What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-03-11 compared with 2021-03-10 · 426 added, 383 removed, 541 unchanged (60% of the section changed)

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This section of this Annual Report on Form 10-K generally discusses 2021 and 2020 items and year-to-year comparisons between 2021 and 2020.

Discussions of 2018 items and year-to-year comparisons between 2019 and 2018 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

For over 45 years, we have been meeting the needs of our policyholders and their families by providing insurance products that provide both living and death benefits.

Citizens conducts operations through its insurance subsidiaries, who provide benefits to residents in 31 U.S.

Discussions of 2019 items and year-to-year comparisons between 2020 and 2019 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020 (the "2020 10-K").

For over 45 years, we have been fulfilling the needs of our policyholders and their families by providing insurance products that offer both living and death benefits.

Citizens conducts insurance related operations through its insurance subsidiaries, which provide benefits to residents in 31 U.S.

states and more than 70 different countries.

We specialize in offering primarily ordinary whole life insurance, endowment products and final expense insurance in niche markets where we believe we can achieve competitive advantages.

Beginning in 2017, we endeavored to transform Citizens, setting the course for a sustainable future.

We took clear and decisive actions to improve internal controls, remediate weaknesses in our financial and operational structures and redefine our culture.

We assessed the strength of our people, products and operations.

Based on clearly defined values and priorities, we made the hard decisions to recruit new talent, exit unprofitable or undesirable markets, realign our distributors and improve the profitability of our product offerings.

We specialize in offering primarily ordinary whole life insurance, endowment products and final expense insurance in niche markets where we believe we can optimize our competitive position.

As an insurance provider, we collect premiums on an ongoing basis from our policyholders and invest the majority of the premiums to pay future benefits, including claims and surrenders and policyholder dividends.

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In addition to paying and reserving for insurance benefits that we pay to our policyholders, our expenses consist primarily of the costs of selling our insurance products (e.g., commissions, underwriting, marketing expenses), operating expenses and income taxes.

2020 Highlights

2020 was a challenging year.

As the COVID-19 pandemic spread across the world and changed behavior and economic patterns, as described in Part I, Item 1.

Business under “Strategic Initiatives”, we focused on pivoting our business to a more virtual model while executing on our growth initiatives that build on our expertise.

We did this while navigating through significant internal and external disruptions, uncertainties and challenges including a change in control, the resignation of our former chief executive officer and appointment of an interim chief executive officer, litigation in Colorado brought by the Foundation, as our former controlling shareholder, against the Company and our Board of Directors following the change in control, and the global pandemic.

These topics are discussed in more detail under Part I.

Business and Part I, Item 3.

Legal Proceedings of this Annual Report on Form 10-K.

During 2020, we reported a net loss of $11.0 million, compared to a net loss of $1.4 million in 2019.

The increase in net loss in 2020 was primarily driven by $10.0 million of general expenses related to executive severance costs and professional fees incurred in connection with the change in control of the Company.

Expenses related to the change in control in 2020 include (i) a severance payment of $8.8 million to a Rabbi Trust for the benefit of our former Chief Executive Officer, Geoffrey Kolander, following his resignation pursuant to the terms of his employment agreement and the Chief Executive Officer Separation of Service and Consulting Agreement dated July 29, 2020 (the “Separation and Consulting Agreement”), and (ii) $1.2 million of expenses related to the accelerated vesting of Mr.

Kolander’s Restricted Stock Units following his resignation upon the change in control pursuant to his employment agreement and Separation and Consulting Agreement.

Legal fees related to the litigation brought by the Foundation against the Company and its Board of Directors in Colorado also contributed to increased general expenses during 2020.

Objective of our Management's Discussion and Analysis

We refer to our Management’s Discussion and Analysis of Financial Condition and Results of Operations as our “MD&A”.

The objective of our MD&A is to provide investors with a succinct analysis of the Company's financial performance from management's perspective.

We start by discussing the factors that we believe drive our operating results and then we discuss how industry developments and economic circumstances in general ( e.g.

, low interest rates, the COVID-19 pandemic) affected or could affect our financial performance.

After telling you about our industry, we discuss our 2021 financial highlights, the impacts of COVID-19 on our business during 2021, and then we break-down our results of operations in detail so an investor understands the various line items of our profit & loss statements from management’s perspective.

Since our investments are one of the two principal sources of our revenues, we describe them in detail.

Finally, we discuss our capital resources and liquidity so investors will have a better understanding how those resources are utilized and how we are able to meet our cash needs.

Throughout the MD&A, we describe how we view the Company and which matters we believe are reasonably likely to affect future operations.

We describe our priorities for the business in Item 1.

Business - “Strategic Initiatives” and in the MD&A, we describe how we performed on those initiatives and any known trends or uncertainties that might impact our ability to achieve our goals.

The Factors that Drive our Operating Results

We see the following as the primary factors that drive our operating results:

• Our investments

• Death claims and surrenders

• Operating expenses

As premium revenues and investment income are our two primary sources of income, both new sales and "resells" ( i.e .

retaining the policy) as well as our investments and the interest we receive on such investments, are key to our profitability.

Throughout the MD&A and in Item 1 - Busi ness , we describe the actions and initiatives that are taken to increase sales and improve retention, how we performed in 2021, and how we view trends with respect

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While our first-year premiums in the fourth quarter of 2020 in our Life Insurance segment were 75% higher than first year premiums in the third quarter of 2020 and 15% higher than first year premiums in the fourth quarter of 2019, premiums decreased by $9.0 million during 2020 as compared to 2019.

We believe that our overall sales in the Life Insurance segment for 2020 were negatively impacted by the COVID-19 pandemic.

First year premiums in our Home Service Insurance segment were also negatively impacted by the COVID-19 pandemic as we stopped our door-to-door selling for two months while we pivoted to more virtual selling methods.

Our renewal premiums in the Life Insurance segment were negatively impacted by higher levels of surrenders, which we believe was due to not only an aging block of business (i.e., maturities and surrenders of products where the surrender charges are close to expiring or have expired) and our decision to cease issuing new policies in Brazil in 2017 (where we see many policies lapsing), but also by economic circumstances in Latin America.

At December 31, 2020, we had $1.8 billion in total assets, an increase from $1.7 billion at December 31, 2019, and we had $34.1 million in cash.

We did not have any debt at December 31, 2020.

Revenue Highlights

As discussed above, insurance premiums and investment income are our primary sources of revenue.

• Insurance premiums declined 4.9% in 2020 compared to 2019, totaling $175.3 million and $184.3 million, respectively, driven by lower first year and renewal premiums in our Life Insurance segment.

• Net investment income increased 1.1% in 2020 compared to 2019, totaling $60.2 million and $59.5 million, respectively, driven by a growing asset base derived from cash flows from our insurance operations, which was partially offset by higher investment expenses from diversification of our investment portfolio into private equity investments.

The average yield on our consolidated investment portfolio was 4.24% (annualized rate) for 2020 compared to 4.36% (annualized rate) for 2019, a decline of twelve basis points, as we faced a challenging investment environment for fixed maturity securities in 2020.

• Lower realized investment gains in 2020 were primarily a function of a recorded net gain in 2019 of $2.4 million net of real estate sales and impairment losses and $2.0 million of realized gains in 2019 related to tender offers for fixed maturity securities.

Benefits and Expenses Highlights

The primary use of our funds is payment of insurance benefits.

Total insurance benefits paid or provided in 2020 increased by 1.3%, from $154.6 million in 2019, to $156.7 million in 2020.

This expense consists primarily of the following:

• Claims and surrender benefits, which increased 13.4% in 2020 compared to 2019.

This increase was primarily due to an increase in surrender benefits and matured endowments in the Life Insurance segment, due primarily to the aging block of business and other economic circumstances.

• Increase in future policy benefit reserves, which decreased 28.3% in 2020 compared to 2019.

Future policy benefit reserves decreased due to the lower in force block of business.

The other primary use of funds are the costs of selling our insurance products (e.g., commissions, underwriting, marketing expenses) and general expenses.

These costs increased in 2020 primarily due to an increase in general expenses, which rose 10.8% in 2020 compared to 2019, driven by the change in control and executive severance expenses as described above.

Our general expenses in 2020 benefited from a $2.2 million reduction in our 7702 tax compliance best estimate liability from the estimate at year end 2019.

The increase in general expenses was also offset by a reduction in costs directly related to the selling of our insurance products, including commissions and capitalization of deferred policy acquisition costs, which decreased in 2020 compared to 2019, as they are directly related to premium production, and primarily first year premium production, which declined in 2020.

ECONOMIC AND INSURANCE INDUSTRY DEVELOPMENTS

While it is difficult to quantify the full impact that the COVID-19 pandemic has had on our business and industry in 2020, as we have previously disclosed, our results of operations for the year ended December 31, 2020 were negatively impacted by the COVID-19 pandemic in the U.S.

and other countries where we do business.

to sales and retention.

We also discuss our investment performance and what we are doing to improve performance in this extended low-interest rate environment.

Our first-year premiums in 2021 increased by 11.2% compared to 2020.

We believe this increase was driven by our focused marketing campaigns, including a campaign intended to recruit new agents, the introduction of new products, and higher sales in 2021 compared to 2020 due to COVID-19 impacts in 2020.

Renewal premiums in our Home Service Insurance increased in 2021 as compared to 2020 due to an increased focus on collection efforts.

Renewal premiums in our Life Insurance segment declined due to the decrease in our in-force business over the last several years.

The prior-year surrenders negatively impacted the current year renewal premiums even though total surrender benefits paid declined in 2021 compared to 2020 (see below).

As we describe in Item 1.

Business - Strategic Initiatives, we believe that our retention efforts began to stem the decline of renewal premiums in 2021.

While interest rates continue to remain low, our yield stayed flat, at 4.24% in both 2021 and 2020.

Our net investment income increased by $1.3 million from 2020 to 2021 due to a greater asset base.

As part of the ongoing process of managing our portfolio and optimizing performance we have been diversifying our investment portfolio in order to help mitigate the effects of the sustained low interest rate environment, and investment related gains on our investments contributed significantly to our profitability in 2021.

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COVID-19 pandemic primarily negatively impacted our product sales (and thus first year premium revenue), and our claims and surrender benefits.

We describe throughout this discussion in more detail areas of our results in which we believe our business may have been impacted by the COVID-19 pandemic.

As described above, we have implemented operational changes and sales practices to mitigate the impact of the COVID-19 pandemic on our business.

Because the COVID-19 pandemic continues to cause quarantines, “stay-at-home” orders and similar mandates for many individuals and businesses requiring them to substantially restrict daily activities and to curtail or cease normal operations globally where we do business, and because of slower-than-expected implementation of COVID-19 vaccines and treatment therapies, we continue to foresee some adverse impact to near-term sales activity and premiums, especially in Latin America, as well as potential continued impact to claims, policy benefits, invested assets and regulatory capital.

We continue to closely monitor developments related to the COVID-19 pandemic to assess its impact on our future results and business.

