investment income, annualized $ 61,357 60,197 60,108 Average invested assets, at amortized cost 1,448,615 1,420,129 1,409,993 Annualized yield on average invested assets 4.24 % 4.24 % 4.26 % Annualized net investment income increased by $1.2 million in the nine months ended September 30, 2021 as compared to the same nine months of 2020 despite a lower annualized yield. The increase is due to our growing asset base and the make-whole call redemptions described below, and to strong yields from our Middle market private equity investment. The annualized yield decreased by two basis points during the first nine 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, in addition to fixed maturity securities, we have been investing in new asset classes, including limited partnerships; however, insurance regulations limit the amount we can invest in these alternative investments. Investment income from fixed maturity securities accounted for approximately 86.1% and 87.2% of total investment income for the three and nine months ended September 30, 2021, respectively. Three Months Ended Nine Months Ended September 30, September 30, (In thousands) 2021 2020 2021 2020 Gross investment income: Fixed maturity securities $ 13,786 13,593 41,682 40,973 Equity securities 213 214 636 593 Policy loans 1,604 1,666 4,811 4,918 Long-term investments 389 72 642 91 Other investment income 15 3 35 87 Total investment income 16,007 15,548 47,806 46,662 Investment expenses (553) (551) (1,788) (1,581) Net investment income $ 15,454 14,997 46,018 45,081 Income from fixed maturity securities income increased 1.4% and 1.7% for the three and nine months ended September 30, 2021, respectively, compared to the same periods in 2020, and our total investment income increased by 3.0% and 2.5% in the same periods. These increases were primarily due to two non-recurring events, (i) a "make-whole" call redemption, and (ii) early distributions from our limited partnership investments. Realized Investment Gains (Losses), Net. We recorded realized gains of $1.3 million and $5.8 million related to fair value changes in our investments in limited partnerships during the three and nine months ended September 30, 2021, respectively. We also recorded realized losses of $0.4 million and realized gains of $0.2 million during the three and nine months ended September 30, 2021, respectively, related to fair value changes in our equity securities owned at September 30, 2021. The fair value of our equity securities owned at September 30, 2020 was negatively impacted by the onset of the COVID-19 pandemic as discussed previously. The Company also sold its former training facility located near Austin, Texas during the third quarter 2021, which resulted in a gain on the sale of $1.0 million. September 30, 2021 | 10-Q 36 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS BENEFITS AND EXPENSES Three Months Ended Nine Months Ended September 30, September 30, (In thousands) 2021 2020 2021 2020 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 Death claims benefits, surrender benefits and general expenses are our primary uses of cash. Claims and Surrenders. Three Months Ended Nine Months Ended September 30, September 30, (In thousands) 2021 2020 2021 2020 Claims and Surrenders: Death claim benefits $ 9,723 7,724 25,207 21,359 Surrender benefits 12,435 16,131 38,771 38,861 Endowment benefits 2,360 2,706 7,012 8,064 Matured endowment benefits 4,276 4,475 15,060 14,376 Property claims 1,765 966 2,401 1,769 Accident and health benefits 98 33 200 147 Other policy benefits 1,159 923 3,050 2,585 Total claims and surrenders $ 31,816 32,958 91,701 87,161 • Death claim benefits increased 25.9% and 18.0% for the three and nine months ended September 30, 2021, respectively, compared to the same periods in 2020. Claims in our Life Insurance segment increased 88.4% during the third quarter and 65.2% during the first nine months of 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 increased 9.6% and 5.2% for the three and nine months ended September 30, 2021, respectively, as compared to the prior year periods. The increases during the first three and nine months of 2021 compared to the same periods last year was due primarily to COVID-19 related deaths, which we believe materially impacted our consolidated results of operations in the third quarter of 2021, as described above. September 30, 2021 | 10-Q 37 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS • Surrender benefits decreased 22.9% and 0.2% for the three and nine months ended September 30, 2021, respectively, compared to the same periods in 2020. Surrender benefits represented less than 0.8% of total direct