CITIZENS, INC. 10-K

Item 9A. CONTROLS AND PROCEDURES (a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosures. Our management, including our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Exchange Act as of December 31, 2021, the end of the period covered by this Annual Report on Form 10-K. Based on such evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of December 31, 2021 to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and such information is accumulated and reported to management, including our principal executive and financial officers, as appropriate to allow timely decisions regarding disclosure. December 31, 2021 | 10-K 61 Table of Contents CITIZENS, INC. (b) MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management evaluated the design and operating effectiveness of internal control over financial reporting based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). Based on this evaluation, management concluded that our internal control over financial reporting as of December 31, 2021 was effective. Grant Thornton LLP, an independent registered public accounting firm, audited the effectiveness of our internal control over financial reporting as of December 31, 2021. Their attestation report is included in Item 9A(c) of this Annual Report. December 31, 2021 | 10-K 62 Table of Contents CITIZENS, INC. (c) ATTESTATION REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Report of Independent Registered Public Accounting Firm Board of Directors and Stockholders Citizens, Inc. Opinion on Internal Control over Financial Reporting We have audited the internal control over financial reporting of Citizens, Inc. (a Colorado corporation) and subsidiaries (the “Company”) as of December 31, 2021, based on criteria established in the 2013 Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in the 2013 Internal Control — Integrated Framework issued by COSO. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the consolidated financial statements of the Company as of and for the year ended December 31, 2021, and our report dated March 11, 2022, expressed an unqualified opinion on those consolidated financial statements. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may December 31, 2021 | 10-K 63 Table of Contents CITIZENS, INC. become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ GRANT THORNTON LLP Miami, Florida March 11, 2022 (d) CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING There were no changes in our internal control over financial reporting during the quarter ended December 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Item 9B. OTHER INFORMATION None. December 31, 2021 | 10-K 64 Table of Contents CITIZENS, INC. PART III The information in this Part III indicated below is incorporated by reference from other sections of this Annual Report on Form 10-K or from our definitive proxy statement pursuant to General Instruction G(3) of Form 10-K. We plan to file our definitive proxy statement for our 2022 annual meeting of shareholders within 120 days after December 31, 2021. Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Item 10 of this Annual Report on Form 10-K incorporates by reference the information in the sections entitled "Corporate Governance," "Audit Matters," "Directors" and "Executive Officers" in our Proxy Statement. Item 11. EXECUTIVE COMPENSATION Item 11 of this Annual Report on Form 10-K incorporates by reference the information in the sections entitled "Directors - Director Compensation," "Executive Compensation" and "Board Matters - Compensation Committee Interlocks and Insider Participation" in our Proxy Statement. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Item 12 of this Annual Report on Form 10-K incorporates by reference the information in the sections entitled "Security Ownership of Directors and Management" and "Security Ownership of Certain Beneficial Owners" in our Proxy Statement. SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS The following table sets forth information regarding securities authorized for issuance under our equity compensation plan, the Citizens, Inc. Omnibus Incentive Plan, as of December 31, 2021. See Note 11. Stock Compensation in the notes to our consolidated financial statements for additional information regarding our Omnibus Incentive Plan. Plan Category Number of securities to be issued upon exercise of outstanding options, warrants and rights Weighted-average exercise price of outstanding options, warrants and rights Number of securities remaining for future issuance under equity compensation plans Equity compensation plans approved by security holders 212,747 $ 5.75 2,450,015 Equity compensation plans not approved by security holders — — — Total 212,747 $ 5.75 2,450,015 Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE Item 13 of this Annual Report on Form 10-K incorporates by reference the information in the sections entitled "Board Matters - Director Independence" and "Board Matters - Certain Relationships and Related Party Transactions" in our Proxy Statement. Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Item 14 of this Annual Report on Form 10-K incorporates by reference the information in the section entitled "Audit Matters" in our Proxy Statement. December 31, 2021 | 10-K 65 Table of Contents CITIZENS, INC. PART IV Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES (a) Documents filed as part of this Report (1) and (2) Financial Statements and Schedules The financial statements and schedules listed on the following index to financial statements and financial statement schedules are filed under Item 8 as part of this Form 10-K. Index to Consolidated Financial Statements and Financial Statement Schedules Page Reference Reports of Independent Registered Public Accounting Firm - Auditor Name: Grant Thornton LLP Auditor Firm ID: 248 Auditor Location: Miami, FL 67 Reports of Independent Registered Public Accounting Firm - Auditor Name: Deloitte & Touche LLP Audit Firm ID: 34 Auditor Location: Austin, TX Consolidated Balance Sheets at December 31, 2021 and 2020 70 Consolidated Statements of Operations and Comprehensive Income (Loss) - years ended December 31, 2021, 2020 and 2019 72 Consolidated Statements of Stockholders' Equity - years ended December 31, 2021, 2020 and 2019 73 Consolidated Statements of Cash Flows - years ended December 31, 2021, 2020 and 2019 74 Notes to Consolidated Financial Statements 76 Schedule II – Condensed Financial Information of Registrant 115 Schedule III – Consolidated Supplementary Insurance Information 118 Schedule IV – Consolidated Statement of Reinsurance 119 All other schedules have been omitted because the required information is inapplicable or the information required is presented in the consolidated financial statements or the notes thereto filed elsewhere herein. (3) Exhibits See the Index of Exhibits . December 31, 2021 | 10-K 66 Table of Contents CITIZENS, INC. Report of Independent Registered Public Accounting Firm Board of Directors and Stockholders Citizens, Inc. Opinion on the financial statements We have audited the accompanying consolidated balance sheet of Citizens, Inc. (a Colorado corporation) and subsidiaries (the “Company”) as of December 31, 2021, the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity, and cash flows for the year ended December 31, 2021, and the related notes and financial statement schedules included under Item 15(a) (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021, and the results of its operations and its cash flows for the year ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated March 11, 2022 expressed an unqualified opinion. Basis for opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion. Critical audit matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Development of Assumptions for Future Policy Benefit Reserves Loss Recognition Testing and Deferred Acquisition Costs Recoverability Testing As described further in notes 1 and 4 to the financial statements, the Company develops assumptions that are used for several key estimates. These estimates include, but are not limited to, the loss recognition testing for future policy benefit reserves for life insurance contracts and deferred policy acquisition costs and their related recoverability estimate. The most significant assumptions include mortality, persistency, expense, and investment experience. These assumptions are based upon the Company’s experience, modified as necessary to reflect December 31, 2021 | 10-K 67 Table of Contents CITIZENS, INC. anticipated trends and to include provisions for possible adverse deviations. Management’s estimate of future policy benefits for life insurance contracts was $1.28 billion as of December 31, 2021, while the balance of deferred policy acquisitions costs which was subject to recoverability testing was $140.4 million as of December 31, 2021. We identified the development of assumptions for future policy benefit reserves loss recognition testing and deferred acquisition costs recoverability testing as a critical audit matter. The principal considerations for our determination that the development of assumptions for future policy benefit reserves loss recognition testing and deferred acquisition costs recoverability testing is a critical audit matter are that the development of these assumptions requires management to make significant estimates regarding mortality, persistency, expense, and investment experience based on historical experience and future expectations. As such, auditing the development of such assumptions involved subjective and complex auditor judgment and the involvement of specialists. Our audit procedures related to the development of assumptions for future policy benefit reserves loss recognition testing and deferred acquisition costs recoverability testing included the following, among others. • We tested the design and operating effectiveness of management's review control over the mortality, persistency, expense, and investment experience assumption development process. • We utilized a specialist in evaluating management's process, methodologies and judgments in the development of the assumptions of mortality, persistency, expense, and investment experience, that were used in management's testing of future policy benefit reserves loss recognition and deferred acquisition costs recoverability testing. /s/ GRANT THORNTON LLP We have served as the Company’s auditor since 2021. Miami, Florida March 11, 2022 December 31, 2021 | 10-K 68 Table of Contents CITIZENS, INC. Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of Citizens, Inc. Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheet of Citizens, Inc. and consolidated subsidiaries (the “Company”) as of December 31, 2020, the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2020, and the related notes and the schedules listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ DELOITTE & TOUCHE LLP Austin, Texas March 10, 2021 We began serving as the Company's auditor in 2017. In 2021, we became the predecessor auditor. December 31, 2021 | 10-K 69 Table of Contents CITIZENS, INC. CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Balance Sheets December 31, (In thousands) 2021 2020 Assets Investments: Fixed maturity securities available-for-sale, at fair value (amortized cost: $ 1,343,755 and $ 1,321,487 in 2021 and 2020, respectively) $ 1,470,617 1,489,383 Equity securities, at fair value 14,844 22,102 Policy loans 80,307 83,318 Real estate held-for-sale — 2,571 Other long-term investments (portion measured at fair value $ 56,038 and $ 11,923 in 2021 and 2020, respectively; less allowance for losses of $ — and $ 11 in 2021 and 2020, respectively) 57,399 27,294 Total investments 1,623,167 1,624,668 Cash and cash equivalents 27,294 34,131 Accrued investment income 16,197 16,137 Reinsurance recoverable 5,539 5,753 Deferred policy acquisition costs 140,380 104,913 Cost of insurance acquired 10,611 11,541 Goodwill and other intangible assets 941 13,570 Federal income tax receivable 762 — Property and equipment, net 14,074 16,312 Due premiums 10,748 11,309 Other assets (less allowance for losses of $ 111 and $ 297 in 2021 and 2020, respectively) 4,798 5,086 Total assets $ 1,854,511 1,843,420 See accompanying Notes to Consolidated Financial Statements. December 31, 2021 | 10-K 70 Table of Contents CITIZENS, INC. CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Balance Sheets December 31, continued (In thousands, except share amounts) 2021 2020 Liabilities and Stockholders' Equity Liabilities: Policy liabilities: Future policy benefit reserves: Life insurance $ 1,278,987 1,246,423 Annuities 83,918 78,304 Accident and health 784 761 Dividend accumulations 37,760 33,336 Premiums paid in advance 40,690 40,605 Policy claims payable 14,590 13,206 Other policyholders' funds 30,690 22,447 Total policy liabilities 1,487,419 1,435,082 Commissions payable 2,285 2,572 Deferred federal income tax liability, net 15,456 9,564 Current federal income tax payable — 43,916 Payable for securities in process of settlement — 5,265 Other liabilities 28,780 46,076 Total liabilities 1,533,940 1,542,475 Commitments and contingencies (Notes 5 and 7) Stockholders' Equity: Common stock: Class A, no par value, 100,000,000 shares authorized, 53,170,413 and 52,654,016 shares issued and outstanding as of December 31, 2021 and 2020, respectively, including shares in treasury of 3,135,738 as of December 31, 2021 and 2020 265,561 262,869 Class B, no par value, 2,000,000 shares authorized, 1,001,714 shares issued and outstanding as of December 31, 2021 and 2020, including shares in treasury of 1,001,714 as of December 31, 2021 3,184 3,184 Accumulated deficit ( 45,565 ) ( 82,352 ) Accumulated other comprehensive income: Net unrealized gains on fixed maturity securities, net of tax 117,492 128,255 Treasury stock, at cost ( 20,101 ) ( 11,011 ) Total stockholders' equity 320,571 300,945 Total liabilities and stockholders' equity $ 1,854,511 1,843,420 See accompanying Notes to Consolidated Financial Statements. December 31, 2021 | 10-K 71 Table of Contents CITIZENS, INC. CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Operations and Comprehensive Income (Loss) Years Ended December 31, (In thousands, except share amounts) 2021 2020 2019 Revenues: Premiums Life insurance $ 169,801 170,328 178,351 Accident and health insurance 1,250 1,019 1,383 Property insurance 3,677 3,982 4,613 Net investment income 61,495 60,197 59,531 Investment related gains (losses), net 10,991 1,502 5,249 Other income 3,332 1,828 1,418 Total revenues 250,546 238,856 250,545 Benefits and Expenses: Insurance benefits paid or provided: Claims and surrenders 119,735 121,145 106,827 Increase in future policy benefit reserves 36,444 29,923 41,712 Policyholders' dividends 6,180 5,587 6,040 Total insurance benefits paid or provided 162,359 156,655 154,579 Commissions 35,463 32,069 34,222 Other general expenses 43,370 53,669 48,440 Capitalization of deferred policy acquisition costs ( 22,740 ) ( 20,475 ) ( 22,255 ) Amortization of deferred policy acquisition costs 24,952 27,439 28,268 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 Income (loss) before federal income tax ( 6,688 ) ( 12,317 ) 5,745 Federal income tax expense (benefit) ( 43,475 ) ( 1,329 ) 7,115 Net income (loss) 36,787 ( 10,988 ) ( 1,370 ) Basic Earnings Per Share: Class A common stock $ 0.74 ( 0.22 ) ( 0.03 ) Class B common stock 0.37 ( 0.11 ) ( 0.01 ) Diluted Earnings Per Share: Class A common stock 0.73 ( 0.22 ) ( 0.03 ) Class B common stock 0.36 ( 0.11 ) ( 0.01 ) Other Comprehensive Income (Loss): Unrealized gains (losses) on fixed maturity securities: Unrealized holding gains (losses) arising during period ( 5,055 ) 48,642 78,825 Reclassification adjustment for losses (gains) included in net income (loss) ( 243 ) 111 ( 1,927 ) Unrealized gains (losses) on fixed maturity securities, net ( 5,298 ) 48,753 76,898 Income tax expense (benefit) on unrealized gains (losses) on fixed maturity securities 5,465 ( 2,385 ) 5,147 Other comprehensive income (loss) ( 10,763 ) 51,138 71,751 Total comprehensive income (loss) $ 26,024 40,150 70,381 See accompanying Notes to Consolidated Financial Statements. December 31, 2021 | 10-K 72 Table of Contents CITIZENS, INC. CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Stockholders' Equity Common Stock Accumulated deficit Accumulated other comprehensive income (loss) Treasury stock Total Stock-holders' equity (In thousands) Class A Class B Balance at December 31, 2018 $ 259,793 3,184 ( 69,599 ) 5,366 ( 11,011 ) 187,733 Comprehensive income (loss): Net income (loss) — — ( 1,370 ) — — ( 1,370 ) Unrealized investment gains (losses), net — — — 71,751 — 71,751 Total comprehensive income (loss) — — ( 1,370 ) 71,751 — 70,381 Stock-based compensation 1,722 — — — — 1,722 Balance at December 31, 2019 261,515 3,184 ( 70,969 ) 77,117 ( 11,011 ) 259,836 Accounting standards adopted January 1, 2020 (1) — — ( 395 ) — — ( 395 ) Comprehensive income (loss): Net income (loss) — — ( 10,988 ) — — ( 10,988 ) Unrealized investment gains (losses), net — — — 51,138 — 51,138 Total comprehensive income (loss) — — ( 10,988 ) 51,138 — 40,150 Stock-based compensation 1,354 — — — — 1,354 Balance at December 31, 2020 262,869 3,184 ( 82,352 ) 128,255 ( 11,011 ) 300,945 Comprehensive income (loss): Net income (loss) — — 36,787 — — 36,787 Unrealized investment gains (losses), net — — — ( 10,763 ) — ( 10,763 ) Total comprehensive income (loss) — — 36,787 ( 10,763 ) — 26,024 Acquisition of treasury stock — — — — ( 9,090 ) ( 9,090 ) Stock-based compensation 2,692 — — — — 2,692 Balance at December 31, 2021 $ 265,561 3,184 ( 45,565 ) 117,492 ( 20,101 ) 320,571 (1) See Note 1 in the Notes to Consolidated Financial Statements for more details. See accompanying Notes to Consolidated Financial Statements. December 31, 2021 | 10-K 73 Table of Contents CITIZENS, INC. CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Cash Flows Years Ended December 31, (In thousands) 2021 2020 2019 Cash Flows from Operating