For an additional discussion of the potential impacts on our business from the COVID-19 pandemic, see Part I, Item 1A – Risk Factors , in this Annual Report on Form 10-K.

Additionally, we continue to be impacted by the following significant economic issues and other developments impacting our business and industry, including the following:

Payment of policyholder benefits for death claims and surrenders is our largest expense.

In 2021, our death claims increased due in large part to COVID-19-related deaths.

Our surrenders decreased by $3.2 million in 2021 from 2020, which we believe was in large part due to our retention efforts.

Operating Expenses are our second largest expense and thus drive our operating results.

Our general operating expenses decreased by $10.3 million in 2021 as compared to 2020.

General operating expenses in 2020 included $10.0 million of severance payments to our former CEO related to the change in control of the Company.

ECONOMIC AND INSURANCE INDUSTRY DEVELOPMENTS

The following significant trends and developments are currently impacting our business and industry:

• Sustained Low Interest Rate Environment.

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◦ Reducing the spread between guaranteed interest rates credited to policyholders and interest earned on supporting assets;

◦ Causing us to reinvest proceeds in lower yielding assets as our fixed maturity investment portfolio, which is primarily invested in callable securities, are called and must be reinvested;

◦ Causing us to reinvest proceeds in lower yielding assets as portions of our fixed maturity investment portfolio, which is primarily invested in callable securities, are called and must be reinvested;

◦ Potentially requiring us to increase our reserves or trigger loss recognition events related to policy liabilities, accelerate amortization of DAC and COIA, and potentially impair intangible assets;

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◦ Changing policyholder behavior, including increasing surrender or withdrawal activity.

Although our investment strategy has not changed, the Company has attempted to mitigate the risk of the low interest rate environment by making new investments in securities of states, municipalities, essential services and corporate issuers as well as identifying investment opportunities in other asset classes such as private equity to increase our yields while maintaining a prudent risk profile for our overall portfolio.

We have attempted to mitigate the risk of the low interest rate environment by making new investments in securities of states, municipalities, essential services and corporate issuers as well as identifying investment opportunities in other asset classes, such as limited partnerships, to increase our yields while maintaining a prudent risk profile for our overall portfolio.

• Impact of COVID-19.

The COVID-19 pandemic has had and continues to have a significant impact on the life insurance industry.

Initially there were hopes for a gradual decline in COVID-19 mortality as the vaccination roll out increased significantly and the pandemic ebbed after more than a year during the summer months of 2021.

However, the emergence of the Delta variant resulted in a significant increase in the number of pandemic-related deaths in 2021, and the emergence of the

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Omicron variant has resulted in additional economic distress in early 2022.

The global life insurance industry has experienced significantly higher reported claims due to the COVID-19 pandemic.

The long-term nature of life insurance products means premiums are not yet capturing the risk that deaths or long-term illness from COVID-19 will likely remain higher than previously estimated.

Additionally, life insurers will need to decide how to underwrite COVID-19 survivors, as the long-term effects of COVID-19 are still unclear.

• Aging population.

According to data from the United Nations, "World Population Prospects:

the 2019 Revision", virtually every country in the world is experiencing growth in the number and proportion of older persons in their population.

Many countries in the world are experiencing growth in the number and proportion of older persons in their population.

As an increasing percentage of the world population reaches retirement age, we believe there will be a greater need for age-related products and we will benefit from increased demand for living benefit products rather than death benefit products, as customers will require cash accumulation to pay expenses to meet their lifetime income needs.

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Reinsurance market dynamics including increased pricing, years of accumulating catastrophic losses, investment market losses and the significant losses expected from the fallout of the COVID-19 pandemic have led to a decline in the availability of reinsurance, tighter terms (such as, for example, pandemic exclusions) and/or increased reinsurance prices.

While we currently cede a limited amount of our primary insurance business to reinsurers, we may find it difficult to obtain reinsurance in the future, forcing us to seek reinsurers who are more expensive to us.

If we cannot obtain affordable reinsurance coverage, either our net exposures will increase or we will have to reduce our underwriting commitments.

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While we currently cede a limited amount of our primary insurance business to reinsurers, we may encounter difficulty in obtaining reinsurance in the future, forcing us to resort to a more expensive reinsurance market.

If we are unable to obtain affordable reinsurance coverage, this may impact our net exposures and the number of underwriting commitments.

• Technology Adoption.

Innovation and digital development strategies continue to evolve and impact all industries, including the insurance industry.

The COVID-19 pandemic has forced companies to virtualize their operations, almost overnight.

It is critical that we embrace these changes for the benefit of our policyholders, agents, employees and stockholders.

• Global Operations.

While our management has extensive experience in writing life insurance policies for foreign residents, changes to foreign laws and regulations and their related application and increased enforcement efforts by foreign governments, along with currency controls affecting our foreign resident insureds, could adversely impact our revenues, results of operations and financial condition.

The onset of the COVID-19 pandemic in 2020 caused companies to adapt to a more digital operations platform, almost overnight.

Therefore, it is critical that we embrace these changes for the benefit of our policyholders, agents, employees and stockholders.

• Climate Change.

Rising climate related losses stemming from the frequency and severity of extreme weather-related events have shone a regulatory spotlight on insurance risk and climate change.

While the majority of our business is related to life insurance products, which may be less impacted by climate change than our property insurance products, we must understand and access accurate climate data in order to make informed decisions with regard to climate risk.

2021 HIGHLIGHTS

COVID-19 PANDEMIC

The overall impact of COVID-19 and its related economic conditions on the Company's financial results continue to be highly uncertain and unpredictable.

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 impact on the Company's results in 2022 or beyond.

Currently, some of the most significant factors affecting our business that could cause our future results to differ significantly from our prior results or forward-looking statements include:

• a higher level of claims due to COVID-19 deaths;

• decreased premium revenue due to disruption to our workforce or distribution channel resulting from required isolation, travel limitations and business restrictions;

• 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;

• volatility in our investment portfolio due to market disruptions caused by COVID-19 related concerns such as inflation.

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We believe that in both 2020 and 2021 we experienced higher than usual death claims due to the impact of COVID-19.

We continue to monitor the impact of the COVID-19 pandemic on our operations.

FINANCIAL HIGHLIGHTS

Federal Income Tax Benefit

The results of operations for the fiscal year ended December 31, 2021 included a significant income tax benefit for the release of most of the uncertain tax position of $43.8 million.

The uncertain tax position from previous years is related to the tax treatment of tax reserves pursuant to Internal Revenue Code ("IRC") Section 807, specifically due to ramifications on the determination of those reserves from our product qualification issues in the past.

The uncertain tax position released during the fourth quarter of 2021 is due to the expiration of the statute of limitations for the year ended December 31, 2017.

Goodwill Impairment

The release of the liability for the uncertain tax position referenced above, increased the carrying value of our Life Insurance segment.

Due to such increase in carrying value and the continued low interest rate environment (which negatively affected the fair value of our net assets by decreasing expected cash flows), we determined that the carrying value of our Life Insurance segment exceeded its implied fair value, resulting in an impairment of goodwill (the excess of the amount paid by us to acquire various life insurance companies over the fair value of their net assets as of the date of acquisition).

Accordingly, as of December 31, 2021, we wrote-off the goodwill and recognized an expense of $12.6 million for 2021.

At December 31, 2021, we had $1.9 billion in total assets, an increase from $1.8 billion at December 31, 2020, and we had $27.3 million in cash.

We did not have any debt at December 31, 2021.

During 2021 , we reported net income of $36.8 million, compared to a net loss of $11.0 million in 2020.

In comparison to 2020, the $47.8 million increase in net income was primarily due to:

↑ $43.8 million tax benefit;

↑ $9.5 million increase in investment related gains;

↓ $10.3 million of general expenses.

The increase in net income was partially offset by:

↑ $4.2 million in death claim benefits;

↑ $6.5 million in future policy benefit reserves;

↑ $12.6 million goodwill impairment.

Revenue Highlights

As discussed above, insurance premiums and investment income are our primary sources of revenue.

• Insurance premiums declined 0.3% in 2021 compared to 2020, totaling $174.7 million and $175.3 million, respectively, as growth in first year premiums in both segments was more than offset by a decline in renewal premiums in our Life Insurance segment.

• Net investment income increased 2.2% in 2021 compared to 2020, totaling $61.5 million and $60.2 million, respectively, driven by a growing asset base.

The average yield on our consolidated investment portfolio was 4.24% for both 2021 and 2020 as diversification of our investment portfolio into limited partnership investments helped offset a challenging investment environment for fixed maturity securities in 2021.

• Investment related gains increased by $9.5 million.

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Benefits and Expenses Highlights

The primary use of our funds is payment of insurance benefits.

Total insurance benefits paid or provided in 2021 increased by 3.6%, from $156.7 million in 2020, to $162.4 million in 2021.

This expense consists primarily of the following:

• Claims and surrender benefits decreased 1.2% in 2021 compared to 2020.

This decrease was primarily due to a decrease in surrender benefits and endowments benefits in the Life Insurance segment, which more than offset the increase in death claims benefits.

The increase in death claim benefits was due primarily to a higher volume of reported claims, including COVID-19 related claims, in addition to an increase in the average death claim amount;

• Future policy benefit reserves, which increased 21.8% in 2021 compared to 2020 as a result of higher sales production and improved persistency.

The other primary use of our funds are the costs of selling our insurance products and other expenses:

• Commissions increased in 2021 compared to 2020, as they are directly related to premium production, and primarily first year premium production, which increased in 2021;

• General expenses decreased 19.2% in 2021 compared to 2020, driven by the change in control and executive severance expenses in 2020;

• Goodwill impairment of $12.6 million in 2021.

Our Operating Segments

We manage our business in two operating segments, Life Insurance and Home Service Insurance.

Life Insurance

International .

For over 45 years, CICA Life Insurance Company of America ("CICA") and its predecessors have issued U.S.

dollar-denominated ordinary whole life insurance and endowment policies to non-U.S.

We completed a novation of all of the international policies issued by CICA to CICA Life Ltd.

("CICA Ltd."), our Bermuda-based insurer, effective July 1, 2018.

In 2018, we novated of all of the international policies issued by CICA to CICA Life Ltd.

("CICA International"), our Bermuda-based insurer.

We distribute our international insurance products through independent marketing organizations and their agents located in the countries in which our policyholders reside.

Endowment product sales are the primary driver of sales in this segment.

The twenty-year endowment is our top selling product, followed by an endowment product that matures at age sixty-five.

Through the domestic market of our Life Insurance segment, we collect renewal premiums on ordinary whole life, credit life insurance, and final expense policies issued to middle- and lower-income families and individuals in certain markets in the Mountain West, Midwest and Southern U.S.

As we discussed in I tem 1.

Business - Strateg ic Initiatives , we will introduce, beginning in Florida, our domestic products and distribution in early 2021.

Our domestic operations in our Life Insurance segment primarily consist of the collection of renewal premiums on ordinary whole life and final expense policies issued to middle- and lower-income families and individuals in certain markets in the Mountain West, Midwest and Southern U.S.