ordinary whole life insurance in force of $4.6 billion as of September 30, 2021. Prior to the three months ended September 30, 2021, our surrender benefits had been increasing due to international policies that have been in force for an extended period and have little or no associated surrender charges. We have focused our efforts on retaining policyholders and believe we have begun to see positive benefits from these efforts starting in the third quarter of 2021. • Matured endowment benefits decreased 4.4% and increased 4.8% for the three and nine months ended September 30, 2021, respectively, compared to the same periods in 2020. We anticipated these fluctuations based upon the dates when our endowment contracts were sold and the maturity dates set forth in the contracts. • Property claims increased 82.7% and 35.7% in the three and nine months ended September 30, 2021, respectively, compared to the same periods in 2020, due to higher hurricane property claims. Increase in Future Policy Benefit Reserves. The change in future policy benefit reserves increased 161.9% and 2.5% for the three and nine months ended September 30, 2021, respectively, compared to the same periods in 2020 due to better persistency and higher production in our Home Service Insurance and Life Insurance segments. See Segment Operations below for more detail. 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 nine months ended September 30, 2021 as compared to the same periods in 2020 due to higher first year sales in 2021. Other General Expenses. General expenses decreased 45.6% and 20.4% in the three and nine months ended September 30, 2021 compared to the same periods in 2020. As discussed above, the three and nine months ended September 30, 2020 were negatively impacted by severance payments, professional fees related to our change in control. 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 nine months ended September 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 lower during the three and nine months ended September 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 increased for the three months and decreased for the nine months ended September 30, 2021 resulting in effective tax rates of (2.8)% and 1,180.0% compared to 3.1% and (25.8)% 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. September 30, 2021 | 10-Q 38 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS 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 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 Nine Months Ended September 30, September 30, (In thousands) 2021 2020 2021 2020 Income (loss) before federal income tax expense: Segments: Life Insurance $ 1,686 5,508 8,707 9,713 Home Service Insurance (4,099) (1,026) (4,319) (3,197) Total segments (2,413) 4,482 4,388 6,516 Other Non-Insurance enterprises (314) (12,653) (4,263) (16,484) Total income (loss) before federal income tax expense $ (2,727) (8,171) 125 (9,968) 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. September 30, 2021 | 10-Q 39 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 Nine Months Ended September 30, September 30, (In thousands) 2021 2020 2021 2020 Revenues: Premiums $ 32,198 32,265 89,399 92,146 Net investment income 11,991 11,507 35,468 34,332 Realized investment gains, net 1,205 133 5,741 1,259 Other income 676 189 2,142 1,195 Total revenues 46,070 44,094 132,750 128,932 Benefits and expenses: Insurance benefits paid or provided: Claims and surrenders 22,565 25,023 69,366 66,071 Increase in future policy benefit reserves 9,369 3,274 17,081 18,804 Policyholders' dividends 1,638 1,443 4,400 3,987 Total insurance benefits paid or provided 33,572 29,740 90,847 88,862 Commissions 4,854 4,140 13,483 11,912 Other general expenses 4,900 1,915 15,273 11,309 Capitalization of deferred policy acquisition costs (4,201) (3,512) (11,578) (10,149) Amortization of deferred policy acquisition costs 5,191 6,190 15,739 16,927 Amortization of cost of insurance acquired 68 113 279 358 Total benefits and expenses 44,384 38,586 124,043 119,219 Income (loss) before federal income tax expense $ 1,686 5,508 8,707 9,713 Income before federal income tax expense declined in the three months ended September 30, 2021 as compared to the prior year periods due to a large increase in future policy benefit reserves this quarter due to better persistency and higher production. In the nine months ended September 30, 2021, income before federal income tax expense decreased by $1.0 million. Realized gains related to our limited partnership investments were negatively offset by lower renewal premiums and increased death claims, partly due to the COVID-19 pandemic and to higher commissions