Activities: Net income (loss) $ 36,787 ( 10,988 ) ( 1,370 ) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Investment related gains (losses), net on sales of investments and other assets ( 10,991 ) ( 1,502 ) ( 5,249 ) Net deferred policy acquisition costs 2,212 6,964 6,013 Amortization of cost of insurance acquired 1,206 1,816 1,546 Depreciation 1,140 1,423 1,677 Amortization of premiums and discounts on investments 5,568 8,061 12,859 Stock-based compensation 646 2,223 2,099 Deferred federal income tax expense (benefit) 427 ( 402 ) 1,573 Goodwill impairment 12,624 — — Change in: Accrued investment income ( 60 ) 1,316 1,014 Reinsurance recoverable 214 ( 2,057 ) ( 32 ) Due premiums 561 1,347 669 Future policy benefit reserves 35,239 29,650 41,479 Other policyholders' liabilities 14,136 11,030 5,387 Federal income tax payable ( 44,678 ) ( 706 ) 3,341 Commissions payable and other liabilities ( 15,450 ) 3,702 2,924 Other, net 874 ( 3,043 ) ( 1,707 ) Net cash provided by (used in) operating activities 40,455 48,834 72,223 Cash Flows from Investing Activities: Sales of fixed maturity securities, available-for-sale 8,238 20,537 66,900 Maturities and calls of fixed maturity securities, available-for-sale 53,089 220,397 181,618 Purchases of fixed maturity securities, available-for-sale ( 94,265 ) ( 271,474 ) ( 329,627 ) Purchases of equity securities — ( 4,473 ) — Sales of equity securities 7,383 — — Principal payments on mortgage loans 10 9 9 Funding of mortgage loans ( 1,000 ) — — Change in policy loans, net 3,011 ( 1,313 ) ( 1,180 ) Sales of other long-term investments and real estate 24,238 3,671 6,983 Purchases of other long-term investments ( 40,788 ) ( 30,256 ) ( 187 ) Purchases of property and equipment ( 1,007 ) ( 221 ) ( 511 ) Sales of property and equipment 14 11 16 Maturities of short-term investments — 1,300 9,090 Purchases of short-term investments — — ( 2,456 ) Net cash provided by (used in) investing activities ( 41,077 ) ( 61,812 ) ( 69,345 ) See accompanying Notes to Consolidated Financial Statements. December 31, 2021 | 10-K 74 Table of Contents CITIZENS, INC. CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Cash Flows Years Ended December 31, (In thousands) 2021 2020 2019 Cash Flows from Financing Activities: Annuity deposits $ 8,839 7,532 6,717 Annuity withdrawals ( 7,763 ) ( 5,759 ) ( 8,505 ) Issuance of common stock 2,255 — — Acquisition of treasury stock ( 9,090 ) — — Other ( 456 ) ( 869 ) ( 377 ) Net cash provided by (used in) financing activities ( 6,215 ) 904 ( 2,165 ) Net increase (decrease) in cash and cash equivalents ( 6,837 ) ( 12,074 ) 713 Cash and cash equivalents at beginning of year 34,131 46,205 45,492 Cash and cash equivalents at end of year $ 27,294 34,131 46,205 Supplemental Disclosure of Operating Activities: Cash paid during the year for income taxes $ 1,198 — 2,200 SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES: During 2021, 2020 and 2019, various fixed maturity issuers exchanged securities with book values of $ 12.1 million, $ 9.1 million and $ 16.8 million, respectively, for securities of equal value. The Company recognized right-of-use assets of $ 12.0 million in exchange for new operating lease liabilities during 2020 and none during 2021 and 2019. The Company accrued purchases of property and equipment of $ 0.8 million as of December 31, 2020, which is reflected in other liabilities on the Consolidated Balance Sheets and recorded none as of December 31, 2021 and 2019. The Company also had $ 5.3 million of unsettled security trades as of December 31, 2020 and none as of December 31, 2021 and 2019. See accompanying Notes to Consolidated Financial Statements. December 31, 2021 | 10-K 75 Table of Contents CITIZENS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION AND CONSOLIDATION The accompanying consolidated financial statements of Citizens, Inc. and its wholly-owned subsidiaries have been prepared in conformity with U.S. generally accepted accounting principles ("U.S. GAAP"). The consolidated financial statements include the accounts and operations of Citizens, Inc. ("Citizens" or the "Company"), a Colorado corporation, and its wholly-owned subsidiaries, CICA Life Insurance Company of America ("CICA"), CICA Life Ltd. ("CICA International"), Citizens National Life Insurance Company ("CNLIC"), Security Plan Life Insurance Company ("SPLIC"), Security Plan Fire Insurance Company ("SPFIC"), Magnolia Guaranty Life Insurance Company ("MGLIC"), and Computing Technology, Inc. ("CTI"). All significant inter-company accounts and transactions have been eliminated. Citizens and its wholly-owned subsidiaries are collectively referred to as the "Company," "we," "us," or "our". Our Life Insurance segment operates through CICA International, CICA and CNLIC. Our international life insurance business, which operates through CICA International, issues U.S. dollar-denominated endowment contracts internationally, which are principally accumulation contracts that incorporate an element of life insurance protection, and ordinary whole life insurance in U.S. dollar-denominated amounts sold to non-U.S. residents. These contracts are designed to provide a fixed amount of insurance coverage over the life of the insured and may utilize rider benefits to provide additional increasing or decreasing coverage and annuity benefits to enhance accumulations. Our domestic life insurance business operates through CICA and CNLIC. CICA issues credit life and disability policies and CNLIC issues ordinary whole life policies mainly in Texas and Florida and services whole life and accident and health policies primarily in the Southern U.S., Midwest and Mountain West. Our Home Service Insurance segment operates through our subsidiaries SPLIC, MGLIC and SPFIC, and focuses on the life insurance needs of the middle- and lower-income markets, primarily in Louisiana, Mississippi and Arkansas. Our products in this segment consist primarily of small face amount ordinary whole life, industrial life and pre-need policies, which are designed to fund final expenses for the insured, primarily consisting of funeral and burial costs as well as property insurance policies, which cover dwelling and contents. CTI provides data processing systems and services to the Company. SIGNIFICANT ACCOUNTING POLICIES INVESTMENTS Investment securities are classified as held-to-maturity ("HTM"), available-for-sale ("AFS") or trading. Management determines the appropriate classification at the time of purchase. The classification of securities is significant since it directly impacts the accounting for unrealized gains and losses on securities. Fixed maturity securities are classified as HTM and carried at amortized cost when management has the positive intent and the Company has the ability to hold the securities to maturity. Securities not classified as HTM are classified as AFS and are carried at fair value, with the unrealized holding gains and losses, net of tax, reported in other comprehensive income and are not reported in earnings until realized. Our fixed maturity securities consist primarily of bonds classified as AFS. The Company does not classify any fixed maturity securities as trading or as HTM. Equity securities are measured at fair value with the change in fair value recorded through net income. Unrealized gains (losses) of fixed maturity securities held as AFS are shown as a separate component of stockholders' equity, net of tax, and is a separate component of comprehensive income. Beginning January 1, 2020 in connection with the adoption of a new accounting standard, the Company assesses AFS fixed maturity securities in an unrealized loss position for expected credit losses. First, we assess whether we intend to sell, or it is more likely than not that we will be required to sell, the security before recovery of its amortized cost. If either of the criteria is met, the security's amortized cost is written down to its fair value. For AFS fixed maturity securities that do not meet either criteria, we evaluate whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions December 31, 2021 | 10-K 76 Table of Contents CITIZENS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) specifically related to the security, among other factors. If management deems a credit loss has occurred, the impairment is recorded through an allowance for credit losses rather than as a write-down. Changes in the allowance for credit losses are recorded through investment related gains and losses. Any impairment that has not been recorded through an allowance for credit losses is recognized in accumulated other comprehensive income on our consolidated balance sheets. Prior to 2020, the Company evaluated all fixed maturity securities on a quarterly basis, and more frequently when economic conditions warranted additional evaluations, to determine if a write-down should be recorded due to an other-than-temporary impairment ("OTTI"). If an OTTI was required, the write-down was recorded directly to operations and any subsequent recoveries were recorded through net investment income over the remaining life of the security. The Company made a policy election to exclude accrued interest from the amortized cost of AFS fixed maturity securities and report accrued interest separately in accrued investment income in the consolidated balance sheets. AFS fixed maturity securities are placed on non-accrual status when we no longer expect to receive all contractual amounts due. Accrued interest receivable is reversed against interest income when a security is placed on non-accrual status. Accordingly, we do not recognize an allowance for credit loss against accrued interest receivable. Premiums and discounts are amortized or accreted over the life of the related security as an adjustment to yield using the effective interest method. Dividend and interest income are recognized when earned. Realized gains and losses are included in earnings and are derived using the specific identification method for determining the cost of securities sold. The Company from time to time may dispose of an impaired security in response to asset/liability management decisions, future market movements, business plan changes, or if the net proceeds can be reinvested at a rate of return that is expected to recover the loss within a reasonable period of time. Policy loans are reported at unpaid principal balances. Other long-term investments at December 31, 2021, consisted primarily of investments in limited partnerships, Federal Home Loan Bank ("FHLB") common stock and mortgage loans. At December 31, 2020, this balance also included a Rabbi Trust established for the benefit of the former Chief Executive Officer for the severance payment that was made to him on February 8, 2021. We initially estimate the fair value of investments in limited partnerships by reference to the transaction price. Subsequently, we obtain the fair value of these investments from net asset value information provided by the general partner or manager of the investments, the financial statements of which are audited annually. Recognition of investment income on these funds is delayed due to the availability of the related financial statements, which are generally obtained from the partnerships' general partners. As a result, our limited partnerships are generally reported on a three-month delay. We are a member of the FHLB of Dallas and such membership requires members to own stock in the FHLB. Our FHLB stock is carried at amortized cost, which approximates fair value. Mortgage loans on real estate are reported at unpaid principal balances. The Company had cash equivalents and fixed maturity securities with an aggregate fair value of $ 10.1 million and $ 10.8 million at December 31, 2021 and 2020, respectively, on deposit with various state regulatory authorities to fulfill statutory requirements. CASH AND CASH EQUIVALENTS Cash consists of balances on hand and on deposit in banks and financial institutions. Cash equivalents consists of securities whose duration does not exceed 90 days at the date of acquisition. SHORT-TERM INVESTMENTS The Company considers investments maturing within one year at acquisition as short-term. These securities are carried at fair value. December 31, 2021 | 10-K 77 Table of Contents CITIZENS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) REINSURANCE RECOVERABLE Reinsurance recoverable includes expected reimbursements for policyholder claim amounts in excess of the Company's retention, as well as profit sharing and experience refund accruals. Reinsurance recoverable is reduced for estimated uncollectible amounts, if any. Reinsurance premiums, benefits and expenses are accounted for on a basis consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. The cost of reinsurance related to long duration contracts is accounted for over the life of the underlying reinsured policies using assumptions consistent with those used to account for the underlying policies. The cost of reinsurance related to short duration contracts is accounted for over the coverage period. Profit-sharing and similar adjustable provisions are accrued based on the experience of the underlying policies. DEFERRED POLICY ACQUISITION COSTS Policy acquisition costs consist of commissions and policy issuance, underwriting and agent convention expenses that are directly related to and vary with the successful production of new business and are deferred. These deferred amounts, referred to as deferred policy acquisition costs ("DAC"), are recorded as an asset on the consolidated balance sheets and amortized to income in a systematic manner, based on related contract revenues or gross profits as appropriate. Traditional life insurance and accident and health insurance acquisition costs are amortized over the premium-paying period of the related policies using assumptions consistent with those used in computing future policy benefit liabilities. For universal life type contracts and investment contracts that include significant surrender charges or that yield significant revenues from sources other than the investment contract holders' funds, the deferred contract acquisition cost amortization is matched to the recognition of gross profit. The effect on the DAC asset that would result from realization of unrealized gains or losses is recognized with an offset to accumulated other comprehensive income in consolidated stockholders' equity. If an internal replacement of insurance or investment contract modification substantially changes a contract as defined in current accounting guidance, then the DAC is written off immediately through income and any new deferrable costs associated with the new replacement are deferred. If a contract modification does not substantially change the contract, the DAC amortization on the original contract will continue and any acquisition costs associated with the related modification are immediately expensed. The ending DAC asset balance is calculated at a seriatim level for policies in force at the end of each reporting period based on the remaining unamortized asset. The assumptions used to calculate DAC are set when a policy is issued and do not change with changes in actual experience, unless a loss recognition event occurs. The seriatim method ensures that policies lapsed or surrendered during the reporting period are no longer included in the DAC calculation. This method limits the amount of deferred costs to its estimated realizable value, provided actual experience is comparable to that contemplated in the locked-in assumptions. Inherent in the capitalization and amortization of DAC are certain management judgments about what acquisition costs are deferred, the ending asset balance and the annual amortization. Approximately 94.6 % of our capitalized DAC is attributed to first year and renewal excess commissions. The remaining 5.4 % is attributed to costs that vary with and are directly related to the successful acquisition of new insurance business. Those costs generally include costs related to the production, underwriting and issuance of new business. DAC is subject to recoverability testing at the time of policy issuance and loss recognition testing on an annual basis, or when an event occurs that might require loss recognition testing. If loss recognition or impairment is necessary, DAC would be written off to the extent that anticipated future premiums and investment income is insufficient to cover expected future policy benefits and expenses. Loss recognition testing that considers, among other things, actual experience and projected future experience calculates the available premium (gross premium less the benefit and expense portion of premium) for the next 50 years. DAC is evaluated for recoverability using best estimate assumptions. Based on the results of DAC recoverability testing and loss recognition testing, management believes that our DAC as of the years ended December 31, 2021 and 2020 limits the amount of deferred costs to its estimated recoverable value. DAC related to investment-oriented products is also adjusted to reflect the effect of unrealized gains or losses on AFS fixed maturity securities with related changes recognized through other comprehensive income (shadow DAC). December 31, 2021 | 10-K 78 Table of Contents CITIZENS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The adjustment is made at each balance sheet date, as if the securities had been sold at their stated aggregate fair value and the proceeds reinvested at current yields. Similarly, for long-duration traditional insurance contracts, if the assets supporting the liabilities are in a net unrealized gain position at the balance sheet date, loss recognition testing assumptions are updated to exclude such gains from future cash flows by reflecting the impact of reinvestment rates on future yields. If a future loss is anticipated under this basis, any additional shortfall indicated by loss recognition tests is recognized as a reduction in accumulated other comprehensive income (shadow loss recognition). Similar