We also sell credit life and credit accident and health insurance domestically.

As we discussed in Item 1.

Business - Strategic Initiatives, we introduced our domestic whole life products to the Florida market in 2021.

Our efforts to recruit agents to sell our products have been slower than we expected and we are re-evaluating our sales distribution approach, initiatives and domestic life insurance offerings in the Florida market in 2022.

The majority of our current domestic revenues are generated by the policies of domestic life insurance companies we have acquired since 1987.

Home Service Insurance

We provide final expense ordinary and industrial life insurance to middle- and lower-income individuals in Louisiana, Mississippi and Arkansas.

These companies provide final expense ordinary and industrial life insurance to middle- and lower-income individuals in Louisiana, Mississippi and Arkansas.

Our policies in this segment are sold and serviced through a home service marketing distribution system utilizing independent agents who work on a route system to collect premiums and service policyholders, and through networks of funeral homes that collect premiums and provide personal policyholder service.

To a much lesser extent, our Home Service Insurance segment also sells limited liability named-peril property policies covering dwellings and content.

In 2021, we added a new whole life product to this market that has higher allowable face values and a new critical illness coverage product which we sell through independent agents.

To a much lesser extent, our Home Service Insurance segment also sells property insurance policies covering dwellings and content.

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CONSOLIDATED RESULTS OF OPERATIONS

A discussion of consolidated results is presented below, followed by a discussion of segment operations and financial results by segment.

Our insurance operations are the primary focus of the Company, as those operations generate most of our income.

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Total $ 411,329,185 26,470 $ 354,172,946 28,339

We issued $354.2 million in insurance face amounts in 2020 as compared to $392.3 million in 2019.

As discussed above, our first-year sales were impacted by the COVID-19 pandemic.

We issued 28,339 new policies in 2020, as compared to 25,604 new policies in 2019.

The increase was driven by policies issued by our Home Service Insurance segment, which have a significantly lower face value than policies issued in our Life Insurance segment.

The number of policies issued in the Life Insurance segment decreased 1.1% in 2020 compared to 2019.

While the total number of new business applications for our Life Insurance segment decreased during 2020 compared to 2019, the number of applications progressively increased during the second half of the year.

In the third quarter, new policies issued increased 53% from the second quarter while fourth quarter policies issued increased 36% from the third quarter.

The increase in applications was primarily due to enhancements to our business operations and sales practices to account for the impact of the COVID-19 pandemic, including sales promotions and campaigns, focused training on virtual selling and strategically prioritizing selling lower face amount policies, which typically have less stringent underwriting requirements and, in some cases, may not require the completion of medical tests, as many of our markets remain in lockdown due to the COVID-19 pandemic.

Although applications increased during the third and fourth quarters, due to these enhancements, average policy face amount declined by 4.8% and the amount of insurance issued declined by 5.8% during 2020 compared to 2019 for the Life Insurance segment.

The number of policies issued in the Home Service Insurance segment increased 12.5% in 2020 compared to 2019.

The increase in new business applications in our Home Service segment was driven primarily by the introduction of a new sales campaign targeted at existing policyholders in the third quarter that emphasized higher volume selling at lower average face amounts.

In doing so, we focused on sales of additional benefits for our existing policyholders, which have lower face values, thus leading to a 24.8% decline in average policy face values and a 15.4% decline in amount of insurance issued as compared to 2019.

Despite the increase in policies issued in 2020, our Home Service Insurance segment continued to be negatively impacted by the COVID-19 pandemic.

We had temporary office closures in Louisiana during the second and third quarters due to the COVID-19 pandemic and Hurricane Laura, and we also curtailed the sales of certain product offerings that require extensive person-to-person sales interaction due to the COVID-19 pandemic.

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Revenues are primarily generated from insurance premium revenues and investment income on invested assets.

Total insurance issued increased $57.2 million, or 16.1%, in 2021 compared to 2020 as both the Life Insurance and Home Service Insurance segments experienced growth in amount of insurance issued.

The number of policies issued in the Life Insurance segment increased 13.2% in 2021 compared to 2020.

We believe the increase was primarily due to enhancements to our business operations and sales practices to adapt to 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 2021.

In addressing the decreasing first year premiums we have seen in recent years in this segment, we have prioritized recruiting new independent contractors in 2021 and we believe we have seen the impact of these efforts in 2021.

We believe that our policies issued and amount of insurance issued in 2020 were negatively impacted by the COVID-19 pandemic.

The number of policies issued in the Home Service Insurance segment decreased 9.3% in 2021 compared to 2020;

however, the amount of insurance issued increased by 32.4% due to higher average policy face amounts.

The increase in higher average policy face amounts issued is 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.

In addition, our Home Service Insurance segment was negatively impacted by the COVID-19 pandemic in 2020 as we had temporary office closures in Louisiana during the second and third quarters of 2020 due to the COVID-19 pandemic and Hurricane Laura, and we also temporarily curtailed the sales of certain product offerings that require extensive person-to-person sales interaction due to the COVID-19 pandemic.

Revenues are primarily generated from insurance premiums and investment income on invested assets.

Years ended December 31,

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Net investment income 61,495 60,197 59,531

Realized investment gains 1,502 5,249 108

Investment related gains (losses) 10,991 1,502 5,249

Other income 3,332 1,828 1,418

Total revenues $ 250,546 238,856 250,545

Premium Income.

Premium income derived from life, accident and health, and property insurance sales decreased 4.9% during 2020 compared to 2019.

The decrease in 2020 was driven primarily by a decline in renewal and first year premiums in our Life insurance segment as discussed in "2020 Highlights".

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Renewal premiums consisted of 89.8% and 90.9% of our total premium revenue in 2021 and 2020, respectively.

Years ended December 31,

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Total premiums $ 174,728 175,329 184,347

As discussed in “2020 Highlights”, we believe that our consolidated first year premium revenue was negatively impacted by the COVID-19 pandemic.

The decrease in renewal premiums in our Life Insurance segment resulted from a decline in our in force business in this segment over the past few years, which is due in part to changes we made to our products and distribution.

Renewal premiums in our Home Services segment were strong but were negatively impacted by catastrophic reinsurance premiums paid in the second half of 2020, as described below.

As discussed above, despite higher first year premiums in both our segments and higher renewal premiums in our Home Service Insurance segment, total premiums declined due to lower renewal premiums in our Life Insurance segment.

A decrease in property insurance premiums resulting from higher catastrophic reinsurance reinstatement premiums in 2021 also contributed to the lower renewal premiums.

We believe that our consolidated first year premium revenue was negatively impacted by the COVID-19 pandemic in both 2020 and 2021.

Net Investment Income.

Net investment income increased 1.1% to $60.2 million in 2020 compared to $59.5 million in 2019 driven by a growing asset base derived from cash flows from our insurance operations.

The annualized yield decreased by twelve basis points in 2020 compared to 2019 as we continue to face a challenging investment environment for fixed maturity assets, which account for the majority of our investment portfolio.

Net investment income performance is summarized as follows.

Our net investment income and investment performance is summarized as follows:

Years ended December 31,

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2021 2020 2019

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

Average invested assets, at amortized cost 1,420,129 1,365,036 1,300,755

Yield on average invested assets 4.24 % 4.36 % 4.17 %

The sustained low interest rate environment of the past several years has required us to reinvest a portion of our portfolio at lower interest rates, which led to a lower portfolio yield in 2020.

As part of the ongoing process of managing our portfolio and optimizing performance, we are continuing to identify and invest in new asset classes, including private equity.

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Investment income from fixed maturity securities accounted for approximately 87.6% of total investment income for the year ended December 31, 2020 and 87.8% for 2019.

Years ended December 31,

(In thousands)

2020 2019 2018

Gross investment income:

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Net investment income $ 61,495 60,197 59,531

Investment income from fixed maturity securities increased 1.5% in 2020 compared to 2019.

We have strategically increased our exposure to both private and public equity this year to improve our overall investment performance, endeavoring to increase our portfolio yields in a prudent manner.

In addition, the increase in the policy loans asset balance, which represents policyholders utilizing their accumulated policy cash value to pay for premiums, contributed to the increase in investment income for 2020.

Realized Gains (Losses) on Investments.

Realized investment gains and losses are as follows:

Average invested assets, at amortized cost $ 1,451,701 1,445,087 1,365,036

Yield on average invested assets 4.24 % 4.24 % 4.36 %

Net investment income increased 2.2% to $61.5 million in 2021 compared to $60.2 million in 2020 driven by a growing asset base.

Investment income from fixed maturity securities accounted for a majority of our investment income.

Long-term investment income continued to increase as our limited partnership asset base grew, in addition to some early distribution income.

The annualized yield remained level in 2021 compared to 2020.

The sustained low interest rate environment of the past several years has required us to reinvest a portion of our portfolio at lower interest rates;

however, diversification of our investment portfolio into limited partnership investments helped offset a challenging investment environment for fixed maturity securities.

As we continue to face a challenging investment environment for fixed maturity assets, which account for the majority of our investment portfolio we have been investing in new asset classes, including limited partnerships;

however, insurance regulations limit the amount we can invest in these alternative investments.

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Investment Related Gains (Losses).

I nvestment gains and losses are as follows:

Years ended December 31,

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2021 2020 2019

Realized investment gains (losses):

Sales, calls and maturities:

Fixed maturity securities $ (112) 1,927 1,792

Real estate — 5,513 —

Property and equipment 9 (48) (80)

Other long-term investments 9 — —

Investment related gains (losses):

Realized investment gains (losses) $ 2,977 (94) 7,392

Change in fair value of equity securities 376 1,596 962

Change in fair value of limited partnerships 7,452 — —

Change in credit loss allowance 186 — —

Other-than-temporary impairments ("OTTI") — — (3,105)

Fixed maturity securities — — (776)

Real estate held for sale — (3,105) —

Realized losses on OTTI — (3,105) (776)

Net realized investment gains $ 1,502 5,249 108

In 2020, we recorded realized gains of $1.6 million primarily related to fair value changes in a preferred stock exchange traded fund investment owned at December 31, 2020.

In 2019, we recognized a gain of $1.9 million related to the redemption of two fixed maturity securities.

We also recorded a net realized gain of $2.4 million from Citizens-owned real estate transactions in 2019.

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Investment related gains (losses), net $ 10,991 1,502 5,249

Net investment related gains increased by $9.5 million in 2021 from 2020, helping drive our net income improvement in 2021.

A significant portion of these gains related to fair value changes in our limited partnership investments.

In addition, the Company realized a gain of $1.0 million on the sale of its former training facility near Austin, Texas during 2021 with a gross sale price of $3.8 million.

The facility was owned by Citizens and was held in Other Non-Insurance Enterprises.

These increases were partially offset by a decrease in fair value on our equity securities.

BENEFITS AND EXPENSES

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Amortization of cost of insurance acquired 1,206 1,816 1,546

Goodwill impairment 12,624 — —

Total benefits and expenses $ 257,234 251,173 244,800

Claims and Surrenders.

Death claim and surrender benefits are our primary use of cash.