due to better first year sales in 2021. The decline to net income in both the three and nine months ended September 30, 2021 was also due to lower other general expenses in this segment during the 2020 period due to the release of our tax compliance liability. September 30, 2021 | 10-Q 40 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS Life Insurance segment premium breakout is detailed below. Three Months Ended Nine Months Ended September 30, September 30, (In thousands) 2021 2020 2021 2020 Premiums: First year $ 2,998 2,214 8,201 6,517 Renewal 29,200 30,051 81,198 85,629 Total premiums $ 32,198 32,265 89,399 92,146 Premiums. We derive most of our premium revenue in the Life Insurance segment from renewal premiums. Total premium revenues decreased slightly for the three months and declined 3.0% for the nine months ended September 30, 2021 compared to the same periods in 2020. While first year premiums increased in both periods in 2021, renewal premiums declined by 2.8% and 5.2% for the same three and nine 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 29.8% in the nine months ended September 30, 2021, but due to lower issued face amounts, first year premiums during the period rose slightly less at 25.8%. September 30, 2021 | 10-Q 41 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS The following graph sets forth, for our top five producing countries, our direct premiums from our international life insurance business for the nine months ended September 30, 2021 and 2020. Three Months Ended Nine Months Ended September 30, September 30, (In thousands) 2021 2020 2021 2020 Country: Colombia $ 6,368 5,858 17,635 17,727 Venezuela 4,729 5,000 13,593 14,890 Taiwan 3,905 4,157 13,132 13,013 Ecuador 3,420 3,443 9,687 9,781 Argentina 2,785 2,466 7,021 6,722 Other Non-U.S. 10,259 10,346 28,447 27,894 Total $ 31,466 31,270 89,515 90,027 DOMESTIC SALES Domestic premiums in our Life Insurance segment were $1.2 million and $3.7 million in the three and nine months ended September 30, 2021, compared to $1.1 million and $3.7 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 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. September 30, 2021 | 10-Q 42 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS Net Investment Income . Annualized net investment income in our Life Insurance segment was as follows: September 30, December 31, September 30, (In thousands, except for %) 2021 2020 2020 Net investment income, annualized $ 47,291 45,885 45,776 Average invested assets, at amortized cost 1,110,332 1,071,792 1,062,751 Annualized yield on average invested assets 4.26 % 4.28 % 4.31 % Annualized net investment income in our Life Insurance segment increased in the nine months ended September 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 nine months of 2021 decreased compared to the same period in 2020 and from December 31, 2020 as we have faced challenges in finding investments with attractive 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 nine months ended September 30, 2021 was due primarily 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 nine months ended September 30, 2021 compared to the same period in 2020. September 30, 2021 | 10-Q 43 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS Three Months Ended Nine Months Ended September 30, September 30, (In thousands) 2021 2020 2021 2020 Claims and Surrenders: Death claim benefits $ 3,005 1,595 7,538 4,563 Surrender benefits 11,870 15,449 37,099 36,884 Endowment benefits 2,359 2,703 7,006 8,056 Matured endowment benefits 4,138 4,324 14,607 13,893 Accident and health benefits 38 34 77 102 Other policy benefits 1,155 918 3,039 2,573 Total claims and surrenders $ 22,565 25,023 69,366 66,071 During the three and nine months ended September 30, 2021 and 2020, the majority of our claims and surrender benefits in our Life Insurance segment are related to payment of surrender benefits. As previously discussed, surrender benefits have been higher than usual the last several years as many of our policies have reached the age where surrender charges have expired. However, policy surrenders decreased 23.2% and were basically flat in the three and nine months ended September 30, 2021, respectively, as compared to the prior year periods, as we have instituted new programs to curb surrenders. Matured endowment benefits paid, our next largest claims and surrenders expense, decreased by 4.3% and increased 5.1%, respectively, during the current year periods as compared to the same periods in 2020. These expenses are consistent with our expectations, as the endowment products are reaching their stated maturities. In addition, as discussed