to other loss recognition on long-duration insurance contracts, such shortfall is first reflected as a reduction in DAC and secondly as an increase in liabilities for future policy benefits. The change in these adjustments, net of tax, is included with the change in net gains (losses) on available-for-sale fixed maturity securities that is credited or charged directly to other comprehensive income. The components of DAC from year to year are summarized as follows: Years ended December 31, (In thousands) 2021 2020 2019 Balance at beginning of period $ 104,913 149,249 155,747 Capitalization of deferred policy acquisition costs 22,740 20,475 22,255 Amortization of deferred policy acquisition costs ( 24,952 ) ( 27,439 ) ( 28,268 ) Effects of unrealized (gains) losses 37,679 ( 37,372 ) ( 485 ) Balance at end of period $ 140,380 104,913 149,249 We converted to a new actuarial valuation software solution that provided enhanced modeling capabilities for the ordinary whole life policies of CNLIC as of April 1, 2021 and of SPLIC as of July 1, 2019. The total impact of these system conversions, which impacted both the Home Service Insurance and Life Insurance segments, reflect changes in actuarial valuation estimates associated with the conversion. The impact is reflected in the accompanying consolidated financial statements and summarized in the table below. (In thousands) 2021 2019 Increase (Decrease) Consolidated Balance Sheets DAC $ ( 122 ) ( 1,396 ) Future policy benefit reserves: Life insurance ( 827 ) ( 2,299 ) Consolidated Statements of Operations and Comprehensive Income (Loss) Decrease in future policy benefit reserves ( 827 ) ( 2,299 ) Amortization of deferred policy acquisition costs 122 1,396 Income before federal income tax 705 903 Federal income tax expense 148 190 Net income $ 557 713 COST OF INSURANCE ACQUIRED Cost of insurance acquired ("COIA") is established when we purchase a block of insurance. COIA is amortized over the emerging profit of the related policies using the same assumptions as were used in computing liabilities for future policy benefits. Inherent in the amortization of COIA are certain management judgments used in the estimation of the ending asset balance and the annual amortization. The key assumptions used in management's estimates are based upon interest, mortality and lapses at the time of purchase. A recoverability test that considers, among other things, actual experience and projected future experience is performed at least annually. These annual recoverability tests are based initially on an estimate of the available premium (gross premium less the benefit and expense portion of premium) for the next 50 years. Management December 31, 2021 | 10-K 79 Table of Contents CITIZENS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) believes that our COIA is recoverable for the years ended December 31, 2021 and 2020. This belief is based upon the analysis performed on estimated future results of the block and our annual recoverability testing. COIA relative to purchased blocks of insurance is summarized as follows: Years ended December 31, (In thousands) 2021 2020 2019 Balance at beginning of period $ 11,541 13,455 15,225 Amortization ( 1,206 ) ( 1,816 ) ( 1,546 ) Change in effects of unrealized (gains) losses on COIA 276 ( 98 ) ( 224 ) Balance at end of period $ 10,611 11,541 13,455 Estimated amortization of COIA in each of the next five years and thereafter is as follows. Actual future amortization will differ from these estimates due to variances from estimated future withdrawal assumptions. (In thousands) Amount Cost of insurance acquired: Year: 2022 $ 846 2023 762 2024 693 2025 633 2026 577 Thereafter 7,308 10,819 Effects of unrealized (gains) losses on COIA ( 208 ) Total cost of insurance acquired $ 10,611 The value of COIA resulting from our various acquisitions was determined based on the present value of future profits discounted at annual rates ranging from 3.7 % to 8.5 %. GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill is the difference between the purchase price in a business combination and the fair value of assets and liabilities acquired and is not amortized. Other intangible assets include various state insurance licenses, which have been determined to have indefinite useful lives and, therefore, are not amortized. Both goodwill and other intangible assets with indefinite useful lives are subject to annual impairment analysis. Goodwill is tested for impairment on an annual basis or more frequently if indicators of potential impairment exist. The goodwill testing requires us to compare the estimated fair value of a reporting unit to its carrying value. If the carrying value of the reporting unit is lower than its estimated fair value, no further evaluation is required. If the carrying value of the reporting unit exceeds its estimated fair value, an impairment charge is recorded for that excess, limited to the total amount of goodwill allocated to that reporting unit. We have the option of performing an assessment of certain qualitative factors to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying value or proceeding directly to a quantitative impairment test. We elected to apply the quantitative assessment for the goodwill in our reporting units within the Life Insurance segment as of December 31, 2021 and 2020. 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, December 31, 2021 | 10-K 80 Table of Contents CITIZENS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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. The following is a summary of changes in goodwill in our Life Insurance segment: Years ended December 31, (In thousands) 2021 2020 2019 Balance at beginning of period $ 12,624 12,624 12,624 Impairment 12,624 — — Balance at end of period $ — 12,624 12,624 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 recognition of an $ 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 2020 or 2019. PROPERTY AND EQUIPMENT Property and equipment are carried at cost less accumulated depreciation. Depreciation of property and equipment is computed using the straight-line method over the useful lives of the assets, ranging from three years to thirty years . The following is a summary of property and equipment. December 31, (In thousands) 2021 2020 Property and equipment: Home office, land and buildings $ 3,980 4,136 Furniture and equipment 1,236 1,618 Electronic data processing equipment and computer software 7,418 7,179 Automobiles — 50 Real estate and equipment leases (See Note 7 ) 10,827 11,973 Total property and equipment 23,461 24,956 Accumulated depreciation ( 9,387 ) ( 8,644 ) Total property and equipment $ 14,074 16,312 The Company has several lease agreements for real estate and equipment, such as its corporate home office and several district office locations related to our Home Service Insurance segment. The Company recognizes these lease agreements on the consolidated balance sheets as a right-of-use asset and a corresponding lease liability. The Company uses its estimated incremental borrowing rate, which is derived from information available at lease commencement date, in determining the present value of lease payments. FUTURE POLICY BENEFITS AND EXPENSES Future policy benefit reserves for traditional life insurance are established based on methods and underlying assumptions in accordance with U.S. GAAP and applicable actuarial standards. Assumptions as to investment yields, expenses, mortality and lapses are based upon our experience, modified as necessary to reflect anticipated trends and to include provisions for possible adverse deviations. The accrued account balance for non-traditional life insurance and investment contracts is computed as deposits net of withdrawals made by the contract holder, plus amounts credited based on contract specifications, less contract fees and charges assessed, plus any additional interest. Annuity interest crediting rates range from 2.5 % December 31, 2021 | 10-K 81 Table of Contents CITIZENS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) to 5.5 % annually. Benefits and expenses are charged against the account balance to recognize costs as incurred over the estimated lives of the contracts. Expenses include interest credited to contract account balances and benefits paid in excess of contract account balances. Unpaid claims on accident and health and specialty property insurance policies represent the estimated liability for benefit expenses, both reported but not paid and incurred but not reported to the Company. The liability for incurred but not reported claims includes estimates for additional claim amounts due related to reported claims. Liabilities for unpaid claims are estimated using individual case basis valuations and statistical analysis. Those estimates are subject to the effects of trends in claim severity and frequency. Anticipated investment income is not considered in determining whether a premium deficiency exists with respect to short-duration contracts. Premium deposits accrue interest at rates ranging from 2.5 % to 6.0 % per annum. The cost of insurance is included in the premium when collected and interest is credited annually to deposit accounts. The development of liabilities for future policy benefits requires management to make estimates and assumptions regarding mortality, persistency, expense, and investment experience based on historical experience and future expectations of those assumptions. Actual results could differ materially from estimates. An additional provision is made on most products to allow for possible adverse deviation from the assumptions assumed. We monitor actual experience and revise assumptions as necessary. PARTICIPATING POLICIES At December 31, 2021 and 2020, participating business approximated 59.3 % and 60.8 % of direct life insurance in force, respectively. Future policy benefits on participating policies are estimated based on net level premium reserves for death and endowment policy benefits with interest rates ranging from 2.5 % to 9.0 %, and the cash surrender values described in such contracts. The scaling rate used for the 2021 portfolio ranged between 2.51 % for 1 year and then going up to 3.02 % over 20 years and remaining there for the duration. Earnings and dividends on participating policies are allocated based on policies in force. Policyholder dividends are determined based on the discretion of the board of directors of the policy issuing subsidiary. Policyholder dividends are accrued over the premium paying periods of the insurance contract. CONTINGENCIES An estimated loss from a contingency is accrued and charged to results of operations only if both of the following conditions are met: 1. Information available prior to the issuance of the consolidated financial statements indicates that it is probable (virtual certainty is not required) that an asset has been impaired or a liability incurred as of the date of the consolidated financial statements; and 2. The amount of the loss can be reasonably estimated. Reasonable estimation of a possible loss does not require estimating a single amount of the loss. It requires that a loss be accrued if it can be estimated within a range. If an amount within the range is a better estimate than any other amount within the range, that amount is accrued. If no amount within the range is a better estimate than any other amount, the minimum amount in the range is accrued. A gain contingency is an uncertain situation that will be resolved in the future, possibly resulting in a gain. We do not allow the recognition of a gain contingency prior to settlement of the underlying event. There were none for the years ended December 31, 2021, 2020 and 2019. December 31, 2021 | 10-K 82 Table of Contents CITIZENS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) PREMIUM REVENUE AND RELATED EXPENSES Premiums on life policies are recognized as earned when due. Premiums paid in advance on the consolidated balance sheets are held on deposit and accrue interest at rates ranging from 2.5 % to 6.0 % until such time as the premiums become due. Premiums on accident and health policies are recognized as revenue over the contract period on a pro rata basis. Benefits and expenses are associated with earned premiums resulting in the recognition of profits over the estimated lives of the contracts. This matching is accomplished by means of a provision for future policy benefits and the capitalization and amortization of deferred policy acquisition costs. Annuity policies, primarily flexible premium fixed annuity products, are accounted for in a manner consistent with accounting for interest bearing financial instruments. Premium receipts are not reported as revenue, rather as deposit liabilities to annuity contracts. The annuity products issued do not include fees or other such charges. INCOME TAXES Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered. A deferred tax asset is recorded only if a determination is made that it is more-likely-than-not that the tax treatment on which the deferred tax asset depends will be sustained in the event of an audit. These determinations inherently involve management's judgment. In addition, the Company must record a tax valuation allowance with respect to deferred tax assets if it is more-likely-than-not that the tax benefit will not be realized. The Company releases stranded tax effects in accumulated other comprehensive income on an aggregate portfolio basis. EARNINGS PER SHARE Basic earnings per share are computed by dividing income available to common stockholders by the weighted average number of shares of common stock outstanding during each period. Diluted earnings per share are computed under the if-converted method for convertible securities and the treasury stock method for warrants, giving effect to all potential dilutive common stock, including options, warrants and convertible/redeemable preferred stock. The basic and diluted earnings per share of Class B common stock are one half the earnings per share of the Class A common stock. USE OF ESTIMATES The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from these estimates. Significant estimates include those used in the evaluation of credit losses on fixed maturity securities, actuarially determined assets and liabilities and assumptions, tests of goodwill impairment, valuation allowance on deferred tax assets, valuation of uncertain tax positions and contingencies relating to litigation and regulatory matters. Certain of these estimates are particularly sensitive to market conditions, and deterioration and/or volatility in the worldwide debt or equity markets could have a material impact on the consolidated financial statements. RECLASSIFICATIONS Certain amounts presented in prior years have been reclassified to conform to the current presentation. No individual amounts were material. December 31, 2021 | 10-K 83 Table of Contents CITIZENS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ACCOUNTING PRONOUNCEMENTS ACCOUNTING STANDARDS RECENTLY ADOPTED In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-13, Financial Instruments-Credit Losses (Topic 326) , with the main objective to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The ASU requires a financial asset (or a group of financial assets) measured at amortized cost to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. The income statement reflects the measurement of credit losses for newly recognized financial assets, as well as the increases or decreases of expected credit losses that have taken place during the period. Credit losses on AFS fixed maturity securities should be measured in a manner similar to current U.S. GAAP; however, the credit losses are recorded through an allowance for credit losses rather than as a write-down. This approach is an improvement to prior U.S. GAAP because an entity will be able to record reversals of credit losses (in situations in which the estimate of credit losses declines) in current period net income, which in turn should align the income statement recognition of credit losses with the reporting period in which changes occur. Prior U.S. GAAP prohibited reflecting those improvements in current-period earnings. The Company adopted this standard effective January 1, 2020 using the modified retrospective approach. The adoption resulted in an increase in accumulated deficit of $ 0.4 million related to agents' debit balance collectability. In September 2018, the FASB issued ASU No. 