As noted in the table below, claims and surrenders increased 13.4% from $106.8 million in 2019 to $121.1 million in 2020.

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Claims and Surrenders.

Payment of death claims and surrender benefits is our primary use of cash.

Claims and surrenders decreased 1.2% from $121.1 million in 2020 to $119.7 million in 2021.

Years ended December 31,

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Total claims and surrenders $ 119,735 121,145 106,827

• Death claim benefits increased 8.3% in 2020.

The increase in 2020 was concentrated in our Home Service Insurance segment and we believe likely reflected increased mortality due to the COVID-19 pandemic in our customer base in this segment.

• Death claim benefits increased 15.4% in 2021 compared to 2020.

The increases were due to both a higher volume, including COVID-19 related deaths, and a higher average amount of reported claims.

Mortality experience and COVID-19 impacts will continue to be closely monitored by the Company.

• Surrender benefits increased 11.2% in 2020.

• Surrender benefits decreased 5.8% in 2021 compared to 2020.

The decrease in surrender benefits is primarily within our Life Insurance segment.

Surrender benefits have been high in recent years due to international policies that have been in force for an extended period and have little or no associated surrender charges, but we have focused our efforts on retaining policyholders and believe we have begun to see positive benefits from these efforts starting in the second half of 2021.

Surrender benefits represented less than 1.1% of total direct life insurance in force of $4.6 billion as of December 31, 2021.

The increase in surrender benefits is primarily within our Life Insurance segment.

A significant portion of surrender benefits relates to policies that have been in force and have little or no associated surrender charges.

• Matured endowment benefits increased 42.5% in 2020 compared to 2019.

These increases were anticipated based upon the dates when our policy endowment contracts were sold and their expected maturities as set forth in their contracts.

• Property claim expenses increased 79.6% in 2020 compared to 2019 due to the three hurricanes that hit Louisiana in the second half of 2020.

• Property claim expenses decreased 24.8% in 2021 compared to 2020 due to fewer hurricanes impacting Louisiana in 2021.

Increase in Future Policy Benefit Reserves.

The change in future policy benefit reserves decreased 28.3% in 2020 compared to 2019.

Future policy benefit reserves decrease as our block of in force business decreases and thus the decline was driven largely by lower policyholder retention.

In 2019, changes in actuarial valuation estimates associated with the conversion to a new actuarial valuation system also contributed $2.4 million to the decline.

Future policy benefit reserves increased 21.8% in 2021 compared to 2020 due to better persistency and higher first year sales in both of our segments.

Policyholder Dividends.

Most of our Life Insurance segment's international policies contain guaranteed cash values and are participating (i.e., provide for cash dividends as apportioned by our Board of Directors).

The policyowner has several options with regards to the policy dividends and annual premium benefits, which include, among other things, electing to receive cash, crediting such amounts towards the payment of premiums on the policy, leaving such amounts on deposit with the Company to accumulate at a defined interest rate or assigning them to a third-party which would allow for participation in the CISIP, as described in Item 1 - Business - International Products.

Policyholders' dividends decreased by 7.5% in 2020 as compared to 2019 due to a lower in force block of business and actions taken by the Company to reduce discretionary dividends on existing international policies in response to the sustained low interest rate environment.

Most of our Life Insurance segment's international policies contain guaranteed cash values and are participating (i.e.

, provide for cash dividends as apportioned by our Board of Directors).

Policyholders' dividends increased by 10.6% in 2021 as compared to 2020 due to increased sales in 2021 and improved policyholder retention.

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 thus the decrease in commissions in 2020 as compared to 2019 was due to lower sales in 2020.

Other General Expenses.

Total general expenses increased 10.8% in 2020 compared to 2019 due primarily to change in control and severance expenses as described above, partially offset by a $2.2 million reduction in our 7702 compliance best estimate liability and decreases in audit and long-term incentive compensation expenses.

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We perform an expense study on an annual basis, utilizing an enterprise-wide time study, and we adjust cost allocations among entities as needed based upon this review.

Any allocation changes are reflected in the segment operations, but do not impact consolidated expenses.

Capitalization of DAC.

commission rates are higher than renewal commission rates.

Commissions fluctuate directly in relation to sales and thus the increase in commissions in 2021 as compared to 2020 was due to higher sales in 2021.

Other General Expenses.

Total general expenses decreased $10.3 million, or 19.2%, in 2021 compared to 2020.

Other general expenses in 2020 included $10.0 million of non-recurring expenses related to change-in-control severance expenses.

We continue to work on improving our controllable operating expenses and in 2021, we had lower audit and long-term incentive compensation expenses compared to 2020.

Capitalization of Deferred Policy Acquisition Costs ("DAC").

We capitalize costs related to successful sales of our insurance products, which include certain commissions, policy issuance costs, and underwriting and agency expenses.

These costs vary based upon amounts or premiums received related to new and renewal business.

Capitalized DAC was $22.7 million and $20.5 million in 2021 and 2020, respectively.

Decreases in capitalized amounts are in line with the decreases noted in sales activity.

These costs will vary based upon successful efforts related to newly issued policies and renewal business.

Increases in capitalized amounts are in line with the increases in new sales activity.

Significantly lower amounts are capitalized related to renewal business in correlation with the lower commissions paid on that business compared to first year business, which has higher commission rates.

Amortization of DAC.

Amortization of Deferred Policy Acquisition Costs.

Amortization of DAC totaled $25.0 million and $27.4 million in 2021 and 2020, respectively.

The decrease in amortization is a result of better persistency and sales.

Amortization of DAC is impacted by new business, persistency and the level of surrenders.

Additionally, 2019 included $1.4 million of amortization associated with the conversion to a new actuarial valuation system.

Amortization of Cost of Insurance Acquired ("COIA").

Amortization of COIA increased in 2020 compared to 2019 due primarily to an update in our Home Service Insurance segment's expected earned rate assumptions used within annuity models that resulted in additional amortization of approximately $0.2 million in 2020.

Amortization of COIA decreased in 2021 compared to 2020 due primarily to an update in our Home Service Insurance segment's expected earned rate assumptions used within annuity models that resulted in additional amortization of approximately $0.2 million in 2020.

Goodwill Impairment.

We recognized a goodwill impairment in our Life Insurance segment of $12.6 million in 2021.

The impairment was triggered by increases in our carrying value of the Life Insurance segment due to the release of a $43.8 million uncertain tax position in the fourth quarter of 2021 following the expiration of the statute of limitations for the tax year ended December 31, 2017.

Federal Income Tax.

Federal income tax benefit of $1.3 million in 2020 and federal income tax expense of $7.1 million in 2019 resulted in effective tax rates of 10.8% and 126.0%, respectively.

Subsequent to the novation of all of the international policies issued by CICA to CICA Ltd., the earnings of CICA Ltd.

are subject to Subpart F of the IRC and, therefore, are included in Citizens' taxable income.

The Subpart F income inclusion generated $2.2 million of federal income tax expense in 2020, as compared to $5.9 million in 2019.

The decrease in tax from Subpart F income was partially offset in 2019 and 2020 by foreign income tax rate differential of $1.6 million and $1.8 million, respectively.

Federal income tax benefits of $43.5 million in 2021 and $1.3 million in 2020 resulted in effective tax rates of 650.0% and 10.8%, respectively.

The significant tax benefit in 2021 is comprised of the release of the uncertain tax position of $43.8 million related to the expiration of the statute of limitations for the year ended December 31, 2017.

Differences between our effective tax rate and the statutory tax rate result from income and expense items that are treated differently for financial reporting and tax purposes.

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SEGMENT OPERATIONS

Our business is comprised of two operating business segments, as detailed below.

As described above, our business is comprised of two operating business segments:

• Life Insurance

• Home Service Insurance

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These segments are reported in accordance with U.S.

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Total income (loss) before federal income taxes $ (6,688) (12,317) 5,745

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LIFE INSURANCE

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dollar-denominated amounts to non-U.S.

residents in more than 75 countries through almost 1,000 independent marketing consultants as of December 31, 2020.

residents in more than 70 countries through almost 1,000 active independent marketing consultants as of December 31, 2021.

Years ended December 31,

1 unchanged sentence

2021 2020 2019

Premiums $ 129,202 137,666 141,146

Life insurance $ 125,558 128,900 136,941

Accident and health insurance 500 301 725

Net investment income 47,216 45,885 44,779

Realized investment gains, net 1,340 6,795 358

Investment related gains, net 9,176 1,340 6,795

Other income 3,362 1,806 1,412

11 unchanged sentences

Amortization of cost of insurance acquired 343 460 492

Goodwill impairment 12,624 — —

Total benefits and expenses 184,894 168,338 178,857

Income before income tax expense $ 9,895 11,795 12,085

Premium revenues decreased by 6.1% in 2020 compared to 2019 as first year premiums decreased by 11.1%, while renewal premiums declined by 5.7%.

While first year premiums declined sharply in 2020 due to the COVID-19 pandemic, we experienced progressive improvement in our new business production for our international business during the second half of the year as described above and in the fourth quarter we experienced the highest level of first year sales over the last three years due to executing on our strategic initiatives.

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Life Insurance premium breakout is detailed below.

Income (loss) before federal income taxes $ 918 9,894 11,795

Income before federal income tax expense decreased in 2021 as compared to 2020 due primarily to the goodwill impairment.

Life Insurance Segment premium breakout is detailed below.

Years ended December 31,

4 unchanged sentences

Total premium $ 126,058 129,202 137,666

92% of our Life Insurance premium revenue in each of the past three years was generated by renewal premiums.

The Company has taken actions over the past few years to pursue long-term growth and stability, including reducing discretionary dividends on existing international policies in response to the sustained low interest environment and making changes to our distribution, which has negatively impacted sales levels.

These changes also included the discontinuance of new business in Brazil in April 2018, following the review of our international business model and regulatory risks.

Brazil had been one of our top premium-producing countries in our international life insurance business for the prior several years.

Finally, Venezuela, which has historically been one of our top premium-producing countries, has experienced prolonged economic and political turmoil, which has negatively impacted our sales in the country, decreasing approximately 10% in each of 2020 and 2019.

As discussed in Part I.

Item 1, Business - Strategic Initiatives, we are beginning to implement on our growth strategies in the Life Insurance segment, by expanding our product offerings to the U.S.

Endowment sales represent a significant portion of our new business sales internationally and totaled approximately $8.6 million and $9.3 million, representing approximately 82.7% and 79.5% of total first year premiums in 2020 and 2019, respectively.

Most of our life insurance policies contain a policy loan provision, which allows the policyholder to use the accumulated cash value of a policy to pay premiums.

These accumulated cash values can also be taken as a cash loan from the policy at the request of the policyholder and are secured by the policy values.

The policy loan asset balance increased 2.0% from 2019 to 2020 and remains at the same approximate ratio to life reserves as noted in prior years.

International Premiums.

The following table sets forth, for our top five producing countries, our direct premiums from our international life insurance business for the periods indicated.

Over 90% of our Life Insurance premium revenue in both 2021 and 2020 was generated by renewal premiums.