in Consolidated Results of Operations above, the COVID-19 pandemic has contributed to the higher death claims in the 2021 periods. Increase in future policy benefit reserves. The change in future policy benefit reserves increased 186.2% and decreased 9.2% for the three and nine months ended September 30, 2021, respectively, compared to the same periods in 2020 due to better persistency as discussed above. In addition, the change in future policy reserves for the nine months ended September 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 and property insurance needs of the middle- and lower-income markets in Louisiana, Mississippi and Arkansas. Premium revenue of 89.2% and 90.0% in the nine months ended September 30, 2021 and 2020, respectively, were from policyholders living in Louisiana. Our policies are 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, which we sell through independent consultants. September 30, 2021 | 10-Q 44 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 Nine Months Ended September 30, September 30, (In thousands) 2021 2020 2021 2020 Revenues: Premiums $ 11,129 11,843 35,786 34,775 Net investment income 3,238 3,200 9,826 9,788 Realized investment gains (losses), net (36) 388 393 (405) Other income 1 1 3 19 Total revenues 14,332 15,432 46,008 44,177 Benefits and expenses: Insurance benefits paid or provided: Claims and surrenders 9,251 7,935 22,335 21,090 Increase in future policy benefit reserves 1,519 884 5,326 3,062 Policyholders' dividends 12 7 31 24 Total insurance benefits paid or provided 10,782 8,826 27,692 24,176 Commissions 4,261 3,572 12,590 10,367 Other general expenses 4,146 4,524 12,024 13,431 Capitalization of deferred policy acquisition costs (1,825) (1,380) (5,220) (3,483) Amortization of deferred policy acquisition costs 852 570 2,561 2,013 Amortization of cost of insurance acquired 215 346 680 870 Total benefits and expenses 18,431 16,458 50,327 47,374 Loss before federal income tax expense $ (4,099) (1,026) (4,319) (3,197) Total revenue declined by 7.1% and increased by 4.1% in the three and nine months ended September 30, 2021, respectively, compared to the same periods in 2020. The changes were primarily due to increases in both first year premiums and renewal premiums in life policies, offset by negative property premiums in the current three-month period due to the impact of Hurricane Ida. First year life premiums increased due mainly to the sales campaigns that focused on increasing the face amount of insurance sold as well as the introduction of our new whole life product in this segment, which has a higher maximum face value. Renewal premiums increased during the nine months ended September 30, 2021 due to improvements in our collection and payment processes, strong collection efforts by our independent agents and our insureds' increased disposable income due to government stimulus and assistance programs related to the COVID-19 pandemic. Sales during the 2020 period were negatively impacted by the COVID-19 pandemic. September 30, 2021 | 10-Q 45 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS Claims and Surrenders. Claims and surrender benefits, which are the largest portion of our expenses in the Home Service Insurance segment, are summarized as follows: Three Months Ended Nine Months Ended September 30, September 30, (In thousands) 2021 2020 2021 2020 Claims and Surrenders: Death claim benefits $ 6,718 6,129 17,669 16,796 Surrender benefits 565 682 1,672 1,977 Endowment benefits 1 3 6 8 Matured endowment benefits 138 151 453 483 Property claims 1,765 966 2,401 1,769 Accident and health benefits 60 (1) 123 45 Other policy benefits 4 5 11 12 Total claims and surrenders $ 9,251 7,935 22,335 21,090 The majority of claims and surrender benefits in our Home Service Insurance segment relate to death claim benefits. Death claim benefits increased 9.6% and 5.2% in the three and nine months ended September 30, 2021, respectively, compared to the 2020 periods. The increase during the first nine months of the year compared to the same period last year was due primarily to COVID-19 related deaths as discussed above. Mortality experience is closely monitored by the Company as a key performance indicator and fluctuates from quarter-to-quarter based on reported claims. As discussed above, property claims were higher due to Hurricane Ida. Increase in future policy benefit reserves. The increase in reserves was higher during the three and nine months ended September 30, 2021 compared to the same period last year due to higher sales and improved retention in 2021. Other general expenses. Other general expenses decreased for the three and nine months ended