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract . This ASU requires an entity in a cloud computing arrangement (i.e., hosting arrangement) that is a service contract to follow the internal-use software guidance in Accounting Standards Codification 350-40 to determine which implementation costs to capitalize as assets or expense as incurred. Capitalized implementation costs should be presented in the same line item on the balance sheet as amounts prepaid for the hosted service, if any (generally as an "other asset"). The capitalized costs will be amortized over the term of the hosting arrangement, with the amortization expense being presented in the same income statement line item as the fees paid for the hosted service. We adopted this standard effective January 1, 2020. The adoption had no impact on our consolidated financial statements. ACCOUNTING STANDARDS NOT YET ADOPTED In August 2018, the FASB issued ASU No. 2018-12, Financial Services-Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts. This ASU amends four key areas of the accounting and impacts disclosures for long-duration insurance and investment contracts: • Requires updated assumptions for liability measurement. Assumptions used to measure the liability for traditional insurance contracts, which are typically determined at contract inception, will now be reviewed at least annually, and, if there is a change, updated, with the effect recorded in net income; • Standardizes the liability discount rate. The liability discount rate will be a market-observable discount rate (upper-medium grade fixed-income instrument yield), with the effect of rate changes recorded in other comprehensive income; • Provides greater consistency in measurement of market risk benefits. The two previous measurement models have been reduced to one measurement model (fair value), resulting in greater uniformity across similar market-based benefits and better alignment with the fair value measurement of derivatives used to hedge capital market risk; • Simplifies amortization of DAC. Previous earnings-based amortization methods have been replaced with a more level amortization basis; and • Requires enhanced disclosures. The new disclosures include rollforwards and information about significant assumptions and the effects of changes in those assumptions. For calendar-year public companies, the changes will be effective on January 1, 2023, however, early adoption is permitted. We will adopt this ASU effective January 1, 2023, with a transition date of January 1, 2021, using a December 31, 2021 | 10-K 84 Table of Contents CITIZENS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) modified retrospective approach. We continue to make progress in our implementation process that includes, but is not limited to, making significant accounting policy decisions, employing appropriate internal controls, building and updating actuarial models and systems, revising reporting processes and developing informative qualitative and quantitative disclosures. In 2022, we will begin the process of recording our transition adjustments and restating applicable periods. We are currently evaluating the impact of adopting this ASU on our consolidated financial condition and results of operations and will be able to better assess the effects as we progress with our implementation efforts. While it is not possible to estimate the expected impact of adoption at this time, the Company believes there is a reasonable possibility that implementation of this ASU may result in a material impact to accumulated other comprehensive income and future earnings patterns. No other new accounting pronouncement issued or effective during 2021 had, or is expected to have, a material impact on our consolidated financial statements. (2) INVESTMENTS The Company invests primarily in fixed maturity securities, which totaled 89.0 % of total cash and invested assets at December 31, 2021. Carrying Value as of December 31, (In thousands, except for %) 2021 % 2020 % Cash and invested assets Fixed maturity securities $ 1,470,617 89.0 % $ 1,489,383 89.8 % Equity securities 14,844 0.9 22,102 1.3 Policy loans 80,307 4.9 83,318 5.0 Real estate and other long-term investments 57,399 3.5 29,865 1.8 Cash and cash equivalents 27,294 1.7 34,131 2.1 Total cash and invested assets $ 1,650,461 100.0 % $ 1,658,799 100.0 % The following table represents the amortized cost, gross unrealized gains and losses and fair value of fixed maturity securities as of December 31, 2021 and 2020. December 31, 2021 (In thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Fixed maturity securities: Available-for-sale: U.S. Treasury securities $ 9,515 1,097 1 10,611 U.S. Government-sponsored enterprises 3,463 996 — 4,459 States and political subdivisions 356,594 28,056 692 383,958 Corporate Financial 213,652 22,477 172 235,957 Consumer 219,223 23,658 900 241,981 Energy 76,989 7,334 68 84,255 All Other 302,141 29,855 1,181 330,815 Residential mortgage-backed 117,755 16,046 6 133,795 Asset-backed 44,322 368 14 44,676 Foreign governments 101 9 — 110 Total fixed maturity securities $ 1,343,755 129,896 3,034 1,470,617 December 31, 2021 | 10-K 85 Table of Contents CITIZENS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2020 (In thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Fixed maturity securities: Available-for-sale: U.S. Treasury securities $ 9,529 1,797 — 11,326 U.S. Government-sponsored enterprises 3,490 1,301 — 4,791 States and political subdivisions 377,462 32,751 548 409,665 Corporate Financial 204,160 31,000 13 235,147 Consumer 196,648 30,116 245 226,519 Energy 81,223 8,174 536 88,861 All Other 284,209 42,554 82 326,681 Commercial mortgage-backed 225 — 4 221 Residential mortgage-backed 118,144 21,819 — 139,963 Asset-backed 46,295 278 482 46,091 Foreign governments 102 16 — 118 Total fixed maturity securities $ 1,321,487 169,806 1,910 1,489,383 Most of the Company's equity securities are diversified stock and bond mutual funds. Fair Value as of December 31, (In thousands) 2021 2020 Equity securities: Stock mutual funds $ 3,571 3,174 Bond mutual funds 5,060 12,354 Common stock 990 1,143 Non-redeemable preferred stock 161 281 Non-redeemable preferred stock fund 5,062 5,150 Total equity securities $ 14,844 22,102 VALUATION OF INVESTMENTS AFS fixed maturity securities are reported in the consolidated financial statements at fair value. Equity securities are measured at fair value with the change in fair value recorded through net income. The Company recognized net realized gains of $ 0.4 million and $ 1.6 million on equity securities held for the years ended December 31, 2021 and 2020. The Company monitors all AFS fixed maturity securities on an on-going basis relative to changes in credit ratings, market prices, earnings trends and financial performance, in addition to specific region or industry reviews. The Company evaluates whether a credit impairment exists for fixed maturity securities by considering primarily the following factors: (a) changes in the financial condition of the security's underlying collateral; (b) whether the issuer is current on contractually obligated interest and principal payments; (c) changes in the financial condition, credit rating and near-term prospects of the issuer; and (d) the payment structure of the security. The Company's best estimate of expected future cash flows used to determine the credit loss amount is a quantitative and qualitative process. Quantitative review includes information received from third-party sources such as financial statements, pricing and rating changes, liquidity and other statistical information. Qualitative factors include judgments related to business strategies, economic impacts on the issuer, overall judgment related to estimates and industry factors December 31, 2021 | 10-K 86 Table of Contents CITIZENS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) as well as the Company's intent to sell the security, or if it is more likely than not that the Company would be required to sell a security before recovery of its amortized cost. The Company's best estimate of future cash flows involves assumptions including, but not limited to, various performance indicators, such as historical and projected default and recovery rates, credit ratings, and current delinquency rates. These assumptions require the use of significant management judgment and include the probability of issuer default and estimates regarding timing and amount of expected recoveries, which may include estimating the underlying collateral value. In addition, projections of expected future fixed maturity security cash flows may change based upon new information regarding the performance of the issuer. Any credit losses are presented as an allowance rather than as a write-down on AFS fixed maturity securities management does not intend to sell or believes that it is more likely than not we will be required to sell. We adopted ASU 2016-13 using the prospective transition approach for fixed maturity securities for which other-than-temporary impairment had been recognized prior to January 1, 2020. As a result, the amortized cost remains the same before and after adoption. The effective interest rate on these fixed maturity securities was not changed. Amounts previously recognized in accumulated other comprehensive income as of January 1, 2020 relating to improvements in cash flow expected to be collected will be accreted into income over the remaining life of the asset. Recoveries of amounts previously written off relating to improvements in cash flows after January 1, 2020 will be recorded in earnings when received. The Company recorded no credit valuation losses on fixed maturity securities for the years ended December 31, 2021 and 2020. For fixed maturity security investments that have unrealized losses as of December 31, 2021 and 2020, the gross unrealized losses that have been in a continuous unrealized loss position for less than 12 months, gross unrealized losses that have been in a continuous unrealized loss position for 12 months or longer and fair value are as follows. December 31, 2021 Less than 12 months Greater than 12 months Total (In thousands, except for # of securities) Fair Value Unrealized Losses # of Securities Fair Value Unrealized Losses # of Securities Fair Value Unrealized Losses # of Securities Fixed maturity securities: Available-for-sale: U.S. Treasury securities $ 72 1 2 — — — 72 1 2 States and political subdivisions 21,715 692 15 — — — 21,715 692 15 Corporate Financial 8,059 86 15 1,227 86 1 9,286 172 16 Consumer 29,494 777 28 2,419 123 1 31,913 900 29 Energy 7,381 68 8 — — — 7,381 68 8 All Other 33,384 781 30 4,523 400 4 37,907 1,181 34 Residential mortgage-backed 1,084 6 6 — — — 1,084 6 6 Asset-backed 9,078 12 11 663 2 1 9,741 14 12 Total fixed maturity securities $ 110,267 2,423 115 8,832 611 7 119,099 3,034 122 December 31, 2021 | 10-K 87 Table of Contents CITIZENS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2020 Less than 12 months Greater than 12 months Total (In thousands, except for # of securities) Fair Value Unrealized Losses # of Securities Fair Value Unrealized Losses # of Securities Fair Value Unrealized Losses # of Securities Fixed maturity securities: Available-for-sale: States and political subdivisions $ 32,487 548 27 — — — 32,487 548 27 Corporate Financial 1,308 13 1 — — — 1,308 13 1 Consumer 10,740 230 5 1,667 15 1 12,407 245 6 Energy 6,350 536 8 — — — 6,350 536 8 All Other 9,418 82 11 — — — 9,418 82 11 Commercial mortgage-backed 221 4 1 — — — 221 4 1 Residential mortgage-backed 83 — 1 — — — 83 — 1 Asset-backed 26,353 481 26 994 1 1 27,347 482 27 Total fixed maturity securities $ 86,960 1,894 80 2,661 16 2 89,621 1,910 82 In each category of our fixed maturity securities described below, we do not intend to sell our investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases. While the losses are currently unrealized, we continue to monitor all fixed maturity securities on an on-going basis as future information may become available which could result in an allowance being recorded. The unrealized losses on fixed maturity securities detailed in the previous tables are due to noncredit-related factors, including interest rate sensitivity and other market conditions, which have little bearing on the recoverability of our investments, hence they are not recognized as credit losses. The fair value is expected to recover as the securities approach maturity or if market yields for such investments decline. The amortized cost and fair value of fixed maturity securities at December 31, 2021 by contractual maturity are shown in the table below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date have been reflected based upon final stated maturity. (In thousands) Amortized Cost Fair Value Fixed maturity securities: Due in one year or less $ 40,017 40,752 Due after one year through five years 119,116 128,507 Due after five years through ten years 200,823 218,200 Due after ten years 983,799 1,083,158 Total fixed maturity securities $ 1,343,755 1,470,617 The Company had no investments in any one entity which exceeded 10% of stockholders' equity at December 31, 2021 or 2020. In addition, there were no investments that were non-income producing for the years ended December 31, 2021 or 2020. December 31, 2021 | 10-K 88 Table of Contents CITIZENS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Major categories of net investment income are summarized as follows: Years ended December 31, (In thousands) 2021 2020 2019 Gross investment income: Fixed maturity securities $ 55,579 54,653 53,860 Equity securities 1,024 816 662 Policy loans 6,420 6,605 6,451 Other long-term investments 809 238 13 Other 54 97 374 Total investment income 63,886 62,409 61,360 Investment expenses ( 2,391 ) ( 2,212 ) ( 1,829 ) Net investment income $ 61,495 60,197 59,531 The Company uses the specific identification method of the individual security to determine the cost basis used in the calculation of realized gains and losses related to security sales. Years ended December 31, (In thousands) 2021 2020 2019 Fixed maturity securities: Proceeds $ 8,238 20,537 66,900 Gross realized gains 189 239 2,538 Gross realized losses 1 351 973 Equity securities: Proceeds $ 7,383 — — Gross realized gains — — — Gross realized losses 149 — — We sold 28 , 29 and 68 fixed maturity securities from our available-for-sale portfolio in 2021, 2020 and 2019, respectively, as part of a repositioning strategy recommended by our asset manager. There was one sale of equity securities in 2021 and none in 2020 or 2019. December 31, 2021 | 10-K 89 Table of Contents CITIZENS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) I nvestment related gains (losses) are as follows: Years ended December 31, (In thousands) 2021 2020 2019 Investment related gains (losses): Sales, calls and maturities: Fixed maturity securities $ 243 ( 112 ) 1,927 Equity securities ( 152 ) — — Real estate 981 — 5,513 Property and equipment 13 9 ( 48 ) Other long-term investments 1,892 9 — 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 — — Realized loss on OTTI - real estate held for sale — — ( 3,105 ) Net investment related gains (losses) $ 10,991 1,502 5,249 The Company sold its former training facility near Austin, Texas during 2021 for a gross sale price of $ 3.8 million, resulting in a gain on the sale of $ 1.0 million. We had recorded an impairment loss of $ 3.1 million in 2019 on this facility in connection with reclassifying it as real estate held for sale. The facility was owned by Citizens and was held in Other Non-Insurance Enterprises. During 2019, the Company sold its former corporate office in Austin, Texas for a gross sale price of $ 7.5 million, resulting in a gain on the sale of $ 5.5 million. The building was owned by CICA and was included in our Life Insurance segment. (3) FAIR VALUE MEASUREMENTS Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We hold AFS fixed maturity securities, which are carried at fair value. We also report our equity securities and certain other long-term investments at fair value with changes in fair value reported through the consolidated statements of operations and comprehensive income (loss). Fair value measurements are generally based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our view of market assumptions in the absence of observable market information. We utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. All assets and liabilities carried at fair value are required to be classified and disclosed in one of the following three categories: • Level 1 - Quoted prices for identical instruments in active markets. • Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active and model-derived valuations whose inputs or whose significant value drivers are observable. • Level 3 - Instruments whose significant value drivers are unobservable. Level 1 primarily consists of financial instruments whose value is based on quoted market prices such as U.S. Treasury securities and actively traded mutual fund and stock investments. Level 2 includes those financial instruments that are valued by independent pricing services or broker quotes. These pricing models are primarily industry-standard models that consider various inputs, such as interest rates, credit spreads and foreign exchange rates for the underlying financial instruments. All significant inputs are December 31, 2021 | 10-K 90 Table of Contents CITIZENS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) observable or derived from observable information in the marketplace or are supported by observable levels at which transactions are executed in the marketplace. Financial instruments in this category primarily include corporate securities, U.S. Government-sponsored enterprise securities, securities issued by states and political subdivisions and certain mortgage and asset-backed securities. Level 3 is comprised of financial instruments whose fair value is estimated based on non-binding broker prices utilizing significant inputs not based on or corroborated by readily available market information. Real estate held-for-sale is in this category. We review the fair value hierarchy classifications each reporting period. Changes in the observability of the valuation attributes may result in a reclassification of certain financial assets. Such reclassifications are reported as transfers in and out of Level 3 at the beginning fair value for the reporting period in which the changes occur. There were no transfers in or out of Level 3 during the years ended December 31, 2021 and 2020. The following tables set forth our assets that are measured at fair value on a recurring basis as of the dates indicated. December 31, 2021 (In thousands) Level 1 Level 2 Level 3 Total Fair Value Financial assets: Fixed maturity securities available-for-sale: U.S. Treasury and U.S. Government-sponsored enterprises $ 10,611 4,459 — 15,070 States and political subdivisions — 383,958 — 383,958 Corporate 51 892,957 — 893,008 Residential mortgage-backed — 133,795 — 133,795 Asset-backed — 44,676 — 44,676 Foreign governments — 110 — 110 Total fixed maturity securities available-for-sale 10,662 1,459,955 — 1,470,617 Equity securities: Stock mutual funds 3,571 — — 3,571 Bond mutual funds 5,060 — — 5,060 Common stock 990 — — 990 Non-redeemable preferred stock 161 — — 161 Non-redeemable preferred stock fund 5,062 — — 5,062 Total equity securities 14,844 — — 14,844 Other long-term investments (1) — — — 56,038 Total financial assets $ 25,506 1,459,955 — 1,541,499 (1) In accordance with Subtopic 