While first year premiums increased by 9.8% in 2021 as compared to 2020, overall premium revenue decreased by 2.4% in 2021 compared to 2020 as renewal premiums declined by 3.5%.

We believe that the increase in first year premiums is the result of actions we have taken over the past 18 months in executing on our strategic initiatives, including sales promotions and campaigns, focused training on virtual selling, and recruiting new independent contractors in 2021.

Renewal premiums have been declining over the last several years, due in part to our

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withdrawal from Brazil and also due to one of our top distributors in Venezuela leaving our Company and as we discussed in Item 3 - Legal Proceedings , we believe is illegally competing with us and stealing our trade secrets and business.

We began to stem the decline of renewal premiums in 2021, which we believe is due in part to our retention efforts that we also discuss in Part I.

Item 1, Business - Strategic Initiatives.

Endowment sales represent a significant portion of our new business sales internationally and totaled approximately $10.0 million and $8.6 million in 2021 and 2020, respectively, representing approximately 87.2% and 82.7% of total first year premiums in 2021 and 2020, respectively.

International Premiums.

The following table sets forth, for our top five producing countries, our direct premiums from our international life insurance business for the periods indicated.

Years ended December 31,

2 unchanged sentences

Colombia $ 24,829 20.2 % $ 25,783 20.4 % $ 26,768 20.1 %

Venezuela 19,956 15.8 22,353 16.8 24,783 18.0

Taiwan 19,042 15.5 19,078 15.1 19,403 14.6

Venezuela 17,788 14.5 19,956 15.8 22,353 16.8

Ecuador 13,115 10.7 13,301 10.5 14,198 10.6

3 unchanged sentences

Total $ 122,805 100.0 % $ 126,285 100.0 % $ 133,353 100.0 %

Sales from Colombia, Venezuela and Taiwan represented the majority of the new and renewal business premiums in 2020 and 2019.

Overall, all of our top five countries listed above experienced a decline in premium levels from 2019 to 2020, with the biggest decrease occurring in Venezuela.

As we discussed above, our in force business, in terms of policy counts and amount of in force insurance, has been declining for several years due to changes we made to our products and distribution over the last few years, which resulted in the pace of new policies issued lagging the number of policies terminated from death, surrender or lapse.

We believe the economic uncertainty in Venezuela contributed to the larger decline in that country.

The five countries listed above represented the majority of the new and renewal premiums in both 2021 and 2020.

All experienced slight declines in 2021 as compared to 2020, which is due to the overall decline in our renewal business.

However, premiums from Venezuela continue to decrease more than the other countries and decreased by 10.9% from 2020 to 2021.

One of our largest distributors, who is based in Venezuela, has left our Company and based upon discovery conducted in such lawsuit, we believe is illegally competing with us and negatively affecting our business in Venezuela.

Domestic Premiums.

Domestic premiums in our Life Insurance segment were $5.1 million in 2020, down from $6.2 million in 2019.

We discontinued new sales of domestic ordinary whole life and endowment life insurance products within our Life Insurance segment in 2017;

therefore, the majority of the premium recorded in 2018, 2019 and 2020 is related to renewal business.

We plan to expand our Life Insurance segment to the Hispanic market in the U.S and expect to begin selling in this market during 2021 as detailed above under Item 1 - Business - Strategic Initiatives.

Domestic premiums in our Life Insurance segment were $5.0 million in 2021, compared to $5.1 million in 2020.

The majority of the premium recorded in 2020 and 2021 is related to renewal business as we discontinued new sales of domestic ordinary whole life and endowment life insurance products within our Life Insurance segment in 2017.

In 2021, we introduced new domestic whole life products and distribution to expand our Life Insurance segment to the Hispanic market in Florida.

However, our efforts to recruit agents to sell our products have been slower than we expected and we are re-evaluating our sales distribution approach, initiatives and domestic life insurance offerings in the Florida market in 2022.

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Net Investment Income.

Net investment income in our Life Insurance segment increased 2.9% in 2021 compared to 2020 due to continued growth in average invested assets.

We experienced a decrease in portfolio yield of 13 basis points in this segment in 2020 compared to 2019 as we continue to face a challenging investment environment for fixed maturity assets, which account for the majority of our investment portfolio.

See the Investments section below for more detailed information on our investments.

We experienced a decrease in portfolio yield of two basis points in this segment in 2021 compared to 2020 as we continue to face a challenging investment environment for fixed maturity assets, which account for the majority of our investment portfolio.

Years ended December 31,

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Annualized yield on average invested assets 4.26 % 4.28 % 4.41 %

Realized Investment Gains, Net.

T he realized gain for 2020 was primarily due to the appreciation in the value of a preferred stock exchange traded fund purchased during the first quarter as we were able to take advantage of the market dislocation to identify an attractive risk-adjusted investment opportunity.

Realized gains for 2019 were primarily due to a realized gain of $5.5 million during the first quarter of 2019 related to the sale of our former corporate headquarters in Austin, Texas and $1.3 million gain on fixed maturity redemptions above par.

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Investment Related Gains, Net.

T he investment related gain for 2021 was primarily due to the appreciation in the value of our limited partnership investments.

The investment related gain for 2020 was primarily due to the appreciation in value of a preferred stock exchange traded fund purchased during the first quarter of 2020 as we were able to take advantage of the market dislocation to identify an attractive risk-adjusted investment opportunity.

Claims and Surrenders.

A breakout of death claim and surrender benefits for the Life Insurance segment is detailed below.

A breakout of the primary claims and surrender benefits for the Life Insurance segment is detailed below.

Years ended December 31,

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75.7% of our claims and surrender benefits in 2021 and 78.0% in 2020 were related to payment of surrender benefits and matured endowment benefits.

Policy surrenders increased 13.4% in 2020 as compared to 2019 and matured endowment benefits increased by 43.6% in 2020.

These expenses have been increasing over the last several years, which is expected, due to the aging of this block of business - a significant portion of surrenders relates to policies that have been in force and have little to no associated surrender charges and endowment products reaching their stated maturities.

Policy surrenders decreased 5.3% in 2021 as compared to 2020 and matured endowment benefits decreased by 6.0% in 2021 as compared to 2020.

Surrender benefits have been higher than usual the last several years.

However, policy surrenders decreased as we have instituted new programs seeking to curb surrenders.

Matured endowment benefits had been increasing over the last several years

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but leveled off this year, which is expected, due to endowment products reaching their stated maturities.

These charges are within expected levels.

The other key component of claims and surrender benefits is death claim benefits, which decreased 10.7% in 2020 compared to 2019.

The other key component of claims and surrender benefits is death claim benefits, which increased 36.2% in 2021 compared to 2020 due to both a higher volume, including COVID-19 related deaths, and a higher average amount of reported claims.

Mortality experience is closely monitored by the Company as a key performance indicator and these amounts were within expected levels.

Increase in future policy benefit reserves.

The change in future policy benefit reserves increased 13.9% in 2021 compared to 2020 due to better persistency.

In addition, the change in future policy reserves for 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 of 2021.

HOME SERVICE INSURANCE

We operate in the Home Service Insurance market through our subsidiaries Security Plan Life Insurance Company ("SPLIC"), Magnolia Guaranty Life Insurance Company ("MGLIC") and Security Plan Fire Insurance Company ("SPFIC"), and focus on the life insurance needs of the middle- and lower-income markets, primarily in Louisiana, Mississippi and Arkansas.

Our policies are sold and serviced through a home service insurance marketing distribution system of 415 independent agents who work on a debit route system and through funeral homes that sell policies, collect premiums and service policyholders.

Our Home Service Insurance products consist primarily of small face amount ordinary whole life and pre-need policies, which are designed to fund final expenses for the insured, primarily consisting of funeral and burial costs.

To a much lesser extent, our Home Service Insurance segment sells limited-liability, named-peril property policies

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covering dwellings and contents.

We provide $30,000 maximum coverage on any one dwelling and contents, while content only coverage and dwelling only coverage are both limited to $20,000.

We provide final expense ordinary life insurance and annuity products primarily to middle- and lower-income individuals and families in Louisiana, Mississippi and Arkansas, a demographic that has been disproportionally impacted by the COVID-19 pandemic.

In June 2021, we added a new whole life product to this market that has higher allowable face values;

and in the fourth quarter of 2021, we added a new critical illness insurance product.

Our Home Service Insurance segment also sells property insurance policies covering dwellings and contents with maximum coverage of $30,000 per dwelling.

Years ended December 31,

1 unchanged sentence

2021 2020 2019

Premiums $ 46,128 46,681 46,714

Life insurance $ 44,243 41,428 41,410

Accident and health insurance 750 718 658

Property insurance 3,677 3,982 4,613

Net investment income 13,224 13,051 13,058

Realized investment gains (losses), net 223 1,470 (46)

Other income (loss) 19 4 (1)

Investment related gains, net 618 223 1,470

Other income 7 19 4

Total revenue 62,519 59,421 61,213

12 unchanged sentences

Income (loss) before income tax expense $ (2,036) (3,470) 1,181

First year premiums in this segment were negatively impacted by the COVID-19 pandemic and thus declined slightly in 2020 as compared to 2019.

We had temporary office closures in Louisiana during the second and third quarters due to the COVID-19 pandemic and we have also had to curtail the sales of certain product offerings that require extensive person-to-person sales interaction.

Premiums were also negatively affected due to three hurricanes in Louisiana during 2020 that increased reinsurance premiums paid to our reinsurers, which we net against premium revenue.

The following table sets forth our direct premiums by state for the periods indicated.

Years ended December 31,

(In thousands, except for %)

2020 2019 2018

Louisiana $ 42,950 90.2 % $ 42,867 90.2 % $ 42,898 90.2 %

Mississippi 1,955 4.1 2,037 4.3 2,105 4.4

Arkansas 1,690 3.6 1,660 3.5 1,675 3.5

Other states 995 2.1 938 2.0 857 1.9

Total premiums $ 47,590 100.0 % $ 47,502 100.0 % $ 47,535 100.0 %

Our net loss before income tax expense decreased by $1.4 million in 2021 due primarily to higher first year and renewal life insurance premiums, which drove the total segment revenue increase of 5.2% in 2021 compared to 2020.

The increase was partially offset by higher reinstatement premiums for reinsurance coverage from the impact of Hurricane Ida in 2021.

First year life premiums increased due mainly to our 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

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segment, which has a higher maximum face value.

Renewal premiums increased during 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.

Our benefits and expenses in this segment increased by $1.7 million in 2021 as compared to 2020, primarily due to higher claims and surrenders, as well as an increase in future policy benefit reserves in 2021 due to better persistency and higher first year sales, partially offset by a decrease in other general expenses.

Claims and Surrenders.

A breakout of death claim and surrender benefits for the Home Service Insurance segment is detailed below.

A breakout of claims and surrender benefits for the Home Service Insurance segment is detailed below.

Years ended December 31,

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The majority of claims and surrender benefits in our Home Service Insurance segment relate to death claim benefits.

Death claim benefits increased 15.3% in 2020 compared to 2019 due primarily to the COVID-19 pandemic and the average dollar amount of claims incurred.