September 30, 2021 due to changes we made to our distribution structure in the prior year. OTHER NON-INSURANCE ENTERPRISES Three Months Ended Nine Months Ended September 30, September 30, (In thousands) 2021 2020 2021 2020 Income (loss) before income tax expense $ (314) (12,653) (4,263) (16,484) 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 related to corporate functions. In the three and nine months ended September 30, 2021, the Other Non-Insurance Enterprises had a loss of $0.3 million and $4.3 million, respectively, compared to a loss of $12.7 million and $16.5 million for the same periods 2020, as other general expenses decreased in the current year periods due to the change of control expenses paid in 2020, as previously discussed. The Company also sold its former training facility located near Austin, Texas during the third quarter 2021, resulting in a gain on the sale of $1.0 million. September 30, 2021 | 10-Q 46 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 September 30, 2021 were $1.6 billion, of which 89.7% 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 September 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 $ 12,850 0.8 % $ 16,117 1.0 % Corporate 881,342 54.2 % 877,208 52.8 % States and political subdivisions (1) 382,322 23.6 % 409,665 24.7 % Mortgage-backed (2) 134,522 8.3 % 140,184 8.5 % Asset-backed 45,546 2.8 % 46,091 2.8 % Foreign governments 112 — % 118 — % Total fixed maturity securities 1,456,694 89.7 % 1,489,383 89.8 % Cash and cash equivalents 30,087 1.9 % 34,131 2.1 % Other investments: Policy loans 80,102 4.9 % 83,318 5.0 % Equity securities 22,335 1.4 % 22,102 1.3 % Real estate and other long-term investments 34,013 2.1 % 29,865 1.8 % Total cash, cash equivalents and invested assets $ 1,623,231 100.0 % $ 1,658,799 100.0 % (1) Includes $159.4 million and $164.0 million of securities guaranteed by third parties at September 30, 2021 and December 31, 2020, respectively. (2) Includes $134.4 million and $139.8 million of U.S. Government-sponsored enterprises at September 30, 2021 and December 31, 2020, respectively. The carrying value of the Company’s fixed maturity securities investment portfolio at both September 30, 2021 and December 31, 2020 was $1.5 billion. The distribution of the credit ratings of our portfolio of fixed maturity securities by carrying value as of September 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 nine months. Cash and cash equivalents decreased as of September 30, 2021 from 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, offset by cash from matured investments that we are holding as we search for suitable investments in the ongoing low interest rate environment. Real estate and other long-term investments increased by $4.1 million as of September 30, 2021 from 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 in February 2021 and completed the sale of our former training facility in July 2021, investments in our limited partnerships, which are considered long-term investments, increased by $20.7 million in 2021. September 30, 2021 | 10-Q 47 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS Obligations of States and Political Subdivisions The Company’s fixed maturity securities investment portfolio at September 30, 2021 and December 31, 2020 included $382.3 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 September 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 $ 20,475 19,627 3,338 3,082 — — 23,813 22,709 6.4 % AA 52,126 48,217 120,994 113,482 12,144 10,829 185,264 172,528 48.8 % A 19,949 18,384 116,059 105,161 5,059 4,413 141,067 127,958 36.2 % BBB 3,410 3,062 13,573 12,956 1,536 1,450 18,519 17,468 4.9 % BB and other 4,734 4,417 8,925 8,573 — — 13,659 12,990 3.7 % Total $ 100,694 93,707 262,889 243,254 18,739 16,692 382,322 353,653 100.0 % State and political subdivision fixed maturity securities excluding third-party guarantees AAA $ 2,599 2,542 — — — — 2,599 2,542 0.7 % AA 35,124 33,418 48,383 44,934 7,517 6,530 91,024 84,882 24.0 % A 31,269 29,189 140,815 128,797 7,988 7,142 180,072 165,128 46.7 % BBB 6,743 6,051 36,008 33,945 57 55 42,808 40,051 11.3 % BB and other 24,959 22,507 37,683 35,578 3,177 2,965 65,819 61,050 17.3 % Total $ 100,694 93,707 262,889 243,254 18,739 16,692 382,322 353,653 100.0 % 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 September 30, 2021. (In thousands) Fair Value Amortized Cost % of Total Fair Value Education $ 69,879 65,080 18.3 % Utilities 66,842 59,940 17.5 % Transportation 39,530 37,917 10.3 % 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 September 30, 2021. The Company holds 21.7% and 10.4% of its municipal bond portfolio in Texas and California issuers, respectively, as of September 30, 2021. There were no other states or individual issuer holdings that represented or exceeded 10% of the total municipal bond portfolio as of September 30, 2021. September 30, 2021 | 10-Q 48 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 September 30, 2021. September 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 $ 19,893 19,119 3,338 3,082 — — 23,231 22,201 AA 21,564 20,843 13,556 12,788 57 55 35,177 33,686 A — — 22,003 21,838 — — 22,003 21,838 BBB — — 1,975 1,826 — — 1,975 1,826 BB and other — — 542 506 — — 542 506 Total $ 41,457 39,962 41,414 40,040 57 55 82,928 80,057 Texas state and political subdivision fixed maturity securities excluding third-party guarantees AAA $ 2,599 2,542 — — — — 2,599 2,542 AA 31,682 30,476 3,252 3,042 — — 34,934 33,518 A 5,988 5,796 29,576 29,002 — — 35,564 34,798 BBB 1,188 1,148 5,624 5,202 57 55 6,869 6,405 BB and other — — 2,962 2,794 — — 2,962 2,794 Total $ 41,457 39,962 41,414 40,040 57 55 82,928 80,057 The table below represents the Company's detailed exposure to municipal bond portfolio in California at September 30, 2021. September 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 $ — — 25,656 24,227 2,929 2,729 28,585 26,956 A 1,655 1,650 4,909 4,714 — — 6,564 6,364 BBB — — 4,794 4,658 — — 4,794 4,658 Total $ 1,655 1,650 35,359 33,599 2,929 2,729 39,943 37,978 California state and political subdivision fixed maturity securities excluding third-party guarantees AA $ 1,655 1,650 2,698 2,632 — — 4,353 4,282 A — — 10,764 10,284 2,929 2,729 13,693 13,013 BBB — — 8,403 7,860 — — 8,403 7,860 BB and other — — 13,494 12,823 — — 13,494 12,823 Total $ 1,655 1,650 35,359 33,599 2,929 2,729 39,943 37,978 September 30, 2021 | 10-Q 49 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS IMPAIRMENT CONSIDERATIONS RELATED TO INVESTMENTS IN FIXED MATURITY AND EQUITY SECURITIES For the three and nine months ended September 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 September 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 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. In addition to the above-mentioned sources of cash, we offer a Stock Investment Plan ("SIP"), whereby investors, policyholders, independent contractors and agents, employees and directors can directly purchase our stock. At our option, purchases of stock under the SIP can be made from newly issued or treasury stock, rather than in the open market, in which case, we can raise capital by selling our shares. 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 September 30, 2021, we have not borrowed any money under the Credit Facility and have no immediate plans to do so. 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 or sales. Primary cash needs relate to payments of policyholder benefits, 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 nine months ended September 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. September 30, 2021 | 10-Q 50 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS In the nine months ended September 30, 2021, our operations provided $23.8 million in net cash as compared to $34.0 million provided by operations in the same period in 2020. As previously disclosed, we used $8.8 million in cash in the first quarter of 2021 to pay a contractually obligated severance to our former CEO. Cash provided by operations was also lower, as first year premiums continued to be outpaced by 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 new investments. Net cash used in investing activities totaled $19.4 million for the nine months ended September 30, 2021 as opposed to $39.2 million used in investing activities for the nine months ended September 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 $8.4 million in the nine months ended September 30, 2021, due primarily to the purchase of 100% of the outstanding Class B common stock from the Harold E. Riley 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 or higher than expected mortality. Accordingly, we have been aggressively managing policyholder retention efforts and in the nine months ended September 30, 2021, surrender benefits slightly decreased. Prior to this year, surrender benefits had been increasing due 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 September 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 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%. 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 September 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 September 30, 2021 | 10-Q 51 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS 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.