820-10, certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the balance sheet. December 31, 2021 | 10-K 91 Table of Contents CITIZENS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2020 (In thousands) Level 1 Level 2 Level 3 Total Fair Value Financial assets: Fixed maturity securities available-for-sale: U.S. Treasury and U.S. Government-sponsored enterprises $ 11,326 4,791 — 16,117 States and political subdivisions — 409,665 — 409,665 Corporate 52 877,156 — 877,208 Commercial mortgage-backed — 221 — 221 Residential mortgage-backed — 139,963 — 139,963 Asset-backed — 46,091 — 46,091 Foreign governments — 118 — 118 Total fixed maturity securities available-for-sale 11,378 1,478,005 — 1,489,383 Equity securities: Stock mutual funds 3,174 — — 3,174 Bond mutual funds 12,354 — — 12,354 Common stock 1,143 — — 1,143 Non-redeemable preferred stock 281 — — 281 Non-redeemable preferred stock fund 5,150 — — 5,150 Total equity securities 22,102 — — 22,102 Other long-term investments (1) — — — 11,923 Total financial assets $ 33,480 1,478,005 — 1,523,408 (1) In accordance with Subtopic 820-10, certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the balance sheet. FINANCIAL INSTRUMENTS VALUATION Fixed maturity securities, available-for-sale. At December 31, 2021, fixed maturity securities, valued using a third-party pricing source, totaled $ 1.5 billion for Level 2 assets and comprised 94.7 % of total reported fair value of our financial assets. The Level 1 and Level 2 valuations are reviewed and updated quarterly through testing by comparisons to separate pricing models, other third-party pricing services, and back tested to recent trades. In addition, we obtain information annually relative to the third-party pricing models and review model parameters for reasonableness. There were no Level 3 assets as of December 31, 2021 and 2020. For the year ended December 31, 2021, there were no material changes to the valuation methods or assumptions used to determine fair values, and no broker or third-party prices were changed from the values received. Equity securities. Our equity securities are classified as Level 1 assets as their fair values are based upon quoted market prices. Limited partnerships. The Company considers the net asset value ("NAV") to represent the value of the investment fund and is measured by the total value of assets minus the total value of liabilities. The following table includes information related to our investments in limited partnerships that calculate NAV per share. For these investments, December 31, 2021 | 10-K 92 Table of Contents CITIZENS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) which are measured at fair value on a recurring basis, we use the NAV per share to measure fair value. These investments are included in other long-term investments on the consolidated balance sheets. December 31, 2021 December 31, 2020 (In thousands, except years) Fair Value Using NAV Per Share Unfunded Commit- ments Remaining life (In years) Fair Value Using NAV Per Share Unfunded Commit- ments Remaining life (In years) Description Limited partnerships Middle market Investments in privately-originated, performing senior secured debt primarily in North America-based companies $ 21,947 18,712 10 $ 10,542 29,783 10 Global equity fund Investments in common stocks of U.S., international developed and emerging markets with a focus on long-term capital growth 10,607 — 0 — — 0 Term liquidity facility Investments in a facility established by the U.S. Federal Reserve that provides financing to U.S. company market participants for levered asset purchases with a focus on asset-backed, commercial mortgage and collateralized loan obligation markets — — 0 1,381 — 3 Late-stage growth Investments in private late-stage, established companies seeking capital to accelerate growth prior to an IPO or sale 20,468 4,459 6 — 16,291 7 Infrastructure Investments in climate infrastructure assets, focusing on renewable power generation in wind and solar energy 3,016 16,653 12 — 17,497 12 Total limited partnerships $ 56,038 39,824 $ 11,923 63,571 The majority of our limited partnership investments are not redeemable because distributions from the funds will be received when the underlying investments of the funds are liquidated. The life spans indicated above may be shortened or extended at the fund manager's discretion, typically in one or two-year increments. The international equity fund is redeemable monthly. FINANCIAL INSTRUMENTS NOT CARRIED AT FAIR VALUE Estimates of fair values are made at a specific point in time, based on relevant market prices and information about the financial instruments. The estimated fair values of financial instruments presented below are not necessarily indicative of the amounts the Company might realize in actual market transactions. The carrying amount and fair value for the financial assets and liabilities on the consolidated financial statements not otherwise disclosed for the periods indicated were as follows: December 31, 2021 December 31, 2020 (In thousands) Carrying Value Fair Value Carrying Value Fair Value Financial assets: Policy loans $ 80,307 80,307 83,318 83,318 Commercial mortgage loan 1,000 1,000 — — Residential mortgage loans 148 169 157 195 Cash and cash equivalents 27,294 27,294 34,131 34,131 Financial liabilities: Annuity - investment contracts 64,384 72,352 60,861 71,547 December 31, 2021 | 10-K 93 Table of Contents CITIZENS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Policy loans. Policy loans had a weighted average annual interest rate of 7.7 % at both December 31, 2021 and 2020 and no specified maturity dates. The aggregate fair value of policy loans approximates the carrying value reflected on the consolidated balance sheets. Policy loans are an integral part of the life insurance policies we have in force, cannot be valued separately and are not marketable. Therefore, the fair value of policy loans approximates the carrying value and policy loans are considered Level 3 assets in the fair value hierarchy. Commercial mortgage loan. We financed $ 1.0 million of the sale of our training facility at a 6.0 % interest rate. The loan is due in less than 1 year. Due to the short-term nature of the loan, the carrying value approximates fair value and is considered a Level 3 asset in the fair value hierarchy. Residential mortgage loans. Mortgage loans are secured principally by residential properties. Weighted average interest rates for these loans were approximately 6.4 % at both December 31, 2021 and 2020, with maturities ranging from 5 to 18 years. Management estimated the fair value using an annual interest rate of 6.25 % at both December 31, 2021 and 2020. Our mortgage loans are considered Level 3 assets in the fair value hierarchy. Cash and cash equivalents. The fair value of cash and cash equivalents approximate carrying value and are characterized as Level 1 assets in the fair value hierarchy. Annuity liabilities. The fair value of the Company's liabilities under annuity contract policies, which are considered Level 3 liabilities, was estimated at December 31, 2021 and 2020 using discounted cash flows based upon spot rates adjusted for various risk adjustments ranging from 0.50 % to 2.63 % and 0.22 % to 2.34 %, respectively. The fair value of liabilities under all insurance contracts are taken into consideration in the overall management of interest rate risk, which seeks to minimize exposure to changing interest rates through the matching of investment maturities with amounts due under insurance contracts. The following table summarizes the carrying amounts of other long-term investments. As of December 31, (In thousands) 2021 2020 Other long-term investments: Limited partnerships $ 56,038 18,135 FHLB common stock 192 190 Mortgage loans 1,148 157 All other investments 21 8,811 Total other long-term investments $ 57,399 27,293 We are a member of the FHLB of Dallas and such membership requires members to own stock in the FHLB. Our FHLB stock is carried at amortized cost, which approximates fair value. Included in all other investments at December 31, 2020 was a Rabbi Trust holding $ 8.8 million for the benefit of our former Chief Executive Officer for the severance payment that was made to him on February 8, 2021. (4) POLICY LIABILITIES AND SHORT DURATION CONTRACTS Various assumptions used to determine the future policy benefit reserves of life insurance include valuation interest rates, mortality assumptions and withdrawals. December 31, 2021 | 10-K 94 Table of Contents CITIZENS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The following table presents information on changes in the liability for life, accident and health and property policy and contract claims for the years ended December 31, 2021, 2020 and 2019. Years ended December 31, (In thousands) 2021 2020 2019 Policy claims payable: Balance at January 1 $ 13,206 8,059 7,614 Less: reinsurance recoverable 3,012 796 511 Net balance at January 1 10,194 7,263 7,103 Add claims incurred, related to: Current year 32,595 38,400 26,816 Prior years (1) 1,052 195 543 33,647 38,595 27,359 Deduct claims paid, related to: Current year 23,369 29,767 20,629 Prior years 8,351 5,897 6,570 31,720 35,664 27,199 Net balance December 31 12,121 10,194 7,263 Plus: reinsurance recoverable 2,469 3,012 796 Balance at December 31 $ 14,590 13,206 8,059 (1) This line is primarily impacted by the level of claim resolutions in the period compared to that which is expected by the reserve assumption. A positive number implies an unfavorable result where claim resolutions were less favorable than assumed while a negative number implies a favorable result compared to assumptions. Our claim assumptions will vary from actual experience in any one period, either favorably or unfavorably. SHORT DURATION CONTRACTS The Company's short duration contracts consist of credit life and credit disability in the Life Insurance segment and property insurance in the Home Service Insurance segment. The credit insurance lines are an immaterial part of short duration contracts so the following disclosures cover only the property insurance line of business in the Home Service Insurance segment. December 31, 2021 | 10-K 95 Table of Contents CITIZENS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Special Property Insurance (Allied and Fire) The following table presents incurred claims development as of December 31, 2021, net of reinsurance, as well as cumulative claim frequency and the total of incurred-but-not-reported liabilities plus expected development on reported claims included within the net incurred claims amounts. This information is presented for the last five years as these claims rarely pay out over a longer period of time. As of December 31, 2021 Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance Total of Incurred but Not Reported Liabilities Plus Expected Development on Reported Claims Cumulative Number of Reported Claims For the Years Ended December 31, ($ In thousands) 2017 2018 2019 2020 2021 Accident Year: (Unaudited) 2017 $ 1,507 1,451 1,406 1,407 1,417 — 664 2018 1,542 1,427 1,432 1,436 — 496 2019 1,549 1,150 1,161 4 588 2020 2,598 2,670 5 2,290 2021 2,087 561 1,875 Total $ 8,771 The following table presents paid claims development as of December 31, 2021, net of reinsurance. Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance Years ended December 31, (In thousands) 2017 2018 2019 2020 2021 Accident Year: (Unaudited) 2017 $ 1,359 1,652 1,661 1,661 1,661 2018 1,507 1,618 1,623 1,623 2019 1,328 1,254 1,274 2020 2,154 2,798 2021 1,442 Total $ 8,798 All outstanding liabilities before 2017, net of reinsurance $ — Liabilities for claims and claim adjustment expenses, net of reinsurance $ 796 December 31, 2021 | 10-K 96 Table of Contents CITIZENS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The reconciliation of the net incurred and paid claims development tables to the liability for claims and claim adjustment expenses in the consolidated balance sheets are as follows: As of December 31, (In thousands) 2021 2020 Net outstanding liabilities: Special property $ 796 743 Other short duration insurance lines 253 214 Liabilities for unpaid claims and claim adjustment expenses, net of reinsurance 1,049 957 Reinsurance recoverable on unpaid claims: Special property 2,083 2,955 Other short duration insurance lines 386 57 Total reinsurance recoverable on unpaid claims 2,469 3,012 Insurance lines other than short duration 11,072 9,237 Total gross liability for unpaid claims and claim adjustment expense $ 14,590 13,206 The following is supplementary information to the consolidated financial statements about average historical claims duration as of December 31, 2021. Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance (Unaudited) Years 1 2 3 4 5 Special property 93.00 % 11.54 % 0.90 % — % — % (5) REINSURANCE In the normal course of business, the Company reinsures portions of certain policies that we underwrite to limit disproportionate risks. During 2021 and 2020, we retained varying amounts of individual insurance up to a maximum retention of $ 100,000 on any life. The Company also reinsures 100 % of our accidental death benefit rider coverage. Catastrophe reinsurance is in place for our property policies. In both 2021 and 2020, this reinsurance provided $ 10.5 million of coverage above a $ 0.5 million deductible. In consideration for a reinstatement premium, second event coverage is provided in excess of a $ 0.5 million deductible up to $ 10.5 million. The annual premium was approximately $ 2.3 million in 2021 and $ 1.4 million and $ 0.8 million in 2020 and 2019, respectively. Our health insurance policies are substantially all reinsured on a 100 % coinsurance basis. We remain contingently liable to the extent that the reinsuring companies cannot meet their obligations under these reinsurance treaties. Our amounts recoverable from reinsurers represent receivables from and reserves ceded to reinsurers. We obtain reinsurance from multiple reinsurers, and we monitor concentration as well as financial strength ratings of our principal reinsurers. The ratings by A.M. Best Company range from A (Excellent) to A+ (Superior). December 31, 2021 | 10-K 97 Table of Contents CITIZENS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Assumed and ceded life reinsurance activity as of December 31, 2021 and 2020 is summarized as follows: December 31, (In thousands) 2021 2020 Aggregate assumed life insurance in force $ 4,366 4,615 Aggregate ceded life insurance in force $ 465,954 474,792 Net life insurance in force $ 4,165,921 4,141,968 The Company's reinsurance recoverable on ceded reinsurance was $ 5.5 million and $ 5.8 million in 2021 and 2020, respectively. Premiums, claims and surrenders assumed and ceded for all lines of business for these years are summarized as follows: Years ended December 31, (In thousands) 2021 2020 2019 Premiums from short-duration contracts: Direct $ 7,631 6,448 6,804 Assumed — — — Ceded ( 2,312 ) ( 1,447 ) ( 808 ) Net premiums earned 5,319 5,001 5,996 Premiums from long-duration contracts: Direct 171,175 172,504 180,205 Assumed 84 91 99 Ceded ( 1,850 ) ( 2,267 ) ( 1,953 ) Net premiums earned 169,409 170,328 178,351 Total premiums earned $ 174,728 175,329 184,347 Claims and surrenders assumed $ 169 174 141 Claims and surrenders ceded $ ( 11,764 ) ( 1,575 ) ( 940 ) During the third quarter of 2021, SPFIC was impacted by Hurricane Ida, the second-most damaging and intense hurricane in Louisiana on record, behind Hurricane Katrina in 2005. In addition, during the third and fourth quarters of 2020, SPFIC was impacted by Hurricanes Laura, Delta and Zeta, all of which caused varying levels of damage in Louisiana. The Company has a reinsurance agreement that covers catastrophic events such as these hurricanes. The reinsurance agreement specifies a maximum coverage per event of $ 10.5 million and a retention level of $ 0.5 million per event. In consideration for a reinstatement premium, second event coverage is provided in excess of a $ 0.5 million deductible up to $ 10.5 million. We expect claims from Hurricane Ida to exceed our reinsurance of $ 11.0 million by approximately $ 0.3 million and thus the total claim impact to us is expected to be approximately $ 0.8 million in 2021. We also paid the $ 0.5 million retention in claim amounts for Laura and Delta and did not exceed the maximum coverage for either of them. All claims related to Zeta were paid by SPFIC and totaled less than $ 0.5 million. (6) STOCKHOLDERS' EQUITY AND RESTRICTIONS STOCK Our Restated and Amended Articles of Incorporation authorize the issuance of 127,000,000 shares, of which 100,000,000 shares shall be Class A common stock, 2,000,000 shares shall be Class B common stock, and 25,000,000 shall be preferred stock. The two authorized classes of common stock are equal in all respects, except (a) each share of Class A common stock is entitled to receive twice the cash dividends paid on a per share basis to the Class B common stock, if any; and (b) the holders of the Class B common stock have the exclusive right to elect a simple majority of the Board of Directors of Citizens. In April 2021, we repurchased all of the outstanding Class B December 31, 2021 | 10-K 98 Table of Contents CITIZENS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) common stock and it is now classified as treasury stock. As a result, all of the directors are elected by the holders of the Class A common stock. Citizens has never issued any preferred stock. A summary of the change in number of shares of Class A and Class B common stock and treasury stock issued is as follows: (In thousands) Common Stock Treasury Class A Class B Stock Balance at December 31, 2018 52,216 1,002 ( 3,136 ) Change 149 — — Balance at December 31, 2019 52,365 1,002 ( 3,136 ) Change 289 — — Balance at December 31, 2020 52,654 1,002 ( 3,136 ) Change 516 — ( 1,002 ) Balance at December 31, 2021 53,170 1,002 ( 4,138 ) EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share. Years ended December 31, (In thousands, except per