Death claim benefits increased 9.5% in 2021 compared to 2020 due to both a higher volume, including COVID-19 related deaths, and a higher average amount of reported claims.

Mortality experience is closely monitored by the Company and can fluctuate based on reported claims as a key performance indicator.

The other primary claims and surrender benefits were:

• Surrender benefits decreased in 2020 compared to 2019 but were within anticipated ranges based on management expectations.

• Property claims increased materially in 2020 compared to 2019.

During the third quarter of 2020, SPFIC was impacted by Hurricane Laura, a Category 4 hurricane that caused significant damage in Louisiana.

During the fourth quarter of 2020 SPFIC was also impacted by Hurricanes Delta and Zeta, both of which were Category 2 storms that also hit Louisiana.

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

The reinsurance agreement specifies a maximum coverage per event of $11.0 million and a retention level of $0.5 million per event.

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

however, any claims in excess of $11.0 million would have to be paid by SPFIC.

Hurricane Zeta has been a less significant storm and at this point, we do not expect the impact of this storm to have a material effect on our consolidated financial statements.

Property claims decreased in 2021 compared to 2020.

The Company was impacted by Hurricane Ida in 2021 and by Hurricanes Laura, Delta and Zeta in 2020.

We have a reinsurance agreement that covers catastrophic events such as hurricanes.

This agreement contains a maximum coverage of $11.0 million per event and a retention level of $0.5 million per event.

The decreased hurricane activity in 2021 helped reduce our property claims in 2021 compared to 2020.

Increase in future policy benefit reserves.

The change in future policy benefit reserves increased 71.7% in 2021 compared to 2020 due to higher sales and improved retention in 2021.

Other general expenses.

Other general expenses decreased in 2021 compared to 2020 as a result of a released tax compliance best estimate liability of $1.8 million and lower expenses due to changes we made to our distribution structure in 2020.

OTHER NON-INSURANCE ENTERPRISES

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2021 2020 2019

Income (loss) before income tax expense (18,741) (7,231) (7,587)

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.

The loss reported for 2020 was negatively impacted by the change in control costs described above, which contributed to the $19.9 million of other general expenses.

The loss in 2019 was impacted by an impairment loss of $3.1 million in connection with reclassifying our Citizens Academy training facility located near Austin, Texas as real estate held for sale.

This facility is no longer being used by the Company and is for sale.

Income (loss) before federal income tax $ (5,570) (18,741) (7,231)

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Our investments are an integral part of our business success, as we invest the majority of premiums collected to pay for future benefits and rely on net investment income for our ongoing operations.

The administration of our investment portfolio is handled by our management and a third-party investment manager, pursuant to Board-approved investment guidelines, with all trading activity approved by each board of Citizens and its insurance subsidiaries.

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 investment related gains or losses, while expenses consist of other general expenses.

The loss reported for 2021 declined as other general expenses decreased in 2021 due to the $10.0 million in severance payments paid in 2020 related to our change in control.

The Company also sold its former training facility located near Austin, Texas during 2021, resulting in a gain on the sale of $1.0 million.

Our investments play a significant role in the success of our business, as we invest the majority of premiums collected to pay for future benefits and rely on net investment income for our ongoing operations.

The administration of our investment portfolio is handled by our management and a third-party investment manager, pursuant to Board-approved investment guidelines.

State insurance statutes prescribe the quality and percentage of the various types of investments that may be made by insurance companies and generally permit investment in qualified state, municipal, federal and foreign government obligations, high quality corporate bonds, preferred and common stock, mortgage loans and real estate within certain specified percentages.

Our investment guidelines comply with the applicable statutes and require that fixed maturity securities, both government and corporate, are investment grade and comprise a majority of the investment portfolio.

Our investment guidelines comply with the applicable statutes and thus fixed maturity securities comprise a majority of our investment portfolio.

The assets are intended to mature in accordance with the average maturity of the insurance products and to provide the cash flow for our insurance company subsidiaries to meet their respective policyholder obligations and operating expenses.

The following table shows the carrying value of our investments by investment category and cash and the percentage of each to total invested assets.

Years ended December 31,

As of December 31,

(In thousands, except for %)

12 unchanged sentences

Total fixed maturity securities 1,470,617 89.0 1,489,383 89.8

Short-term investments — — 1,301 0.1

Cash and cash equivalents 27,294 1.7 34,131 2.1

4 unchanged sentences

Total cash and invested assets $ 1,650,461 100.0 % $ 1,658,799 100.0 %

(1) Includes $164.0 million and $188.1 million of securities guaranteed by third parties for the years ended December 31, 2020 and 2019, respectively.

(1) Includes $158.6 million and $164.0 million of securities guaranteed by third parties at December 31, 2021 and 2020, respectively.

(2) Includes $133.7 million and $139.8 million of U.S.

Government agencies and government-sponsored enterprises for the years ended December 31, 2020 and 2019, respectively.

Government agencies and government-sponsored enterprises at December 31, 2021 and 2020, respectively.

During 2021, we continued repositioning our portfolio into more diversified holdings as part of our investment management strategy.

As investments matured or were called, the Company increased investments in corporate securities, which now represent 54.0% of our cash and invested assets as of December 31, 2021 as compared to 52.8% at December 31, 2020.

The Company has also decreased its exposure to the municipal bond market, which now represents 24.7% of the investment portfolio in 2020 compared to 35.1% in 2019.

Cash and cash equivalents decreased as of December 31, 2020 compared to December 31, 2019 due to timing of cash inflows and investments of cash into marketable securities.

The Company has also decreased its exposure to the municipal bond market, which represents 23.3% of the investment portfolio as of December 31, 2021 compared to 24.7% as of December 31, 2020.

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Real estate and other long-term investments increased to $29.9 million as of December 31, 2020 as compared to $3 million as of December 31, 2019 primarily due to investments of $18.1 million in private equity funds and other alternative investments and payment of $8.8 million to a Rabbi Trust for the benefit of Mr.

Kolander representing the severance payments due to him under his employment agreement and Chief Executive Officer Separation of Service and Consulting Agreement in connection with his resignation following the change in control.

Cash and cash equivalents decreased as of December 31, 2021 compared to December 31, 2020 due to timing of cash inflows and investments of cash into marketable securities.

Real estate and other long-term investments increased to $57.4 million as of December 31, 2021, as compared to $29.9 million as of December 31, 2020, primarily due to investments of $37.9 million in limited partnerships, partially offset by the sale of our former training facility for $2.5 million and the payment of $8.8 million of severance previously held in a Rabbi trust for the benefit of our former chief executive officer.

At December 31, 2021, investments in fixed maturity and equity securities were 90.0% of our total cash and invested assets.

1 unchanged sentence

We had no fixed maturity securities that were classified as trading securities at December 31, 2021 or 2020.

The following table shows annualized investment yields by segment operations as of December 31 for each year presented.

The following table shows annualized investment yields by segment and on a consolidated basis as of December 31 for each year presented.

Insurance Home

4 unchanged sentences

Yields on investment assets vary between segment operations due to different portfolio mixes and durations in the segments.

Our annualized yield on average invested assets on the consolidated level decreased twelve basis points in 2020 compared to 2019, primarily driven by the Life Insurance segment.

The consolidated yields include our other non-insurance enterprises.

The sustained low interest rate environment of the past several years for fixed maturity assets, which account for the majority of our investment portfolio, has required us to reinvest a portion of our portfolio at lower interest rates;

however, diversification of our investment portfolio into limited partnership investments helped offset a challenging investment environment for fixed maturity securities in 2021.

Credit quality is an important feature of our investment guidelines for our fixed maturity securities.

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The Company made new investments in investment grade bonds during 2021.

Non-investment grade securities are the result of downgrades of issuers or securities acquired during acquisitions of companies, as the Company has not purchased below investment grade securities.

Non-investment grade securities are the result of downgrades of issuers or securities acquired during acquisitions of other companies, as the Company has not purchased below investment grade securities.

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Total $ 98,024 91,334 267,379 248,574 18,555 16,686 383,958 356,594 100.0 %

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 portfolio of fixed maturity securities at December 31, 2020.

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 portfolio of municipal fixed maturity securities at December 31, 2021.

(In thousands, except for %) Fair

Value Amortized Cost % of Total Fair Value

Utilities $ 69,190 60,895 16.9 %

Education $ 69,130 65,040 18.0 %

The Company's municipal holdings are spread across many states, however, municipal fixed maturity securities from Texas comprise the most significant concentration of the total municipal holdings portfolio as of December 31, 2020.

Utilities 62,545 55,958 16.3 %

Transportation 44,210 42,569 11.5 %

The Company's municipal holdings are spread across many states.

However, municipal fixed maturity securities from Texas and California comprise the most significant concentration of the total municipal holdings portfolio as of December 31, 2021.

The Company holds 21.6% and 12.9% of its municipal holdings in Texas and California issuers, respectively, as of December 31, 2021.

There were no other states or individual issuer holdings that represented or exceeded 10% of the total municipal portfolio as of December 31, 2021.

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The Company holds 21.4% of its municipal holdings in Texas issuers as of December 31, 2020.

There were no other states or individual issuer holdings that represented or exceeded 10% of the total municipal portfolio as of December 31, 2020.

General Obligation Special Revenue Total

The table below represents the Company's detailed exposure to municipal bond portfolio by credit rating in Texas at December 31, 2021.

General Obligation Special Revenue Other Total

(In thousands) Fair

2 unchanged sentences

Value Amortized

Texas securities including third-party guarantees

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Total $ 41,617 39,901 41,139 40,017 57 55 82,813 79,973

The table below represents the Company's detailed exposure to municipal bond portfolio by credit rating in California at December 31, 2021.

General Obligation Special Revenue Other Total

(In thousands) Fair

Value Amortized

California securities including third-party guarantees

AA $ — — 31,942 30,407 2,933 2,729 34,875 33,136

A 1,705 1,650 8,354 8,113 — — 10,059 9,763

BBB — — 4,757 4,653 — — 4,757 4,653

Total $ 1,705 1,650 45,053 43,173 2,933 2,729 49,691 47,552

California securities excluding third-party guarantees

AA $ — — 3,708 3,639 — — 3,708 3,639

A 1,705 1,650 16,076 15,463 2,933 2,729 20,714 19,842

BBB — — 8,315 7,847 — — 8,315 7,847

BB and other — — 16,954 16,224 — — 16,954 16,224

Total $ 1,705 1,650 45,053 43,173 2,933 2,729 49,691 47,552

IMPAIRMENT CONSIDERATIONS RELATED TO INVESTMENTS IN FIXED MATURITY AND EQUITY SECURITIES

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

Summary of Significant Accounting Policies for a discussion regarding our application of this accounting standard in 2020.

The Company recorded no credit losses on securities in 2020 or other-than-temporary impairments ("OTTI") on securities in 2019.

Summary of Significant Accounting Policies for a discussion regarding our application of this accounting standard.

The Company recorded no credit losses on securities in 2021 or 2020.