share amounts) 2021 2020 2019 Net income (loss) $ 36,787 ( 10,988 ) ( 1,370 ) Numerator for Basic Earnings Per Share: Net income (loss) allocated to Class A common stock $ 36,673 ( 10,878 ) ( 1,356 ) Net income (loss) allocated to Class B common stock 114 ( 110 ) ( 14 ) Net income (loss) $ 36,787 ( 10,988 ) ( 1,370 ) Denominator for Basic Earnings Per Share: Weighted average shares of Class A outstanding 49,664 49,400 49,214 Weighted average shares of Class B outstanding 308 1,002 1,002 Total weighted average shares outstanding 49,972 50,402 50,216 Basic earnings (loss) per share of Class A common stock $ 0.74 ( 0.22 ) ( 0.03 ) Basic earnings (loss) per share of Class B common stock 0.37 ( 0.11 ) ( 0.01 ) Numerator for Diluted Earnings Per Share: Net income (loss) allocated to Class A common stock $ 36,675 ( 10,878 ) ( 1,356 ) Net income (loss) allocated to Class B common stock 112 ( 110 ) ( 14 ) Net income (loss) $ 36,787 ( 10,988 ) ( 1,370 ) Denominator for Diluted Earnings Per Share: Weighted average shares of Class A outstanding 50,337 49,938 49,347 Weighted average shares of Class B outstanding 308 1,002 1,002 Total weighted average shares outstanding 50,645 50,940 50,349 Diluted earnings (loss) per share of Class A common stock $ 0.73 ( 0.22 ) ( 0.03 ) Diluted earnings (loss) per share of Class B common stock 0.36 ( 0.11 ) ( 0.01 ) December 31, 2021 | 10-K 99 Table of Contents CITIZENS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) STATUTORY CAPITAL AND SURPLUS The table below shows the combined total of all of our domestic insurance subsidiaries' statutory capital and surplus and statutory net income (loss) for life insurance operations and property insurance operations, although these amounts are not all available as dividends to Citizens because only CICA is directly owned by Citizens. All other domestic subsidiaries are owned by CICA. As of December 31, (In thousands) 2021 2020 Combined statutory capital and surplus Life insurance operations $ 43,138 39,633 Property insurance operations 5,298 4,810 Total combined statutory capital and surplus $ 48,436 44,443 Years ended December 31, (In thousands) 2021 2020 2019 Combined statutory net income (loss) Life insurance operations $ 5,280 9,458 ( 1,200 ) Property insurance operations ( 1,512 ) ( 1,985 ) ( 451 ) Total combined statutory net income (loss) $ 3,768 7,473 ( 1,651 ) Generally, the net assets of the domestic insurance subsidiaries available for transfer to their immediate parent are limited to the lesser of the subsidiary's net gain from operations during the preceding year or 10 % of the subsidiary's net statutory surplus as of the end of the preceding year as determined in accordance with accounting practices prescribed or permitted by insurance regulatory authorities. Under these practices, total surplus at December 31, 2021 was $ 40.0 million and net gain from operations was $ 0.2 million for CICA for the year ended December 31, 2021. Based upon these amounts, a $ 0.2 million dividend could be paid to the Company without prior regulatory approval in 2022. Payments of dividends in excess of such amounts would generally require approval by regulatory authorities. CICA, CNLIC, SPLIC, MGLIC and SPFIC have calculated their risk-based capital ("RBC") in accordance with the National Association of Insurance Commissioners' ("NAIC") Model Rule and the RBC rules as adopted by their respective states of domicile. As part of the novation transaction with CICA International, the Company agreed to infuse capital into CICA as required by the Colorado Department of Insurance to maintain CICA's RBC above 350% in any future calendar year-end periods. All insurance subsidiaries exceeded RBC minimum levels at December 31, 2021. Under the Bermuda Insurance Act 1978, an insurer is prohibited from declaring or paying a dividend if it is in breach of its Enhanced Capital Requirement (“ECR”) or Minimum Margin of Solvency (“MMS”) or if the declaration or payment of such dividend would cause such a breach. Where an insurer fails to meet its MMS on the last day of any financial year, it is prohibited from declaring or paying any dividends during the next financial year without the approval of the Bermuda Monetary Authority (the “BMA” or the "Authority"). Insurers are also prohibited from paying a dividend in an amount exceeding 25 % of the prior year’s total statutory capital and surplus, unless at least two members of the board of directors and its principal representative sign and submit to the BMA an affidavit attesting that a dividend in excess of this amount would not cause such insurer to fail to meet its relevant margins. In certain instances, the insurer would also be required to provide prior notice to the BMA in advance of the payment of dividends. In the event that such an affidavit is submitted to the BMA in accordance with the Bermuda Insurance Act, and further subject to CICA International meeting its MMS and ECR requirements, CICA International would be permitted to distribute a dividend not exceeding 25 % of its prior year's total statutory capital and surplus. Distributions in excess of this amount require the approval of the BMA. Further, CICA International must obtain the December 31, 2021 | 10-K 100 Table of Contents CITIZENS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) BMA’s prior approval before reducing its total statutory capital as shown in its previous financial year statutory balance sheet by 15 % or more. CICA International is also prohibited from declaring or paying any dividends unless the value of its long-term business assets exceeds its long-term business liabilities, as certified by its approved actuary, by the amount of the dividend and at least the MMS. These restrictions on declaring or paying dividends and distributions under the Bermuda Insurance Act of 1978 are in addition to those under Bermuda’s Companies Act 1981 which apply to all Bermuda companies. Based upon these rules, CICA International can pay a dividend of $ 4.5 million without prior regulatory approval in 2022. However, the BMA has requested that CICA International notify the Authority in advance of any potential dividend payments and any intercompany related payments or transactions. As of December 31, (In thousands) 2021 2020 CICA International capital and surplus $ 141,931 158,447 Years ended December 31, (In thousands) 2021 2020 2019 CICA International net income (loss) $ 14,029 9,000 7,649 The BMA established risk-based regulatory capital adequacy and solvency margin requirements for Bermuda insurers that mandate that a Bermuda-domiciled subsidiary’s ECR be calculated by either: (a) Bermuda Solvency Capital Requirement ("BSCR"); or (b) an internal capital model that the BMA has approved for use for this purpose. CICA International uses the BSCR in calculating its solvency requirements. The Economic Balance Sheet ("EBS") framework is embedded as part of the BSCR and forms the basis of its ECR. CICA International held capital in excess of the BSCR requirements at December 31, 2021. 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 % (equal to the TCL). Since CICA International's capital level currently exceeds 120 %, Citizens is not currently required to make a capital contribution. On June 10, 2016, the NAIC Executive Committee and Plenary voted to adopt a recommendation for January 1, 2017 as the operative date for the implementation of Principles-Based Reserves (“PBR”) as a national standard for life insurance products. Although this NAIC standard does not change the reserving requirements under U.S. GAAP, it can be significant for many life insurers. PBR replaces the current formulaic approach to determining policy reserves with an approach that more closely reflects the risks of highly complex products. Companies will be expected to develop “right-sized” reserves that better align with their specific product features, their observed actuarial experience, and their overall risk management procedures. PBR was required effective January 1, 2020. The Company files annual requests for PBR exemption with the various state Departments of Insurance since all of our domestic insurance subsidiaries met the small company exemption outlined in the NAIC Valuation Manual, VM-20, for principle-based reserving. (7) COMMITMENTS AND CONTINGENCIES QUALIFICATIONS OF LIFE PRODUCTS We have previously reported that a portion of the life insurance policies issued by our subsidiary insurance companies failed to qualify for the favorable U.S. federal income tax treatment afforded by Sections 7702 and 72(s) of the Internal Revenue Code ("IRC") of 1986. Further, we have determined that the structure of our policies sold to non-U.S. persons, which were novated to CICA International effective July 1, 2018, inadvertently generated U.S. source income over time, which subjected the Company to certain tax withholding and information reporting requirements under Chapters 3 or 4 of the IRC. The products have been and continue to be appropriately reported as life insurance under U.S. GAAP for financial reporting. December 31, 2021 | 10-K 101 Table of Contents CITIZENS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) To satisfy the Internal Revenue Service ("IRS") tax withholding and information reporting requirements for the novated policies sold to non-U.S. persons as described above, the Company submitted withholding tax returns to the IRS in December 2019, and amended returns in August 2020 and paid the associated withholding tax. The IRS processed these withholding tax returns in 2021, and the Company considers this matter closed. LITIGATION AND REGULATORY ACTIONS From time to time we are subject to legal and regulatory actions relating to our business. We defend all claims vigorously. As a result, we incur defense costs, including attorneys' fees, other direct litigation costs and the expenditure of management time that otherwise would be devoted to our business. If we suffer an adverse judgment as a result of litigation claims, it could have a material adverse effect on our business, results of operations and financial condition. CREDIT FACILITY On May 5, 2021 , the Company entered into a $ 20 million senior secured revolving credit facility (the “Credit Facility”) with Regions Bank ("Regions"). The Credit Facility has a three-year term, maturing on May 5, 2024 , and allows the Company to borrow up to $ 20 million for working capital purposes, capital expenditures and other corporate purposes. Revolving loans may be requested by the Company in aggregate minimum principal amounts of $ 0.5 million per loan. At the Company's election, the revolving loans may either bear a base rate, which is 1.75 % plus a base rate (a fluctuating rate per annum) equal to the greatest of (a) Regions' prime rate, (b) the federal funds rate plus 0.50 %, (c) the one-month LIBOR rate plus 1 %, and (d) 0.75 %; or an adjusted LIBOR rate, which is 2.75 % plus an adjusted LIBOR rate but cannot be less than 0.75 %. The Company is required to pay Regions a quarterly commitment fee of 0.375 % of the unused portion of the Credit Facility, which the Company expenses as it is incurred. Obligations under the Credit Facility are secured by substantially all of the assets of the Company other than the equity interests in all of the regulated insurance subsidiaries, real estate owned by the Company, and other limited exceptions. The Credit Facility contains customary events of default and financial, affirmative and negative covenants, including but not limited to restrictions on indebtedness, liens, investments, asset dispositions and restricted payments. As of December 31, 2021, the Company had no t borrowed any funds against the Credit Facility and was not in violation of any covenants. CONTRACTUAL OBLIGATIONS The Company leases home office space in Austin, Texas for Citizens and in Bermuda for CICA International as well as several district office locations related to our Home Service Insurance segment across Louisiana, Mississippi and Arkansas, which are classified as operating leases. Certain operating leases include renewal options that extend the lease term. The exercise of lease renewal options is at our sole discretion when it is reasonably certain that we will exercise such option. The Company also has a minimal amount of finance leases regarding equipment. Leases with an initial term of 12 months or less are immaterial to the consolidated financial statements and are recognized as lease expense on a straight-line basis over the lease term and not recorded on the consolidated balance sheets. Our operating lease liabilities had a weighted-average lease term of 8.9 years remaining as of December 31, 2021. December 31, 2021 | 10-K 102 Table of Contents CITIZENS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Maturities of our remaining operating lease liabilities as of December 31, 2021 are as follows. (In thousands) Operating Lease Payments Maturity of operating lease liabilities 2022 $ 1,272 2023 1,271 2024 1,303 2025 1,335 2026 1,368 After 2026 5,567 Total operating lease payments 12,116 Interest expense ( 1,290 ) Present value of operating lease liabilities $ 10,826 We record the lease right-of-use asset in Other Assets and the lease liability in Other Liabilities using a weighted average discount rate of 2.81 %. Cash payments related to the operating lease liabilities were $ 1.4 million and $ 1.3 million for the years ended December 31, 2021 and 2020 and were reported in operating cash flows. The Company does not engage in lease agreements among related parties. As of December 31, 2021, CICA International is committed to fund investments up to $ 39.8 million related to limited partnership investments. (8) SEGMENT AND OTHER OPERATING INFORMATION The Company has two reportable segments: Life Insurance and Home Service Insurance. Our Life Insurance segment primarily issues endowment contracts, which are principally accumulation contracts that incorporate an element of life insurance protection, and ordinary whole life insurance to non-U.S. residents through CICA International. These contracts are designed to provide a fixed amount of insurance coverage over the life of the insured and may utilize rider benefits to provide additional coverage and annuity benefits to enhance accumulations. CICA issues credit life and disability and accident and health related policies throughout the Midwest and southern U.S. CNLIC issues ordinary whole life policies in Florida. Our Home Service Insurance segment operates through our subsidiaries SPLIC, MGLIC and SPFIC, and focuses on the life insurance needs of the middle- and lower-income markets, primarily in Louisiana, Mississippi and Arkansas. Our policies are sold and serviced through 169 funeral homes and 397 independent agents who sell policies, collect premiums and service policyholders. Our Home Service Insurance segment also sells property insurance policies in Louisiana. The Life Insurance and Home Service Insurance portions of the Company constitute separate businesses. In addition to the Life Insurance and Home Service Insurance business, the Company also operates other non-insurance portions of the Company ("Other Non-Insurance Enterprises"), which primarily include the Company’s IT and Corporate-support functions that are included in the tables presented below to properly reconcile the segment information with the consolidated financial statements of the Company. The accounting policies of the reportable segments and Other Non-Insurance Enterprises are presented in accordance with U.S. GAAP and are the same as those described in the summary of significant accounting policies. The Company evaluates profit and loss performance based on U.S. GAAP net income before federal income taxes for its two reportable segments. December 31, 2021 | 10-K 103 Table of Contents CITIZENS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The Company's Other Non-Insurance Enterprises represents the only difference between segments and reported consolidated operations. Year ended December 31, 2021 (In thousands) Life Insurance Home Service Insurance Other Non-Insurance Enterprises Consolidated Revenues: Premiums Life insurance $ 125,558 44,243 — 169,801 Accident and health insurance 500 750 — 1,250 Property insurance — 3,677 — 3,677 Net investment income (loss) 47,216 13,224 1,055 61,495 Investment related gains (losses), net 9,176 618 1,197 10,991 Other income (loss) 3,362 7 ( 37 ) 3,332 Total revenue 185,812 62,519 2,215 250,546 Benefits and expenses: Insurance benefits paid or provided: Claims and surrenders 91,390 28,345 — 119,735 Increase in future policy benefit reserves 29,407 7,037 — 36,444 Policyholders' dividends 6,140 40 — 6,180 Total insurance benefits paid or provided 126,937 35,422 — 162,359 Commissions 18,747 16,716 — 35,463 Other general expenses 20,846 14,739 7,785 43,370 Capitalization of deferred policy acquisition costs ( 16,174 ) ( 6,566 ) — ( 22,740 ) Amortization of deferred policy acquisition costs 21,571 3,381 — 24,952 Amortization of cost of insurance acquired 343 863 — 1,206 Goodwill impairment 12,624 — — 12,624 Total benefits and expenses 184,894 64,555 7,785 257,234 Income (loss) before federal income tax $ 918 ( 2,036 ) ( 5,570 ) ( 6,688 ) December 31, 2021 | 10-K 104 Table of Contents CITIZENS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Year ended December 31, 2020 (In thousands) Life Insurance Home Service Insurance Other Non-Insurance Enterprises Consolidated Revenues: Premiums Life insurance $ 128,900 41,428 — 170,328 Accident and health insurance 301 718 — 1,019 Property insurance — 3,982 — 3,982 Net investment income (loss) 45,885 13,051 1,261 60,197 Investment related gains (losses), net 1,340 223 ( 61 ) 1,502 Other income (loss) 1,806 19 3 1,828 Total revenue 178,232 59,421 1,203 238,856 Benefits and expenses: Insurance benefits paid or provided: Claims and surrenders 93,813 27,332 — 121,145 Increase in future policy benefit reserves 25,825 4,098 — 29,923 Policyholders' dividends 5,554 33 — 5,587 Total insurance benefits paid or provided 125,192 31,463 — 156,655 Commissions 17,944 14,125 — 32,069 Other general expenses 16,323 17,402 19,944 53,669 Capitalization of deferred policy acquisition costs ( 15,568 ) ( 4,907 ) — ( 20,475 ) Amortization of deferred policy acquisition costs 23,987 3,452 — 27,439 Amortization of cost of insurance acquired 460 1,356 — 1,816 Total benefits and expenses 168,338 62,891 19,944 251,173 Income (loss) before federal income tax $ 9,894 ( 3,470 ) ( 18,741 ) ( 12,317 ) December 31, 2021 | 10-K 105 Table of Contents CITIZENS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Year ended December 31, 2019 (In thousands) Life Insurance Home Service Insurance Other Non-Insurance Enterprises Consolidated Revenues: Premiums Life insurance $ 136,941 41,410 — 178,351 Accident and health insurance 725 658 — 1,383 Property insurance — 4,613 — 4,613 Net investment income (loss) 44,779 13,058 1,694 59,531 Investment related gains (losses), net 6,795 1,470 ( 3,016 ) 5,249 Other income (loss) 1,412 4 2 1,418 Total revenue 190,652 61,213 ( 1,320 ) 250,545 Benefits and expenses: Insurance benefits paid or provided: Claims and surrenders 82,964 23,863 — 106,827 Increase in future policy benefit reserves 39,873 1,839 — 41,712 Policyholders' dividends 6,004 36 — 6,040 Total insurance benefits paid or provided 128,841 25,738 — 154,579 Commissions 20,128 14,094 — 34,222 Other general expenses 23,012 19,517 5,911 48,440 Capitalization of deferred policy acquisition costs ( 17,448 ) ( 4,807 ) — ( 22,255 ) Amortization of deferred policy acquisition costs 23,832 4,436 — 28,268 Amortization of cost of insurance acquired 492 1,054 — 1,546 Total benefits and expenses 178,857 60,032 5,911 244,800 Income (loss) before federal income tax $ 11,795 1,181 ( 7,231 ) 5,745 The table below summarizes assets by segment. December 31, (In thousands) 2021 2020 Assets: Life Insurance $ 1,390,392 1,381,723 Home Service Insurance 407,603 385,931 Other Non-Insurance Enterprises 56,516 75,766 Total assets $ 1,854,511 1,843,420 December 31, 2021 | 10-K 106 Table of Contents CITIZENS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) GEOGRAPHIC INFORMATION The following table sets forth, by country, the Company's annual total of earned premiums from geographic area for the years indicated: Years ended December 31, (In thousands) 2021 2020 2019 Area: United States $ 56,000 52,667 53,656 Colombia 24,829 25,783 26,768 Taiwan 19,042 19,078 19,403 Venezuela 17,788 19,956 22,353 Ecuador 13,115 13,301 14,198 Argentina 9,160 9,175 10,069 Other foreign countries 38,871 38,993 40,562 Net reinsurance ( 4,077 ) ( 3,624 ) ( 2,662 ) Total premiums $ 174,728 175,329 184,347 (9) INCOME TAXES CICA International, a wholly-owned subsidiary of Citizens, is considered a controlled foreign corporation for federal income tax purposes. As a result, the insurance activity of CICA International is subject to Subpart F of the IRC and is included in Citizens’ taxable income. Due to the 0 % enacted tax rate in Bermuda there are no deferred taxes recorded for CICA International's temporary differences. For the years ended December 31, 2021, 2020 and 2019, the Subpart F income inclusion generated $ 2.1 million, $ 2.2 million and $ 5.9 million of federal income tax expense, respectively. A reconciliation between the U.S. corporate income tax rate and the effective income tax rate is as follows: Years ended December 31, (In thousands, except for %) 2021 % 2020 % 2019 % Expected tax expense (benefit) $ ( 1,404 ) 21.0 % $ ( 2,586 ) 21.0 % $ 1,186 21.0 % Foreign income tax rate differential ( 2,912 ) 43.5 ( 1,817 ) 14.8 ( 1,562 ) ( 27.7 ) Tax-exempt interest and dividends-received deduction ( 114 ) 1.7 ( 146 ) 1.2 ( 145 ) ( 2.6 ) Adjustment of prior year taxes ( 61 ) 0.9 194 ( 1.6 ) ( 99 ) ( 1.8 ) Effect of uncertain tax position ( 43,834 ) 655.4 1 — 1,148 20.3 Nondeductible costs to remediate tax compliance issue ( 176 ) 2.6 ( 620 ) 5.0 ( 27 ) ( 0.5 ) Compensation limitation under 162(m) and 280(g) ( 21 ) 0.3 2,386 ( 19.4 ) 480 8.5 Subpart F income 2,102 ( 31.4 ) 2,217 ( 18.0 ) 5,853 103.6 Rate differential on net operating loss carryback claim 295 ( 4.4 ) ( 999 ) 8.1 — — Goodwill impairment 2,651 ( 39.6 ) — — — — Other ( 1 ) — 41 ( 0.3 ) 281 5.2 Total federal income tax expense (benefit) $ ( 43,475 ) 650.0 % $ ( 1,329 ) 10.8 % $ 7,115 126.0 % December 31, 2021 | 10-K 107 Table of Contents CITIZENS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Income tax expense (benefit) consists of: Years ended December 31, (In thousands) 2021 2020 2019 Income tax expense (benefit): Current - normal operations $ ( 68 ) ( 927 ) 5,542 Current - UTP release impact ( 43,834 ) — — Deferred 427 ( 402 ) 1,573 Total income tax expense (benefit) $ ( 43,475 ) ( 1,329 ) 7,115 The components of deferred federal income taxes are as follows: December 31, (In thousands) 2021 2020 Deferred tax assets: Future policy benefit reserves $ 2,572 2,657 Net operating and capital loss carryforwards 1,545 1,395 Accrued policyholder dividends and expenses 115 124 Investments 218 147 Deferred intercompany loss 1,848 2,002 Accrued compensation 337 513 Lease liability 2,274 2,514 Other 236 584 Total gross deferred tax assets 9,145 9,936 Deferred tax liabilities: DAC, COIA and intangible assets ( 8,955 ) ( 8,693 ) Unrealized gains on investments available-for-sale ( 10,350 ) ( 4,522 ) Tax reserves transition liability ( 2,989 ) ( 3,736 ) Right-of-use lease asset ( 2,274 ) ( 2,514 ) Other ( 33 ) ( 35 ) Total gross deferred tax liabilities ( 24,601 ) ( 19,500 ) Net deferred tax liability $ ( 15,456 ) ( 9,564 ) A summary of the changes in the components of deferred federal and state income taxes is as follows: December 31, (In thousands) 2021 2020 Deferred federal and state income taxes: Balance January 1, $ ( 9,564 ) ( 12,428 ) Deferred tax benefit (expense) ( 427 ) 402 Investments available-for-sale ( 5,709 ) 2,774 Effects of unrealized gains on DAC, COIA and reserves 244 ( 391 ) Adoption of ASU 2016-13 — 79 Balance December 31, $ ( 15,456 ) ( 9,564 ) December 31, 2021 | 10-K 108 Table of Contents CITIZENS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The Company and our subsidiaries have net operating loss carryforwards of $ 6.3 million at December 31, 2021, which will begin expiring in 2036. MGLIC joined the Company's consolidated tax return filing group in 2020 and had a $ 0.4 million net operating loss carryforward as of December 31, 2021, which will begin expiring in 2037. The MGLIC net operating losses were incurred while it was owned by the Company; thus, there will be no IRC Section 382 limit on the utilization of these net operating losses. The Company and our subsidiaries had capital loss carryforwards of $ 1.0 million at December 31, 2021, which begin expiring in 2026. At December 31, 2021 and 2020, we determined that as a result of our taxable capital gain income in carryback periods, the expected reversal of existing deferred tax liabilities, and tax planning strategies, it was more likely than not that the deferred tax assets would be realized. Thus, the Company holds no valuation allowance in operations or other comprehensive income at December 31, 2021 and 2020. The Company recognizes only the impact of tax positions that, based on their technical merits, are more likely than not to be sustained upon an audit by the taxing authority. A reconciliation of unrecognized tax benefits is as follows: Years ended December 31, (In thousands) 2021 2020 2019 Balance at January 1, $ 45,990 45,989 44,841 Additions for tax positions of prior years — 1 1,148 Reductions for tax positions of prior years ( 43,834 ) — — Balance December 31, $ 2,156 45,990 45,989 This unrecognized tax benefit is reported net in current federal income tax payable on the consolidated balance sheets. Included in these amounts are interest expense of $ 0.4 million and $ 9.9 million with respect to unrecognized tax benefits as of December 31, 2021 and 2020, respectively. The Company’s unrecognized tax benefits at December 31, 2021 would affect the effective tax rate if recognized. The Company accrued an uncertain tax position of $ 46.0 million at December 31, 2020. However, the Company released $ 43.8 million of this uncertain tax position, including interest, during the fourth quarter of 2021 following the expiration of the statute of limitations on the tax year ended December 31, 2017. The Company believes it is reasonably possible that $ 1.0 million of the uncertain tax benefits will decrease within the next twelve months. The Company’s practice is to recognize interest and penalties related to income tax matters in income tax expense. In the consolidated statements of operations and comprehensive income (loss), the amount of interest income recorded was $ 9.5 million for the year ended December 31, 2021, and interest expense of $ 0.0 million and $ 1.1 million were recorded for the years ended December 31, 2020 and 2019, respectively. The Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was enacted on March 27, 2020 in response to the COVID-19 pandemic. The CARES Act, among other things, permits net operating losses incurred in 2018, 2019 and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. During the year ended December 31, 2020, the Company was able to claim a net refund for taxes paid in preceding years as a result of the CARES Act. As of December 31, 2021, the Company has an accrued tax refund remaining of $ 2.6 million. The Consolidated Appropriations Act was enacted on December 27, 2020 and the American Rescue Plan Act of 2021 was enacted March 11, 2021. These Acts did not have a material impact on the Company's financial statements. December 31, 2021 | 10-K 109 Table of Contents CITIZENS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The Company's Federal income tax return is filed on a consolidated basis with the following entities: Citizens, Inc. CICA Life Insurance Company of America Citizens National Life Insurance Company Magnolia Guaranty Life Insurance Company Security Plan Life Insurance Company Security Plan Fire Insurance Company Computing Technology, Inc. The method of tax allocation among companies is subject to a written tax sharing agreement, approved by the Board of Directors, whereby allocation is made primarily on a separate return basis pursuant to the wait-and-see method. Under this method, consolidated group members are not given current credit or refunds for net operating losses until taxable income on a separate return basis is generated. Intercompany tax balances are settled at least annually. The Company and our subsidiaries file income tax returns in the U.S. federal jurisdiction and various U.S. states. Our subsidiaries are subject to examination by U.S. tax authorities for tax years 2013 - 2016 and 2018 - 2020. December 31, 2021 | 10-K 110 Table of Contents CITIZENS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (10) OTHER COMPREHENSIVE INCOME (LOSS) The changes in the components of other comprehensive income (loss) are reported net of the effects of income taxes of 21% in 2021, 2020 and 2019, as indicated below. (In thousands) Amount Tax Effect Total Year ended December 31, 2021 Unrealized gains (losses): Unrealized holding gains (losses) arising during the period $ ( 41,123 ) 3,084 ( 38,039 ) Reclassification adjustment for (gains) losses included in net income ( 243 ) 51 ( 192 ) Effects on DAC 37,679 ( 8,938 ) 28,741 Effects on COIA 276 ( 58 ) 218 Effects on unearned revenue reserves ( 1,887 ) 396 ( 1,491 ) Other comprehensive income (loss) $ ( 5,298 ) ( 5,465 ) ( 10,763 ) Year ended December 31, 2020 Unrealized gains (losses): Unrealized holding gains (losses) arising during the period $ 84,010 ( 6,044 ) 77,966 Reclassification adjustment for (gains) losses included in net income 111 ( 23 ) 88 Effects on DAC ( 37,372 ) 8,872 ( 28,500 ) Effects on COIA ( 98 ) 21 ( 77 ) Effects on unearned revenue reserves 2,102 ( 441 ) 1,661 Other comprehensive income (loss) $ 48,753 2,385 51,138 Year ended December 31, 2019 Unrealized gains (losses): Unrealized holding gains (losses) arising during the period $ 78,744 ( 5,535 ) 73,209 Reclassification adjustment for (gains) losses included in net income ( 1,927 ) 405 ( 1,522 ) Effects on DAC ( 484 ) 102 ( 382 ) Effects on COIA ( 224 ) 47 ( 177 ) Effects on unearned revenue reserves 789 ( 166 ) 623 Other comprehensive income (loss) $ 76,898 ( 5,147 ) 71,751 (11) STOCK COMPENSATION In 2021, 2020 and 2019, the Company's Board of Directors approved awards of restricted stock units ("RSUs") under the Citizens, Inc. Omnibus Incentive Plan for non-employee directors and the executive management team. The RSUs granted to the directors vest one year from the date of the annual shareholders meeting, subject to continued service on the Board. RSUs to the executive management team are subject to achieving performance goals and once the goals are met, RSUs are awarded. These awarded RSUs have a time-based vesting component, which was two years for the executive officers prior to 2021 and is now three years , in all cases, subject to continued employment. In addition, the Board also approved an allotment of RSUs for other employees with a delegation to the Chief Executive Officer to determine the participants and number of RSUs to be awarded. There were three million shares originally authorized to be granted under the plan. December 31, 2021 | 10-K 111 Table of Contents CITIZENS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The following table provides a rollforward of restricted stock activity: Restricted Stock Units Units Weighted Average Grant Price Weighted Average Remaining Contractual Life Aggregate Fair Value (1) (In thousands) (In years) (In thousands) Outstanding at December 31, 2019 275 $ 7.09 0.50 $ 1,947 Granted 350 6.59 1,948 Less: Vested 435 6.65 2,753 Forfeited — 7.18 — Outstanding at December 31, 2020 190 6.03 0.88 1,142 Granted 178 5.83 1,040 Less: Vested 147 6.21 913 Forfeited 8 5.96 47 Outstanding at December 31, 2021 213 $ 5.75 1.63 $ 1,222 (1) Fair value per share of restricted stock units was equal to Grant Date fair value per share, which was calculated based on the closing price of the Company's Class A common stock on the NYSE on the grant date, in accordance with ASC Topic 718. As of December 31, 2021, we recognized $ 0.7 million of expense, while $ 0.8 million was unrecognized and is expected to be amortized up to three years . Restricted stock unit awards give the participant the right to receive common stock in the future, subject to certain restrictions and a risk of forfeiture. Forfeitures are recognized in the period they occur. Compensation expense of $ 0.6 million, $ 2.2 million and $ 2.1 million was recognized as of December 31, 2021, 2020 and 2019, respectively, related to these awards. Under the terms of an employment agreement in connection with his resignation following a change in control of the Company, all of the outstanding restricted stock units granted to our former Chief Executive Officer immediately vested during 2020. (12) BENEFIT PLANS The Company sponsors a defined contribution retirement plan. The plan was initially established as the Citizens, Inc. Profit Sharing Plan and was restated as the Citizens, Inc. 401(k) Retirement and Profit Sharing Plan effective March 1, 2016. There have been no profit sharing contributions since 2014. The 401(k) plan allows employees who have completed three months of service to participate. Voluntary contributions are made by employees and the Company provides a matching contribution based upon the employee's level of contribution. The Company's expense was $ 0.7 million, $ 0.8 million and $ 0.8 million in 2021, 2020 and 2019, respectively. The Company is primarily self-insured for employee health benefits. The Company records its self-insurance liability based on an estimate of claims incurred but not yet reported. There is stop-loss coverage for amounts in excess of $ 80,000 per individual per year. If more claims are made than were estimated or if the costs of actual claims increase beyond what was anticipated, reserves recorded may not be sufficient and additional accruals may be required in future periods. December 31, 2021 | 10-K 112 Table of Contents CITIZENS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (13) RELATED PARTY TRANSACTIONS The Company has various routine related party transactions in conjunction with our holding company structure, such as a management service agreement related to costs incurred, a tax sharing agreement between entities, and inter-company dividends and capital contributions. 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. A reinsurance assumption and novation transaction was completed effective July 1, 2018 between CICA and CICA International to transfer the international policies from CICA to CICA International, the newly formed Bermuda entity. There were no changes related to these relationships during the year ended December 31, 2021 and no additional related party transactions. CERTAIN PAYMENTS FOLLOWING CHANGE IN CONTROL For over 30 years, the Harold E. Riley Trust (the “Trust”), a trust controlled by our founder, Harold E. Riley, and his family, was the beneficial owner of 100% of the Company’s Class B common stock. The Trust documents provided that upon Mr. Riley’s death, which occurred in 2017, the Class B common stock would transfer from the Trust to the Harold E. Riley Foundation (the “Foundation”). Because our insurance subsidiaries are regulated entities, the transfer required regulatory approval by the insurance regulators of Colorado, Louisiana, Mississippi and Texas, the states in which the Company's insurance subsidiaries are domiciled. On July 29, 2020, the final approval was obtained. Because the Class B common stock elects a simple majority of the Board of Directors of the Company, the transfer of the shares from the Trust to the Foundation constituted a change in control of the Company. Following the change in control of the Company, our then Chief Executive Officer, Geoffrey Kolander, resigned from his position as Chief Executive Officer and President and as a member of the Board of Directors, and terminated the Employment Agreement by and between the Company and Mr. Kolander dated January 1, 2019 (the “2019 Employment Agreement”) due to the change in control. Pursuant to Sections 6(g) and (h) of the 2019 Employment Agreement, Mr. Kolander was entitled to a cash severance amount of $ 8.8 million, less required withholdings and deductions. Additionally, all outstanding Restricted Stock Units held by Mr. Kolander were fully vested on August 5, 2020, the effective date of his resignation. In accordance with the 2019 Employment Agreement, the cash severance amount was paid on February 8, 2021. These amounts were expensed in 2020. To assist in the orderly transition of his duties and responsibilities, Mr. Kolander entered into a Separation and Consulting Agreement with the Company. Under the Separation and Consulting Agreement, Mr. Kolander agreed to provide leadership transition guidance and business continuity assistance to the Company as a consultant, for up to 14 hours per week, after the separation date through March 9, 2021. Mr. Kolander was paid at a rate of $ 14,000 per week. The above summary of the Separation and Consulting Agreement is qualified by reference in its entirety to the Separation and Consulting Agreement, which was filed as an exhibit to our Current Report on Form 8-K filed on July 30, 2020. Gerald W. Shields, the Vice Chairman of the Board of Directors of the Company, was appointed Interim Chief Executive Officer and President effective August 5, 2020. On such date, the Company entered into a Consulting Agreement with Mr. Shields (the “Consulting Agreement”), pursuant to which Mr. Shields provided consulting services to function as Interim Chief Executive Officer and President of the Company until a permanent Chief Executive Officer was hired by the Company. Pursuant to the Consulting Agreement, Mr. Shields was paid a consulting fee of $ 14,500 per week in 2020, a bonus of $ 125,000 for service performed in 2020, and in 2021, the Consulting Agreement was amended to provide a weekly payment of $ 15,500 . The Consulting Agreement was terminated when Mr. Shields became the permanent Chief Executive Officer effective January 1, 2022. December 31, 2021 | 10-K 113 Table of Contents CITIZENS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (14) QUARTERLY FINANCIAL INFORMATION (Unaudited) The following table contains selected unaudited financial data for each quarter. (In thousands, except per share amounts) Fourth Quarter Third Quarter Second Quarter First Quarter 2021 Revenues $ 69,921 61,584 63,558 55,483 Benefits and expenses 76,734 64,311 57,958 58,231 Federal income tax expense (benefit) ( 44,950 ) 72 578 825 Net income (loss) 38,137 ( 2,799 ) 5,022 ( 3,573 ) Net income (loss) available to common shareholders 38,137 ( 2,799 ) 5,022 ( 3,573 ) Basic earnings (losses) per share of Class A common stock 0.77 ( 0.06 ) 0.10 ( 0.07 ) Basic earnings (losses) per share of Class B common stock 0.36 — 0.05 ( 0.04 ) Diluted earnings (losses) per share of Class A common stock 0.77 ( 0.06 ) 0.10 ( 0.07 ) Diluted earnings (losses) per share of Class B common stock 0.36 — 0.05 ( 0.04 ) 2020 Revenues 64,968 59,825 58,341 55,722 Benefits and expenses 67,317 67,996 57,903 57,957 Federal income tax expense (benefit) ( 3,887 ) ( 256 ) 1,465 1,349 Net income (loss) 1,538 ( 7,915 ) ( 1,027 ) ( 3,584 ) Net income (loss) available to common shareholders 1,538 ( 7,915 ) ( 1,027 ) ( 3,584 ) Basic earnings (losses) per share of Class A common stock 0.03 ( 0.16 ) ( 0.02 ) ( 0.07 ) Basic earnings (losses) per share of Class B common stock 0.01 ( 0.07 ) ( 0.01 ) ( 0.04 ) Diluted earnings (losses) per share of Class A common stock 0.03 ( 0.16 ) ( 0.02 ) ( 0.07 ) Diluted earnings (losses) per share of Class B common stock 0.01 ( 0.07 ) ( 0.01 ) ( 0.04 ) (15) SUBSEQUENT EVENTS The Company has evaluated the impact of subsequent events as defined by the accounting guidance through the date this report was issued and determined that no subsequent events need to be recognized or disclosed. December 31, 2021 | 10-K 114 Table of Contents CITIZENS, INC. FINANCIAL SCHEDULES Schedule II Condensed Financial Information of Registrant CITIZENS, INC. (Parent Company) Balance Sheets December 31, (In thousands) 2021 2020 Assets Investment in subsidiaries (1) $ 271,639 231,992 Fixed maturity securities available-for-sale, at fair value 33,724 42,202 Equity securities, at fair value 1,466 1,347 Mortgage loans on real estate 1,000 — Real estate held-for-sale — 2,571 Other long-term investments — 8,790 Cash 3,399 3,102 Accrued investment income 439 471 Accounts receivable from subsidiaries (1) 5,832 4,911 Property and equipment, net 11,564 12,666 Other assets 3,049 3,183 Total assets $ 332,112 311,235 Liabilities and Stockholders' Equity Liabilities: Accrued expense and other liabilities $ 11,541 10,290 Total liabilities $ 11,541 10,290 Stockholders' equity: Common stock: Class A $ 265,561 262,869 Class B 3,184 3,184 Accumulated deficit ( 45,565 ) ( 82,352 ) Unrealized investment gains (losses) on securities held by parent and subsidiaries, net of tax 117,492 128,255 Treasury stock ( 20,101 ) ( 11,011 ) Total stockholders' equity 320,571 300,945 Total liabilities and stockholders' equity $ 332,112 311,235 (1) Eliminated in consolidation. Note to Schedule II : Citizens, Inc.'s investments in consolidated subsidiaries are stated at cost plus equity in undistributed income of consolidated subsidiaries. The Company includes in its Statement of Operations and Comprehensive Income (Loss) dividends from its subsidiaries and equity in income (loss) of consolidated subsidiaries, which represents the net income (loss) of each of its wholly-owned subsidiaries. December 31, 2021 | 10-K 115 Table of Contents CITIZENS, INC. FINANCIAL SCHEDULES Schedule II, Continued Condensed Financial Information of Registrant CITIZENS, INC. (Parent Company) Statements of Operations and Comprehensive Income (Loss) Years ended December 31, (In thousands) 2021 2020 2019 Comprehensive income (loss): Revenues: Management service fees (1) $ 33,311 32,828 43,694 Investment income 1,063 11,253 1,685 Other ( 37 ) 3 2 Investment related gains (losses), net 1,197 ( 62 ) ( 3,013 ) Total revenues 35,534 44,022 42,368 Expenses: General expenses 37,977 49,747 46,020 Taxes, licenses and fees 198 189 146 Total expenses 38,175 49,936 46,166 Income (loss) before federal income tax expense (benefit) and equity in income (loss) of consolidated subsidiaries ( 2,641 ) ( 5,914 ) ( 3,798 ) Federal income tax expense (benefit) ( 1,661 ) ( 5,583 ) ( 4,491 ) Income (loss) before equity in income (loss) of consolidated subsidiaries ( 980 ) ( 331 ) 693 Equity in income (loss) of consolidated subsidiaries 37,767 ( 10,657 ) ( 2,063 ) Net income (loss) 36,787 ( 10,988 ) ( 1,370 ) Other comprehensive income (loss) ( 10,763 ) 51,138 71,751 Total comprehensive income $ 26,024 40,150 70,381 (1) Eliminated in consolidation. Note to Schedule II : Citizens, Inc.'s investments in consolidated subsidiaries are stated at cost plus equity in undistributed income of consolidated subsidiaries. The Company includes in its Statement of Operations and Comprehensive Income (Loss) dividends from its subsidiaries and equity in income (loss) of consolidated subsidiaries, which represents the net income (loss) of each of its wholly-owned subsidiaries. December 31, 2021 | 10-K 116 Table of Contents CITIZENS, INC. FINANCIAL SCHEDULES Schedule II, Continued Condensed Financial Information of Registrant CITIZENS, INC. (Parent Company) Statements of Cash Flows Years ended December 31, (In thousands) 2021 2020 2019 Cash flows from operating activities: Net income (loss) $ 36,787 ( 10,988 ) ( 1,370 ) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Investment related gains (losses), net ( 1,197 ) 62 3,013 Equity in loss (income) of consolidated subsidiaries ( 37,767 ) 10,657 2,063 Change in accrued expenses and other liabilities ( 11,458 ) 11,629 ( 6,530 ) Change in federal income tax payable ( 2,683 ) ( 17,647 ) — Deferred federal income tax expense (benefit) 227 79 — Amortization of premiums and discounts on investments 473 535 496 Depreciation 239 133 267 Change in accrued investment income 32 64 ( 5 ) Stock-based compensation 646 2,223 2,099 Decrease (increase) in receivable from subsidiaries and other assets ( 921 ) ( 141 ) 1,101 Other, net 151 ( 3,896 ) ( 248 ) Net cash provided by (used in) operating activities ( 15,471 ) ( 7,290 ) 886 Cash flows from investing activities: Purchases of fixed maturity securities, available-for-sale ( 2,678 ) ( 4,628 ) ( 12,970 ) Maturities and calls of fixed maturity securities, available-for-sale 7,548 7,114 691 Purchase of equity securities — ( 250 ) — Sales of fixed maturity securities, available-for-sale 6,952 5,735 4,268 Sales of property and equipment 14 11 14 Sale of other long-term investments 8,790 — — Sale of real estate 3,552 — — Funding of mortgage loans ( 1,000 ) — — Purchases of other long-term investments — ( 8,790 ) — Purchases of property and equipment ( 119 ) ( 60 ) ( 85 ) Purchases of short-term investments — — ( 2,456 ) Maturities of short-term investments — 1,300 9,090 Net cash provided by (used in) investing activities 23,059 432 ( 1,448 ) Cash flows from financing activities: Issuance of common stock 2,255 — — Acquisition of treasury stock ( 9,090 ) — — Other ( 456 ) ( 869 ) ( 377 ) Net cash provided by (used in) financing activities ( 7,291 ) ( 869 ) ( 377 ) Net increase (decrease) in cash 297 ( 7,727 ) ( 939 ) Cash at beginning of year 3,102 10,829 11,768 Cash at end of year $ 3,399 3,102 10,829 Note to Schedule II : Citizens, Inc.'s investments in consolidated subsidiaries are stated at cost plus equity in undistributed income of consolidated subsidiaries. The Company includes in its Statement of Operations and Comprehensive Income (Loss) dividends from its subsidiaries and equity in income (loss) of consolidated subsidiaries, which represents the net income (loss) of each of its wholly-owned subsidiaries. December 31, 2021 | 10-K 117 Table of Contents CITIZENS, INC. FINANCIAL SCHEDULES Schedule III Consolidated Supplementary Insurance Information Years ended December 31, (In thousands) 2021 2020 Deferred policy acquisition costs: Life Insurance $ 97,644 94,771 Home Service Insurance 42,736 10,142 Total consolidated deferred policy acquisition costs $ 140,380 104,913 Future policy benefit reserves and policy claims payable: Life Insurance $ 1,084,455 1,052,638 Home Service Insurance 293,824 286,056 Total consolidated future policy benefit reserves and policy claims payable $ 1,378,279 1,338,694 Unearned premiums: Life Insurance $ 1,471 1,446 Home Service Insurance 331 262 Total consolidated unearned premiums $ 1,802 1,708 Other policy claims and benefits payable: Life Insurance $ 105,310 92,758 Home Service Insurance 2,028 1,922 Total consolidated other policy claims and benefits payable $ 107,338 94,680 December 31, 2021 | 10-K 118 Table of Contents CITIZENS, INC. FINANCIAL SCHEDULES For the Company's short duration contracts (property), written premium is not materially different from earned premium, therefore only earned premiums are detailed in Schedule IV. Schedule IV Consolidated Statement of Reinsurance (In thousands) Direct Amount Ceded to Other Companies Assumed From Other Companies Net Amount % of Amount Assumed to Net Year ended December 31, 2021 Life insurance in force $ 4,627,509 465,954 4,366 4,165,921 0.1 % Premiums: Life insurance 171,567 1,850 84 169,801 Accident and health insurance 1,255 5 — 1,250 Property insurance 5,984 2,307 — 3,677 Total premiums $ 178,806 4,162 84 174,728 — % Year ended December 31, 2020 Life insurance in force $ 4,612,145 474,792 4,615 4,141,968 0.1 % Premiums: Life insurance 172,503 2,266 91 170,328 Accident and health insurance 1,033 14 — 1,019 Property insurance 5,416 1,434 — 3,982 Total premiums $ 178,952 3,714 91 175,329 0.1 % Year ended December 31, 2019 Life insurance in force $ 4,728,826 486,937 4,892 4,246,781 0.1 % Premiums: Life insurance 180,204 1,952 99 178,351 Accident and health insurance 1,400 17 — 1,383 Property insurance 5,405 792 — 4,613 Total premiums $ 187,009 2,761 99 184,347 0.1 % December 31, 2021 | 10-K 119 Table of Contents EXHIBITS Exhibit No. The following exhibits are filed herewith: 3.1 Restated and Amended Articles of Incorporation dated March 4, 2004 (incorporated herein by reference to Exhibit 3.1 to the Registrant's Annual Report on Form 10-K for the Year Ended December 31, 2003, filed on March 15, 2004) 3.2 Amended and Restated Bylaws dated June 2 , 2021 (incorporated herein by reference to Exhibit 3.1 to the Registrant's Current Report on Form 8-K, filed on June 7 , 2021) 4.1* Description of Securities of Citizens, Inc. 10.1 Form of Indemnification Agreement for Executive Officers (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed on November 8, 2017) 10.2 Form of Indemnification Agreement for Directors (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on November 8, 2017) 10.3† Citizens, Inc. Omnibus Incentive Plan (incorporated by reference to Exhibit 4.3 to the Registration Statement on Form S-8 filed by the Registrant on December 5, 2017) 10.4† Form of Citizens, Inc. Employee Restricted Stock Unit Agreement (incorporated by reference to Exhibit 10.6 to the Registrant's Annual Report on Form 10-K filed on March 29, 2018) 10.5† Form of Citizens, Inc. Non-employee Director Restricted Stock Unit Agreement (incorporated by reference to Exhibit 10.7 to the Registrant's Annual Report on Form 10-K filed on March 29, 2018) 10.6† Consulting Agreement by and Between the Company and Gerald W. Shields dated August 5, 2020 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed on July 30, 2020) 10.7† Amendment to Consulting Agreement by and between the Company and Gerald W. Shields effective January 1, 2021 (incorporated by reference to Exhibit 10.9 to the Registrant’s Annual Report on Form 10-K, filed on March 10, 2021) 10.8† Amendment to Gerald Shields Consulting Agreement (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed on November 4, 2021) 10.9 Mutual Agreement for Compromise, Settlement and Release with the Harold E. Riley Foundation dated February 6, 2021 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed on February 9, 2021) 10.10 Mutual Agreement for Compromise, Settlement and Release with Michael C. Hughes, Charles W. Hott and David August Boto dated February 5, 2021 (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K, filed on February 9, 2021) 10.11 Purchase and Sale Agreement dated February 6, 2021 (incorporated herein by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed on February 9, 2021) 10.12 Credit Agreement between the Company and Regions Bank dated May 5, 2021 (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed on August 4, 2021) 10.13 Pledge and Security Agreement dated May 5, 2021 by and between Citizens, Inc. as obligor, and Regions Bank, as lender (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q filed on August 4, 2021) 10.14† Separation Agreement between the Company and James A. Eliasberg effective April 30, 2021 (incorporated by referenced to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q filed on August 4, 2021) December 31, 2021 | 10-K 120 Table of Contents 10.15† Form of Executive Change in Leadership Agreement entered into by and between the Company and each of the following: Jeffery P. Conklin, Sheryl Kinlaw, Robert M. Mauldin III and Harvey J.L. Waite (incorporated by referenced to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q filed on November 4, 2021) 21* Subsidiaries of the Registrant 23.1* Consent of Independent Registered Public Accounting Firm - Grant Thornton LLP 23.2* Consent of Independent Registered Public Accounting Firm - Deloitte & Touche LLP 24 Power of Attorney (included on signature page enclosed herein) 31.1* Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act 31.2* Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act 32.1* Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act 32.2* Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act 101.INS XBRL Instance Document 101.SCH XBRL Taxonomy Extension Schema 101.CAL XBRL Taxonomy Extension Calculation Linkbase 101.DEF XBRL Taxonomy Extension Definition Linkbase 101.LAB XBRL Taxonomy Extension Label Linkbase 101.PRE XBRL Taxonomy Extension Presentation Linkbase 104 Inline XBRL for the cover page of this Annual Report on Form 10-K for the year ended December 31, 2021, filed electronically herewith, included in the Exhibit 101 Inline XBRL Document Set. † Indicates management contract or compensatory plan or arrangement. * Filed herewith. December 31, 2021 | 10-K 121 Table of Contents SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized. CITIZENS, INC. Date: March 11, 2022 By: /s/ Gerald W. Shields Gerald W. Shields, Chief Executive Officer and President (Principal Executive Officer) By: /s/ Jeffery P. Conklin Jeffery P. Conklin, Vice President, Chief Financial Officer, Chief Investment Officer and Treasurer (Principal Financial and Accounting Officer) POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Gerald W. Shields and Jeffery P. Conklin jointly and severally, his or her attorneys-in-fact, each with the power of substitution, for him or her in any and all capacities, to sign any amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated and on March 11, 2022. Dated: March 11, 2022 /s/ Christopher W. Claus /s/ Dr. Terry S. Maness Christopher W. Claus, Director Dr. Terry S. Maness, Director /s/ Jerry D. Davis, Jr. /s/ Gerald W. Shields Jerry D. Davis, Jr., Chairman of the Board and Director Gerald W. Shields, Vice Chairman of the Board and Director /s/ Dr. E. Dean Gage /s/ Dr. Robert B. Sloan, Jr. Dr. E. Dean Gage, Director Dr. Robert B. Sloan, Jr., Director /s/ Francis A. Keating II /s/ Cynthia H. Davis Francis A. Keating II, Director Cynthia H. Davis, Director /s/ J. Keith Morgan /s/ Mary Taylor J. Keith Morgan, Director Mary Taylor, Director December 31, 2021 | 10-K 122