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Gross unrealized losses on AFS fixed maturity securities amounted to $3.0 million as of December 31, 2021 and $1.9 million as of December 31, 2020.

This increase in gross unrealized losses during 2020 was a result of the market disruption caused by the COVID-19 pandemic.

This increase in gross unrealized losses during 2021 was a result of the increase in average interest rates compared to 2020.

Information on both unrealized and realized gains and losses by category is set forth in Note 2.

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We believe we have established appropriate reinsurance coverage based upon our net retained insured liabilities compared to our surplus.

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The effect of reinsurance on premiums is as follows.

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Thus, the first $0.5 million of incurred claims and any claims in excess of $11.0 million per event are SPFIC's responsibility.

The reinsurance premium for catastrophe reinsurance was $1.4 million in 2020 and $0.8 million in 2019 and 2018, respectively.

The reinsurance premium for catastrophe reinsurance was $2.3 million in 2021, $1.4 million in 2020 and $0.8 million in 2019.

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LIQUIDITY AND CAPITAL RESOURCES

Below are our primary capital resources (based on carrying value) at each of December 31, 2021 and 2020.

(In thousands, except for %)

Fixed maturity securities $ 1,470,617 1,489,383

Cash and cash equivalents 27,294 34,131

Liquidity refers to a company's ability to generate sufficient cash flows to meet the needs of its operations.

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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.

Since the Company does not have any debt, the Company could seek a line of credit in order to provide additional liquidity at the holding company level if needed to provide for longer-term or emergency cash needs.

We currently anticipate meeting our short-term and long-term cash needs with cash generated by our insurance operations and from our invested assets.

From time-to-time we may raise capital by selling shares in our SIP (as defined below) and we may also access our Credit Facility if needed (both as described below).

PARENT COMPANY LIQUIDITY AND CAPITAL RESOURCES

Liquidity is the ability to generate amounts of cash adequate to meet our cash needs.

Citizens is a holding company and has had minimal operations of its own.

4 unchanged sentences

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

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subject insurance operations to significant regulatory restrictions.

states of domicile which subject insurance operations to significant regulatory restrictions.

As discussed in Part I, Item 1, Business and Part I.

Risk Factors , 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.

Risk Factors , these laws and regulations require, among other things, that our insurance subsidiaries maintain minimum capital 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.

As we discussed in "2020 Highlights", Citizens had significant expenses in 2020 related to executive severance costs due to severance payable to our former Chief Executive Officer following the change in control.

These expenses included payment of $8.8 million to a Rabbi Trust for the benefit of Mr.

During the third quarter of 2020, Citizens sold approximately $5.7 million of fixed maturity securities held in our investment portfolio in order to fund a portion of the $8.8 million severance payment to the Rabbi Trust for the benefit of Mr.

The $8.8 million payment was paid to Mr.

Kolander on February 8, 2021.

We also incurred significant one-time expenses related to the build-out of our new headquarters in Austin, Texas and for the purchase of furniture and fixtures for the leased space.

Additionally, as discussed in Part I.

Business , on March 5, 2021, the Company paid $9.1 million to the Foundation to hold in escrow in order to purchase, upon obtaining final regulatory approval, 100% of the outstanding Class B common stock.

See Contractual Obligations and Off-balance Sheet Arrangements below for a discussion of real estate lease payments to be made under our new long-term contract for our headquarters in Austin, Texas.

We have been closely monitoring the impact that the COVID-19 pandemic may have on our liquidity and capital resources.

To the extent that we continue to experience decreases in sales or collections of renewal premiums, increases in surrenders, decreases in our investment income and/or increases in claim payments as a result of the COVID-19 pandemic, the liquidity of our insurance subsidiaries would be negatively impacted, inhibiting their ability to make dividends to the Company, and we may have to sell some of our investments to meet operational cash flow requirements.

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 IV, 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 December 31, 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.

Primary cash needs are for payments of policy benefits to policyholders, investment purchases, and operating expenses.

Historically, we have not had to liquidate investments to provide cash flow for our insurance operations and we did not do so in 2020.

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.

As discussed above, premium revenue was $175.3 million and $184.3 million in the years ended December 31, 2020 and 2019, respectively.

Our primary uses of cash are for payments of policy benefits to policyholders, investment purchases, and operating expenses.

Historically, cash flow from our operations has been sufficient to meet our cash needs and we have not had to liquidate a material amount of investments to pay our expenses and we did not do so in 2021.

Premium revenue was $174.7 million and $175.3 million in the years ended December 31, 2021 and 2020, respectively.

See Contractual Obligations and Off-balance Sheet Arrangements below for a discussion of known and estimated cash needs related to payments of future policy benefits and policy claims.

Cash flows from operating activities were $48.8 million, $72.2 million and $84.6 million for the years ended December 31, 2020, 2019 and 2018, respectively.

We have traditionally also had significant cash flows from both scheduled and unscheduled investment security maturities, redemptions, and prepayments.

These cash flows, for the most part, are reinvested in fixed income securities and to a lesser extent private equity funds or other alternative investments.

However, during the third quarter of 2020, the Company used funds from matured securities to pay $6.0 million to the IRS for the tax compliance matter described in Note 7.

Cash flow projections and cash flow tests under various market interest rate scenarios are performed annually to assist in evaluating liquidity needs and adequacy.

Cash from Operations.

Cash provided by (used in) operating activities is an important liquidity metric because it reflects, during a given period, the amount of cash generated that is available to pay our operating expenses or

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make strategic acquisitions.

Cash provided by operating activities was $40.5 million and $48.8 million for the years ended December 31, 2021 and 2020, respectively.

Cash provided by operations was lower in 2021 due to (i) the $8.8 million severance payment to our former CEO, (ii) decreased renewal premiums in our international business;

and (iii) increased first year premiums, which have higher costs associated with them than renewal premiums, such as commissions.

During the third quarter of 2020, the Company used funds from matured securities to pay $6.0 million to the IRS for the tax compliance matter described in Note 7.

Commitments and Contingencies in the notes to our consolidated financial statements.

As noted in Note 7.

Commitments and Contingencies , our payment does not represent closure of the matter or IRS acceptance of the tax liability shown on the submitted withholding tax returns, and the IRS reserves the right to revise our total tax liability for the covered period.

Commitments and Contingencies , the IRS processed these withholding tax returns in 2021, and the Company considers this matter closed.

Cash from/used in Investments.

We have traditionally also had significant cash flows from both scheduled and unscheduled investment security maturities, redemptions, and prepayments.

These cash flows, for the most part, are reinvested in fixed income securities and to a lesser extent limited partnerships or other alternative investments.

Net cash outflows from investing activities totaled $41.1 million and $61.8 million for the years ended December 31, 2021 and 2020, respectively.

The investing activities fluctuate from period to period due to timing of securities activities such as calls and maturities and reinvestment of those funds.

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Our investments consist of 90.6% of marketable fixed maturity securities classified as available-for-sale and 0.9% of equity securities that could be readily converted to cash for liquidity needs.

Over the last several years, a large portion of our fixed maturity security investment portfolio has matured, which required us to reinvest in fixed maturity securities with lower interest rates.

We are seeking to diversify our portfolio with private equity investments in order to earn higher interest rates to mitigate the effect of a decrease in our spread between our policy liability crediting rates and our investment earned rates (our gross margin), which could also negatively impact our liquidity.

Over the last several years, a large portion of our fixed maturity security investment portfolio has matured or called, which required us to reinvest in fixed maturity securities with lower interest rates.

We are seeking to diversify our portfolio with limited partnership investments in order to earn higher investment income to mitigate the effect of a decrease in our spread between our policy liability crediting rates and our investment earned rates (our gross margin), which could also negatively impact our liquidity.

Our investment portfolio (and, specifically, the valuations of investment assets we hold) has also been, and may continue to be, adversely affected as a result of market developments from the COVID-19 pandemic and uncertainty regarding its outcome.

1 unchanged sentence

or in global economic conditions may also adversely affect the values and cash flows of these assets.

Because claims and surrenders are our largest expense, a primary liquidity concern is the risk of an extraordinary level of early policyholder surrenders.

We include provisions in our insurance policies, such as surrender charges, that help limit and discourage early withdrawals.

Since these contractual withdrawals, as well as the level of surrenders experienced, have been largely consistent with our assumptions, our associated cash outflows for claims and surrender benefits historically have not had an adverse impact on our overall liquidity.

Although we experienced an increase in surrenders in the Life Insurance segment during 2020 compared to 2019, we believe that such surrenders were not materially impacted by the COVID-19 pandemic.

To the extent that we continue to experience an increase in surrenders in our Life Insurance segment, whether due to the COVID-19 pandemic or otherwise, our liquidity could be negatively impacted.

Cash from/used in Financing Activities.

Cash used in financing activities was $6.2 million for the year ended December 31, 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.

This amount was partially offset by $2.3 million we received from issuing shares under our SIP and $1.1 million net in annuity deposits received higher than annuity withdrawals.

Trends, Demands and Restrictions on our Uses of Cash

Because claims and surrenders are our largest expense, a primary liquidity concern is the risk of either (i) an extraordinary level of early policyholder surrenders, or (ii) higher than expected mortality experience.

In order to mitigate the risk of early policyholder surrenders, we include provisions in our insurance policies, such as surrender charges, that help limit and discourage early withdrawals.

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 and due to other reasons, like the loss of one of our biggest distributors in Venezuela (see Item 3.

Legal Proceedings ).

However, policy surrenders decreased 5.3% in 2021 when compared to 2020 as we have instituted new programs seeking to curb surrenders.

To the extent that early surrenders are higher than expected, our liquidity could be negatively impacted.

We continue to monitor surrenders and early withdrawals.

Our whole life and endowment products provide the policyholder with alternatives once the policy matures.

The policyholder can choose to take a lump sum payout or leave the money on deposit at interest with the Company.

Our whole life and endowment products provide the policyholder with alternatives once the policy matures - they can choose to take a lump sum payout or leave the money on deposit at interest with the Company.

As of December 31, 2021, 40% of the Company's total insurance in force was in endowment products.

Approximately 15% of the endowments in force will mature in the next five years.

Policyholder election behavior is unknown, but if policyholders elect lump sum distributions, the Company could be exposed to liquidity risk in years of high maturities.

Policyholder election behavior is unknown, but if too many policyholders elect lump sum distributions, the Company could be exposed to liquidity risk in years of high maturities.

Meeting these distributions could require the Company to sell securities at inopportune times to pay policyholder withdrawals.

Alternatively, if the policyholders were to leave the money on deposit with the Company at interest, our profitability could be impacted if the product guaranteed rate is higher than the market rate we are earning on our investments.

We currently anticipate that available liquidity sources, our capital resources and future cash flows will be adequate to meet our needs for funds, but we will monitor closely our policyholder behavior patterns.

For reasons previously discussed, we have experienced increased death claim benefits in our Home Service Insurance segment in 2020 compared to 2019.

Additionally, we are closely monitoring claim volumes to evaluate whether there is a delay in reporting or filing for benefits as a result of the COVID-19 pandemic in our Home Service Insurance segment and Life Insurance segment.

To the extent we continue to experience increased claims and the associated death benefit payouts in our Home Service Insurance segment and, possibly our Life Insurance segment, as a result of the COVID-19 pandemic, our liquidity could be negatively impacted.

We currently anticipate that our available operating cash flow and capital resources will be adequate to meet our needs for funds, but we will monitor closely our policyholder behavior patterns.

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Primarily due to the COVID-19 pandemic, we have experienced increased death claim benefits over the last two years.

Because the pandemic was an unforeseen event that was not priced into our product assumptions, to the extent we continue to experience increased claims and the associated death benefit payouts as a result of the COVID-19 pandemic, our liquidity could be negatively impacted.

Some of our policies include pandemic exclusions, and we carry reinsurance to offset some of these risks.

While our mortality experience is closely monitored by the Company and the activity has historically been within expected levels, we cannot predict whether we will see increased death benefit payouts above expected levels due to the COVID-19 pandemic.

Cash flow projections and cash flow tests under various market interest rate scenarios are performed annually to assist in evaluating liquidity needs and adequacy.

As described above in "Home Service Insurance", we experienced substantial increases in property claims in the last half of 2020 due in large part to three hurricanes that hit Louisiana.

As a result, Citizens had to contribute additional capital to SPFIC in order to maintain statutory capital requirements.

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.

We experienced substantial increases in property claims in the 2021 and the last half of 2020 due in large part to four hurricanes that hit Louisiana.

As a result, SPLIC had to contribute capital to SPFIC in both 2021 and 2020 in order to maintain statutory capital requirements.

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

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includes capital and surplus as reported under statutory accounting principles, plus certain investment reserves.

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.

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At December 31, 2021, our domestic insurance subsidiaries were above the required minimum RBC levels.

is a Bermuda domiciled company.

CICA International 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 December 31, 2020, CICA Ltd.

was above the TCL threshold.

However, as discussed in Part I.

Business – International Regulation – Bermuda, due to the Prudential Review, the BMA is requiring Citizens and CICA Ltd.

to enter into a “Keepwell Agreement”, which would encumber certain assets of the Company.

The Keepwell Agreement will include a specific target solvency level at which the Company would be required to make a capital injection into CICA Ltd.

Both the Keepwell Agreement and any capital injection could negatively impact the Company’s capital resources and liquidity.

As of December 31, 2021, CICA International was above the TCL threshold.

At the request of the BMA, on April 15, 2021, Citizens and CICA International entered into a Keep Well Agreement.

The Keep Well Agreement requires Citizens to contribute up to $10 million in capital to CICA International as necessary to ensure that CICA International has a minimum capital level of 120%.

Since CICA International'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 International could negatively impact the Company's capital resources and liquidity.

CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS

We have committed to the following contractual obligations as of December 31, 2020, with the payments due by the period indicated below:

(In thousands) Total Less than 1

Our material cash requirements from known contractual and other obligations primarily relate to our policy liabilities.

Expected timing of those payments are as follows:

As of December 31, 2021

(In thousands)

Total Less than 1

Year 1 to 3 Years 3 to 5 Years More than 5

3 unchanged sentences

Future policy benefit reserves 1,472,829 36,906 104,454 136,757 1,194,712

Life insurance 1,246,423 22,561 77,937 128,601 1,017,324

Annuities 78,304 — 7 4 78,293

Accident and health 761 107 396 8 250

Dividend accumulations 33,336 — — — 33,336

Premiums paid in advance 40,605 930 3,239 5,383 31,053

Other policyholder funds 22,447 — — — 22,447

Total policy liabilities 1,421,876 23,598 81,579 133,996 1,182,703

Policy claims payable 14,590 14,590 — — —

Life insurance 12,314 12,314 — — —

Accident and health 149 149 — — —

Casualty 743 743 — — —

Total policy claims payable 13,206 13,206 — — —

Total purchase obligations 9,592 9,592 — — —

Total contractual obligations $ 1,538,070 73,970 124,953 139,134 1,200,013

Future Policy Benefit Reserves and Policy Claims Payable.

The payments related to the future policy benefits and policy claims payable reflected in the table above have been projected utilizing assumptions based upon our historical experience and anticipated future experience.

Payments of amounts related to annuity, dividend and other policyholder funds left on deposit are projected based on assumptions of policyholder withdrawal activity.

Because the exact timing and amount of the ultimate policyholder fund obligation is subject to significant uncertainty, we have reflected the obligation at the amount of the liability presented on the consolidated balance sheet in the more than five-year category.

As a life insurance company, the vast majority of our known cash requirements are for payments related to future policy benefits and policy claims payable, which we estimated in the table above.

These amounts have been projected utilizing assumptions based upon our historical experience and anticipated future experience.

Because the exact timing and amount of the future policy benefit reserves are subject to significant uncertainty, we have reflected the majority of the obligation in the more than five-years category.

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Real Estate and Equipment Leases.

The Company entered into a long-term lease agreement with an unrelated party for its new home office in Austin, Texas and moved into its new home office in the first week of November 2020.

Payments under this new long-term lease agreement average approximately $112,340 per month.

Total Purchase Obligations.

Total purchase obligations in the table above reflect primarily the $8.8 million held in the Rabbi Trust at December 31, 2020 for the severance payment made to Mr.

Kolander in February 2021.

The Company does not have off-balance sheet arrangements at December 31, 2020 and does not expect any future effects on the Company's financial condition related to any such arrangements.

We do not utilize special purpose entities as investment vehicles, nor are there any such entities in which we have an investment that engages in speculative activities of any nature, and we do not use such investments to hedge our investment positions.

Real Estate Lease.

The Company entered into a long-term lease agreement with an unrelated party for its home office in Austin, Texas and moved into its new home office in 2020.

Payments under this long-term lease agreement average approximately $112,340 per month.

The Company does not have off-balance sheet arrangements at December 31, 2021.

We do not utilize special purpose entities as investment vehicles, nor do we invest in any such entities that engage in speculative activities of any nature.

In addition, we do not hedge our investment positions.

We have no known material cash requirements other than those described above.

CRITICAL ACCOUNTING POLICIES

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Changes in our assumptions, estimates or assessments as a result of unforeseen events or otherwise could have a material impact on our financial position or results of operations.

Management has discussed the development and selection of its critical accounting estimates with the Audit Committee of the Board of Directors, and the Audit Committee has reviewed the disclosure presented below relating to them.

Summary of Significant Accounting Policies in the notes to our consolidated financial statements for further information on our critical accounting policies.

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The Company's best estimate of future cash flows involves assumptions including, but not limited to, various performance indicators, such as historical and projected default and recovery rates, credit ratings, and current delinquency rates.

These assumptions require the use of significant management judgment and include the

These assumptions require the use of significant management judgment and include the probability of issuer default and estimates regarding timing and amount of expected recoveries, which may include estimating the underlying collateral value.

In addition, projections of expected future fixed maturity security cash

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CITIZENS, INC.

probability of issuer default and estimates regarding timing and amount of expected recoveries, which may include estimating the underlying collateral value.

In addition, projections of expected future fixed maturity security cash flows may change based upon new information regarding the performance of the issuer.

flows may change based upon new information regarding the performance of the issuer.

Any credit losses are presented as an allowance rather than as a write-down of AFS fixed maturity securities.

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Based on the results of DAC recoverability and loss recognition testing, management believes that our DAC for the years ended December 31, 2021 and 2020 is recorded at its estimated realizable value.

However, if expenses or mortality increase by 5% from our underlying assumptions or interest rates continue to decline, a loss recognition event could occur in our Home Service Insurance segment.

However, if mortality increases by more than 125% from our underlying assumptions a loss recognition event could occur in our Home Service Insurance segment.

Likewise, if interest rates decline significantly, a loss recognition event could occur in both of our operating segments.

For DAC related to long-duration traditional insurance contracts, if the assets supporting the liabilities are in a net unrealized gain position at the balance sheet date, loss recognition testing assumptions are updated to exclude such gains from future cash flows by reflecting the impact of reinvestment rates on future yields.

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Estimates of fair value are inherently uncertain and represent management's reasonable expectations regarding future developments.

We performed our annual goodwill impairment test and the fair value was in excess of the segment's carrying value for the years ended 2020, 2019 or 2018.

As of December 31, 2020, the Company had $12.6 million of goodwill allocated to the Life Insurance segment and the segment's fair value exceeded the carrying value by approximately 8%.

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

These judgements incorporate multiple inputs including discounted cash flow calculations based on assumptions that market participants would make in valuing the reporting unit, levels of economic capital, production levels and profitability of new business, pricing changes, spread compression, value of in force and earnings projections.

The Company completes its annual goodwill assessment for the individual reporting units within the Life Insurance segment as of December 31 each year.

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

These judgments incorporate multiple inputs, including discounted cash flow calculations based on assumptions that market participants would make in valuing the reporting unit, levels of economic capital, production levels and profitability of new business, pricing changes, spread compression, value of in force, discount rate and earnings projections.

Estimates of fair value are inherently uncertain and represent management’s reasonable expectations regarding future developments.

Unfavorable changes to assumptions or factors that decrease the fair value and could result in future impairment include, but are not limited to, lower expectations for future sales, higher maintenance expenses, unfavorable mortality, higher discount rates and market-based inputs.

Increases in the carrying value of the segment caused by recognition of uncertain tax benefits could also result in future impairment.

We recorded an impairment of $12.6 million in 2021 in our Life Insurance segment caused by increases in our carrying value of the segment due to the release of a $43.8 million uncertain tax position in the fourth quarter of 2021 following the expiration of the statute of limitations on the tax year ended December 31, 2017.

This impairment is recorded on the Consolidated Statement of Operations.

There was no impairment of goodwill in the years ended December 31, 2020 or 2019.

December 31, 2021 | 10-K 58

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We do not allow the recognition of a gain contingency prior to settlement of the underlying event.

If we were to have a gain contingency, we would disclose it in the notes to our consolidated financial statements.

TAX ACCOUNTING

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The effect on deferred tax assets and liabilities of a change in tax rates is recognized in net income in the period in which the change is enacted.

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 on its US federal income tax return and due to the 0% enacted tax rate in Bermuda there are no deferred taxes recorded for CICA Ltd.'s temporary differences.

CICA International, a wholly-owned subsidiary of Citizens, is considered a controlled foreign corporation for U.S.

federal tax purposes.

As a result, the insurance activity of CICA International is subject to Subpart F of the IRC and is included in Citizens taxable income on its U.S.

federal income tax return.

Due to the 0% enacted tax rate in Bermuda there are no deferred taxes recorded for CICA International's temporary differences.

RECENT ACCOUNTING PRONOUNCEMENTS

Financial Statements and Supplementary Data and "Accounting Pronouncements" in Note 1.

Accounting Pronouncements in the notes to our consolidated financial statements.

Summary of Significant Accounting Policies in the notes to our consolidated financial statements.

December 31, 2021 | 10-K 59

1 unchanged sentence

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis