CITIZENS, INC. (CIA) FY 2021 MD&A

Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This section of this Annual Report on Form 10-K generally discusses 2021 and 2020 items and year-to-year comparisons between 2021 and 2020. Discussions of 2019 items and year-to-year comparisons between 2020 and 2019 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020 (the "2020 10-K").

OVERVIEW

For over 45 years, we have been fulfilling the needs of our policyholders and their families by providing insurance products that offer both living and death benefits. Citizens conducts insurance related operations through its insurance subsidiaries, which provide benefits to residents in 31 U.S. states and more than 70 different countries. We specialize in offering primarily ordinary whole life insurance, endowment products and final expense insurance in niche markets where we believe we can optimize our competitive position.

As an insurance provider, we collect premiums on an ongoing basis from our policyholders and invest the majority of the premiums to pay future benefits, including claims and surrenders and policyholder dividends. Accordingly, the Company derives its revenues principally from: (1) life insurance premiums earned for insurance coverages provided to insureds in our two operating segments – Life Insurance and Home Services Insurance; and (2) net investment income. In addition to paying and reserving for insurance benefits that we pay to our policyholders, our expenses consist primarily of the costs of selling our insurance products (e.g., commissions, underwriting, marketing expenses), operating expenses and income taxes.

Objective of our Management's Discussion and Analysis

We refer to our Management’s Discussion and Analysis of Financial Condition and Results of Operations as our “MD&A”. The objective of our MD&A is to provide investors with a succinct analysis of the Company's financial performance from management's perspective. We start by discussing the factors that we believe drive our operating results and then we discuss how industry developments and economic circumstances in general (e.g., low interest rates, the COVID-19 pandemic) affected or could affect our financial performance. After telling you about our industry, we discuss our 2021 financial highlights, the impacts of COVID-19 on our business during 2021, and then we break-down our results of operations in detail so an investor understands the various line items of our profit & loss statements from management’s perspective. Since our investments are one of the two principal sources of our revenues, we describe them in detail. Finally, we discuss our capital resources and liquidity so investors will have a better understanding how those resources are utilized and how we are able to meet our cash needs.

Throughout the MD&A, we describe how we view the Company and which matters we believe are reasonably likely to affect future operations. We describe our priorities for the business in Item 1. Business - “Strategic Initiatives” and in the MD&A, we describe how we performed on those initiatives and any known trends or uncertainties that might impact our ability to achieve our goals.

The Factors that Drive our Operating Results

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

•Sales

•Our investments

•Death claims and surrenders

•Operating expenses

As premium revenues and investment income are our two primary sources of income, both new sales and "resells" (i.e. retaining the policy) as well as our investments and the interest we receive on such investments, are key to our profitability. Throughout the MD&A and in Item 1 - Business, we describe the actions and initiatives that are taken to increase sales and improve retention, how we performed in 2021, and how we view trends with respect

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

Our first-year premiums in 2021 increased by 11.2% compared to 2020. We believe this increase was driven by our focused marketing campaigns, including a campaign intended to recruit new agents, the introduction of new products, and higher sales in 2021 compared to 2020 due to COVID-19 impacts in 2020.

Renewal premiums in our Home Service Insurance increased in 2021 as compared to 2020 due to an increased focus on collection efforts. Renewal premiums in our Life Insurance segment declined due to the decrease in our in-force business over the last several years. The prior-year surrenders negatively impacted the current year renewal premiums even though total surrender benefits paid declined in 2021 compared to 2020 (see below). As we describe in Item 1. Business - Strategic Initiatives, we believe that our retention efforts began to stem the decline of renewal premiums in 2021.

While interest rates continue to remain low, our yield stayed flat, at 4.24% in both 2021 and 2020. Our net investment income increased by $1.3 million from 2020 to 2021 due to a greater asset base.

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

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Payment of policyholder benefits for death claims and surrenders is our largest expense. In 2021, our death claims increased due in large part to COVID-19-related deaths. Our surrenders decreased by $3.2 million in 2021 from 2020, which we believe was in large part due to our retention efforts.

Operating Expenses are our second largest expense and thus drive our operating results. Our general operating expenses decreased by $10.3 million in 2021 as compared to 2020. General operating expenses in 2020 included $10.0 million of severance payments to our former CEO related to the change in control of the Company.

ECONOMIC AND INSURANCE INDUSTRY DEVELOPMENTS

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

•Sustained Low Interest Rate Environment. Market interest rates are a key driver of our results. Persistent low interest rates are identified as a major threat for life insurance companies, given their rate-sensitive products and investments. The sustained low interest rate environment continues to limit increases in profit margins for life insurers by:

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

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

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

◦Making our products less attractive (due to lower credited interest rates), resulting in lower sales; and

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

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

•Impact of COVID-19. The COVID-19 pandemic has had and continues to have a significant impact on the life insurance industry. Initially there were hopes for a gradual decline in COVID-19 mortality as the vaccination roll out increased significantly and the pandemic ebbed after more than a year during the summer months of 2021. However, the emergence of the Delta variant resulted in a significant increase in the number of pandemic-related deaths in 2021, and the emergence of the

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Omicron variant has resulted in additional economic distress in early 2022. The global life insurance industry has experienced significantly higher reported claims due to the COVID-19 pandemic.

The long-term nature of life insurance products means premiums are not yet capturing the risk that deaths or long-term illness from COVID-19 will likely remain higher than previously estimated. Additionally, life insurers will need to decide how to underwrite COVID-19 survivors, as the long-term effects of COVID-19 are still unclear.

•Aging population. Many countries in the world are experiencing growth in the number and proportion of older persons in their population. As an increasing percentage of the world population reaches retirement age, we believe there will be a greater need for age-related products and we will benefit from increased demand for living benefit products rather than death benefit products, as customers will require cash accumulation to pay expenses to meet their lifetime income needs.  Our ordinary life products are designed to accumulate cash values to provide for living expenses in a policy owner's later years, while continuously providing a death benefit. However, as the population reaches retirement age, policyholders may decide to use their accumulated cash value for cash needed in retirement, thus increasing surrenders of long-term products.

•Availability of Reinsurance. Reinsurance market dynamics including increased pricing, years of accumulating catastrophic losses, investment market losses and the significant losses expected from the fallout of the COVID-19 pandemic have led to a decline in the availability of reinsurance, tighter terms (such as, for example, pandemic exclusions) and/or increased reinsurance prices. While we currently cede a limited amount of our primary insurance business to reinsurers, we may encounter difficulty in obtaining reinsurance in the future, forcing us to resort to a more expensive reinsurance market.  If we are unable to obtain affordable reinsurance coverage, this may impact our net exposures and the number of underwriting commitments.

•Technology Adoption. Innovation and digital development strategies continue to evolve and impact all industries, including the insurance industry. The onset of the COVID-19 pandemic in 2020 caused companies to adapt to a more digital operations platform, almost overnight. Therefore, it is critical that we embrace these changes for the benefit of our policyholders, agents, employees and stockholders.

•Climate Change. Rising climate related losses stemming from the frequency and severity of extreme weather-related events have shone a regulatory spotlight on insurance risk and climate change. While the majority of our business is related to life insurance products, which may be less impacted by climate change than our property insurance products, we must understand and access accurate climate data in order to make informed decisions with regard to climate risk.

2021 HIGHLIGHTS

COVID-19 PANDEMIC

The overall impact of COVID-19 and its related economic conditions on the Company's financial results continue to be highly uncertain and unpredictable. While the Company has implemented new strategies and processes to mitigate this impact, the scope, duration and magnitude of the direct and indirect effects of COVID-19 are difficult or impossible to anticipate. As a result, it is not possible to predict its impact on the Company's results in 2022 or beyond. Currently, some of the most significant factors affecting our business that could cause our future results to differ significantly from our prior results or forward-looking statements include:

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

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

•higher surrenders and lapses due to cash needs our policyholders may have due to concerns over COVID-19 economic impacts, particularly in our international business; and

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

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

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

FINANCIAL HIGHLIGHTS

Federal Income Tax Benefit

The results of operations for the fiscal year ended December 31, 2021 included a significant income tax benefit for the release of most of the uncertain tax position of $43.8 million. The uncertain tax position from previous years is related to the tax treatment of tax reserves pursuant to Internal Revenue Code ("IRC") Section 807, specifically due to ramifications on the determination of those reserves from our product qualification issues in the past. The uncertain tax position released during the fourth quarter of 2021 is due to the expiration of the statute of limitations for the year ended December 31, 2017.

Goodwill Impairment

The release of the liability for the uncertain tax position referenced above, increased the carrying value of our Life Insurance segment. Due to such increase in carrying value and the continued low interest rate environment (which negatively affected the fair value of our net assets by decreasing expected cash flows), we determined that the carrying value of our Life Insurance segment exceeded its implied fair value, resulting in an impairment of goodwill (the excess of the amount paid by us to acquire various life insurance companies over the fair value of their net assets as of the date of acquisition). Accordingly, as of December 31, 2021, we wrote-off the goodwill and recognized an expense of $12.6 million for 2021.

Summary

At December 31, 2021, we had $1.9 billion in total assets, an increase from $1.8 billion at December 31, 2020, and we had $27.3 million in cash. We did not have any debt at December 31, 2021.

During 2021, we reported net income of $36.8 million, compared to a net loss of $11.0 million in 2020. In comparison to 2020, the $47.8 million increase in net income was primarily due to:

↑ $43.8 million tax benefit;

↑ $9.5 million increase in investment related gains; and

↓ $10.3 million of general expenses.

The increase in net income was partially offset by:

↑ $4.2 million in death claim benefits;

↑ $6.5 million in future policy benefit reserves; and

↑ $12.6 million goodwill impairment.

Revenue Highlights

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

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

•Net investment income increased 2.2% in 2021 compared to 2020, totaling $61.5 million and $60.2 million, respectively, driven by a growing asset base. The average yield on our consolidated investment portfolio was 4.24% for both 2021 and 2020 as diversification of our investment portfolio into limited partnership investments helped offset a challenging investment environment for fixed maturity securities in 2021.

•Investment related gains increased by $9.5 million.

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Benefits and Expenses Highlights

The primary use of our funds is payment of insurance benefits. Total insurance benefits paid or provided in 2021 increased by 3.6%, from $156.7 million in 2020, to $162.4 million in 2021. This expense consists primarily of the following:

•Claims and surrender benefits decreased 1.2% in 2021 compared to 2020. This decrease was primarily due to a decrease in surrender benefits and endowments benefits in the Life Insurance segment, which more than offset the increase in death claims benefits. The increase in death claim benefits was due primarily to a higher volume of reported claims, including COVID-19 related claims, in addition to an increase in the average death claim amount; and

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

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

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

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

•Goodwill impairment of $12.6 million in 2021.

Our Operating Segments

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

Life Insurance

International. For over 45 years, CICA Life Insurance Company of America ("CICA") and its predecessors have issued U.S. dollar-denominated ordinary whole life insurance and endowment policies to non-U.S. residents. In 2018, we novated of all of the international policies issued by CICA to CICA Life Ltd. ("CICA International"), our Bermuda-based insurer. We distribute our international insurance products through independent marketing organizations and their agents located in the countries in which our policyholders reside. Endowment product sales are the primary driver of sales in this segment.

Domestic. Our domestic operations in our Life Insurance segment primarily consist of the collection of renewal premiums on ordinary whole life and final expense policies issued to middle- and lower-income families and individuals in certain markets in the Mountain West, Midwest and Southern U.S. We also sell credit life and credit accident and health insurance domestically. As we discussed in Item 1. Business - Strategic Initiatives, we introduced our domestic whole life products to the Florida market in 2021. Our efforts to recruit agents to sell our products have been slower than we expected and we are re-evaluating our sales distribution approach, initiatives and domestic life insurance offerings in the Florida market in 2022. The majority of our current domestic revenues are generated by the policies of domestic life insurance companies we have acquired since 1987.

Home Service Insurance

We operate in the Home Service Insurance market through our subsidiaries Security Plan Life Insurance Company ("SPLIC"), Magnolia Guaranty Life Insurance Company ("MGLIC") and Security Plan Fire Insurance Company ("SPFIC"). These companies provide final expense ordinary and industrial life insurance to middle- and lower-income individuals in Louisiana, Mississippi and Arkansas. Our policies in this segment are sold and serviced through a home service marketing distribution system utilizing independent agents who work on a route system to collect premiums and service policyholders, and through networks of funeral homes that collect premiums and provide personal policyholder service. In 2021, we added a new whole life product to this market that has higher allowable face values and a new critical illness coverage product which we sell through independent agents. To a much lesser extent, our Home Service Insurance segment also sells property insurance policies covering dwellings and content.

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CONSOLIDATED RESULTS OF OPERATIONS

Our insurance operations are the primary focus of the Company, as those operations generate most of our income.  The total dollar amount of insurance issued, number of policies issued, and average face amounts of policies issued in 2021 and 2020 are shown below.

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

The number of policies issued in the Life Insurance segment increased 13.2% in 2021 compared to 2020. We believe the increase was primarily due to enhancements to our business operations and sales practices to adapt to the COVID-19 pandemic as well as continued sales promotions and campaigns, focused training on virtual selling, and strategically prioritizing selling lower face amount policies due to the COVID-19 pandemic in 2021. In addressing the decreasing first year premiums we have seen in recent years in this segment, we have prioritized recruiting new independent contractors in 2021 and we believe we have seen the impact of these efforts in 2021. We believe that our policies issued and amount of insurance issued in 2020 were negatively impacted by the COVID-19 pandemic.

The number of policies issued in the Home Service Insurance segment decreased 9.3% in 2021 compared to 2020; however, the amount of insurance issued increased by 32.4% due to higher average policy face amounts. The increase in higher average policy face amounts issued is attributable to sales campaigns that focused on increasing the face amount of insurance sold as well as the introduction of our new whole life product in this segment, which has a higher maximum face value. In addition, our Home Service Insurance segment was negatively impacted by the COVID-19 pandemic in 2020 as we had temporary office closures in Louisiana during the second and third quarters of 2020 due to the COVID-19 pandemic and Hurricane Laura, and we also temporarily curtailed the sales of certain product offerings that require extensive person-to-person sales interaction due to the COVID-19 pandemic.

REVENUES

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

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

As discussed above, despite higher first year premiums in both our segments and higher renewal premiums in our Home Service Insurance segment, total premiums declined due to lower renewal premiums in our Life Insurance segment. A decrease in property insurance premiums resulting from higher catastrophic reinsurance reinstatement premiums in 2021 also contributed to the lower renewal premiums. We believe that our consolidated first year premium revenue was negatively impacted by the COVID-19 pandemic in both 2020 and 2021.

Net Investment Income. Our net investment income and investment performance is summarized as follows:

Net investment income increased 2.2% to $61.5 million in 2021 compared to $60.2 million in 2020 driven by a growing asset base. Investment income from fixed maturity securities accounted for a majority of our investment income. Long-term investment income continued to increase as our limited partnership asset base grew, in addition to some early distribution income.

The annualized yield remained level in 2021 compared to 2020. The sustained low interest rate environment of the past several years has required us to reinvest a portion of our portfolio at lower interest rates; however, diversification of our investment portfolio into limited partnership investments helped offset a challenging investment environment for fixed maturity securities. As we continue to face a challenging investment environment for fixed maturity assets, which account for the majority of our investment portfolio we have been investing in new asset classes, including limited partnerships; however, insurance regulations limit the amount we can invest in these alternative investments.

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Investment Related Gains (Losses).  Investment gains and losses are as follows:

Net investment related gains increased by $9.5 million in 2021 from 2020, helping drive our net income improvement in 2021. A significant portion of these gains related to fair value changes in our limited partnership investments. In addition, the Company realized a gain of $1.0 million on the sale of its former training facility near Austin, Texas during 2021 with a gross sale price of $3.8 million. The facility was owned by Citizens and was held in Other Non-Insurance Enterprises. These increases were partially offset by a decrease in fair value on our equity securities.

BENEFITS AND EXPENSES

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Claims and Surrenders.  Payment of death claims and surrender benefits is our primary use of cash. Claims and surrenders decreased 1.2% from $121.1 million in 2020 to $119.7 million in 2021.

•Death claim benefits increased 15.4% in 2021 compared to 2020. The increases were due to both a higher volume, including COVID-19 related deaths, and a higher average amount of reported claims. Mortality experience and COVID-19 impacts will continue to be closely monitored by the Company.

•Surrender benefits decreased 5.8% in 2021 compared to 2020. The decrease in surrender benefits is primarily within our Life Insurance segment. Surrender benefits have been high in recent years due to international policies that have been in force for an extended period and have little or no associated surrender charges, but we have focused our efforts on retaining policyholders and believe we have begun to see positive benefits from these efforts starting in the second half of 2021. Surrender benefits represented less than 1.1% of total direct life insurance in force of $4.6 billion as of December 31, 2021.

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

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

Policyholder Dividends.  Most of our Life Insurance segment's international policies contain guaranteed cash values and are participating (i.e., provide for cash dividends as apportioned by our Board of Directors). Policyholders' dividends increased by 10.6% in 2021 as compared to 2020 due to increased sales in 2021 and improved policyholder retention.

Commissions. Commission expenses are a cost of acquiring business, as commissions are the primary compensation paid to our independent consultants and independent agents for selling our products. First year

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

Other General Expenses.  Total general expenses decreased $10.3 million, or 19.2%, in 2021 compared to 2020. Other general expenses in 2020 included $10.0 million of non-recurring expenses related to change-in-control severance expenses. We continue to work on improving our controllable operating expenses and in 2021, we had lower audit and long-term incentive compensation expenses compared to 2020.

Capitalization of Deferred Policy Acquisition Costs ("DAC").  We capitalize costs related to successful sales of our insurance products, which include certain commissions, policy issuance costs, and underwriting and agency expenses. These costs vary based upon amounts or premiums received related to new and renewal business. Capitalized DAC was $22.7 million and $20.5 million in 2021 and 2020, respectively.  Increases in capitalized amounts are in line with the increases in new sales activity.  Significantly lower amounts are capitalized related to renewal business in correlation with the lower commissions paid on that business compared to first year business, which has higher commission rates.

Amortization of Deferred Policy Acquisition Costs. Amortization of DAC totaled $25.0 million and $27.4 million in 2021 and 2020, respectively. The decrease in amortization is a result of better persistency and sales. Amortization of DAC is impacted by new business, persistency and the level of surrenders.

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

Goodwill Impairment. We recognized a goodwill impairment in our Life Insurance segment of $12.6 million in 2021. The impairment was triggered by increases in our carrying value of the Life Insurance segment due to the release of a $43.8 million uncertain tax position in the fourth quarter of 2021 following the expiration of the statute of limitations for the tax year ended December 31, 2017.

Federal Income Tax.  Federal income tax benefits of $43.5 million in 2021 and $1.3 million in 2020 resulted in effective tax rates of 650.0% and 10.8%, respectively. The significant tax benefit in 2021 is comprised of the release of the uncertain tax position of $43.8 million related to the expiration of the statute of limitations for the year ended December 31, 2017.  Differences between our effective tax rate and the statutory tax rate result from income and expense items that are treated differently for financial reporting and tax purposes. Refer to Note 9. Income Taxes in the notes to our consolidated financial statements for further discussion.

SEGMENT OPERATIONS

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

•Life Insurance

•Home Service Insurance

These segments are reported in accordance with U.S. GAAP. The Company evaluates profit and loss performance based on net income (loss) before federal income taxes for these segments.

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LIFE INSURANCE

Our Life Insurance segment primarily issues ordinary whole life insurance and endowment policies in U.S. dollar-denominated amounts to non-U.S. residents in more than 70 countries through almost 1,000 active independent marketing consultants as of December 31, 2021.

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

Life Insurance Segment premium breakout is detailed below.

Over 90% of our Life Insurance premium revenue in both 2021 and 2020 was generated by renewal premiums. While first year premiums increased by 9.8% in 2021 as compared to 2020, overall premium revenue decreased by 2.4% in 2021 compared to 2020 as renewal premiums declined by 3.5%. We believe that the increase in first year premiums is the result of actions we have taken over the past 18 months in executing on our strategic initiatives, including sales promotions and campaigns, focused training on virtual selling, and recruiting new independent contractors in 2021. Renewal premiums have been declining over the last several years, due in part to our

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withdrawal from Brazil and also due to one of our top distributors in Venezuela leaving our Company and as we discussed in Item 3 - Legal Proceedings, we believe is illegally competing with us and stealing our trade secrets and business. We began to stem the decline of renewal premiums in 2021, which we believe is due in part to our retention efforts that we also discuss in Part I. Item 1, Business - Strategic Initiatives.

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

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

The five countries listed above represented the majority of the new and renewal premiums in both 2021 and 2020. All experienced slight declines in 2021 as compared to 2020, which is due to the overall decline in our renewal business. However, premiums from Venezuela continue to decrease more than the other countries and decreased by 10.9% from 2020 to 2021. One of our largest distributors, who is based in Venezuela, has left our Company and based upon discovery conducted in such lawsuit, we believe is illegally competing with us and negatively affecting our business in Venezuela.

Domestic Premiums. Domestic premiums in our Life Insurance segment were $5.0 million in 2021, compared to $5.1 million in 2020. The majority of the premium recorded in 2020 and 2021 is related to renewal business as we discontinued new sales of domestic ordinary whole life and endowment life insurance products within our Life Insurance segment in 2017. In 2021, we introduced new domestic whole life products and distribution to expand our Life Insurance segment to the Hispanic market in Florida. However, our efforts to recruit agents to sell our products have been slower than we expected and we are re-evaluating our sales distribution approach, initiatives and domestic life insurance offerings in the Florida market in 2022.

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Net Investment Income.  Net investment income in our Life Insurance segment increased 2.9% in 2021 compared to 2020 due to continued growth in average invested assets. We experienced a decrease in portfolio yield of two basis points in this segment in 2021 compared to 2020 as we continue to face a challenging investment environment for fixed maturity assets, which account for the majority of our investment portfolio.

Investment Related Gains, Net.  The investment related gain for 2021 was primarily due to the appreciation in the value of our limited partnership investments. The investment related gain for 2020 was primarily due to the appreciation in value of a preferred stock exchange traded fund purchased during the first quarter of 2020 as we were able to take advantage of the market dislocation to identify an attractive risk-adjusted investment opportunity.

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

75.7% of our claims and surrender benefits in 2021 and 78.0% in 2020 were related to payment of surrender benefits and matured endowment benefits. Policy surrenders decreased 5.3% in 2021 as compared to 2020 and matured endowment benefits decreased by 6.0% in 2021 as compared to 2020. Surrender benefits have been higher than usual the last several years. However, policy surrenders decreased as we have instituted new programs seeking to curb surrenders. Matured endowment benefits had been increasing over the last several years

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but leveled off this year, which is expected, due to endowment products reaching their stated maturities. These charges are within expected levels.

The other key component of claims and surrender benefits is death claim benefits, which increased 36.2% in 2021 compared to 2020 due to both a higher volume, including COVID-19 related deaths, and a higher average amount of reported claims. Mortality experience is closely monitored by the Company as a key performance indicator and these amounts were within expected levels.

Increase in future policy benefit reserves. The change in future policy benefit reserves increased 13.9% in 2021 compared to 2020 due to better persistency. In addition, the change in future policy reserves for 2021 was lower due to an $0.8 million adjustment for the conversion of a small block of policies to our new actuarial valuation system for our Life Insurance segment during the second quarter of 2021.

HOME SERVICE INSURANCE

Our Home Service Insurance products consist primarily of small face amount ordinary whole life and pre-need policies, which are designed to fund final expenses for the insured, primarily consisting of funeral and burial costs. In June 2021, we added a new whole life product to this market that has higher allowable face values; and in the fourth quarter of 2021, we added a new critical illness insurance product. Our Home Service Insurance segment also sells property insurance policies covering dwellings and contents with maximum coverage of $30,000 per dwelling.

Our net loss before income tax expense decreased by $1.4 million in 2021 due primarily to higher first year and renewal life insurance premiums, which drove the total segment revenue increase of 5.2% in 2021 compared to 2020. The increase was partially offset by higher reinstatement premiums for reinsurance coverage from the impact of Hurricane Ida in 2021. First year life premiums increased due mainly to our sales campaigns that focused on increasing the face amount of insurance sold as well as the introduction of our new whole life product in this

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segment, which has a higher maximum face value. Renewal premiums increased during 2021 due to improvements in our collection and payment processes, strong collection efforts by our independent agents and our insureds' increased disposable income due to government stimulus and assistance programs related to the COVID-19 pandemic. Sales during the 2020 period were negatively impacted by the COVID-19 pandemic.

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

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

The majority of claims and surrender benefits in our Home Service Insurance segment relate to death claim benefits. Death claim benefits increased 9.5% in 2021 compared to 2020 due to both a higher volume, including COVID-19 related deaths, and a higher average amount of reported claims. Mortality experience is closely monitored by the Company and can fluctuate based on reported claims as a key performance indicator.

Property claims decreased in 2021 compared to 2020. The Company was impacted by Hurricane Ida in 2021 and by Hurricanes Laura, Delta and Zeta in 2020. We have a reinsurance agreement that covers catastrophic events such as hurricanes. This agreement contains a maximum coverage of $11.0 million per event and a retention level of $0.5 million per event. The decreased hurricane activity in 2021 helped reduce our property claims in 2021 compared to 2020.

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

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

OTHER NON-INSURANCE ENTERPRISES

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This operating unit represents the administrative support entities to the insurance operations whose revenues are primarily intercompany and have been eliminated in consolidation under U.S. GAAP, which typically results in a segment loss. Revenue in this operating unit consists primarily of net investment income and investment related gains or losses, while expenses consist of other general expenses. The loss reported for 2021 declined as other general expenses decreased in 2021 due to the $10.0 million in severance payments paid in 2020 related to our change in control. The Company also sold its former training facility located near Austin, Texas during 2021, resulting in a gain on the sale of $1.0 million.

INVESTMENTS

Our investments play a significant role in the success of our business, as we invest the majority of premiums collected to pay for future benefits and rely on net investment income for our ongoing operations. The administration of our investment portfolio is handled by our management and a third-party investment manager, pursuant to Board-approved investment guidelines. State insurance statutes prescribe the quality and percentage of the various types of investments that may be made by insurance companies and generally permit investment in qualified state, municipal, federal and foreign government obligations, high quality corporate bonds, preferred and common stock, mortgage loans and real estate within certain specified percentages. Our investment guidelines comply with the applicable statutes and thus fixed maturity securities comprise a majority of our investment portfolio. The assets are intended to mature in accordance with the average maturity of the insurance products and to provide the cash flow for our insurance company subsidiaries to meet their respective policyholder obligations and operating expenses.

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

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

(2) Includes $133.7 million and $139.8 million of U.S. Government agencies and government-sponsored enterprises at December 31, 2021 and 2020, respectively.

During 2021, we continued repositioning our portfolio into more diversified holdings as part of our investment management strategy. As investments matured or were called, the Company increased investments in corporate securities, which now represent 54.0% of our cash and invested assets as of December 31, 2021 as compared to 52.8% at December 31, 2020. The Company has also decreased its exposure to the municipal bond market, which represents 23.3% of the investment portfolio as of December 31, 2021 compared to 24.7% as of December 31, 2020.

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

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

At December 31, 2021, investments in fixed maturity and equity securities were 90.0% of our total cash and invested assets.  All of our fixed maturity securities were classified as available-for-sale at December 31, 2021 and 2020.  We had no fixed maturity securities that were classified as trading securities at December 31, 2021 or 2020.

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

Yields on investment assets vary between segment operations due to different portfolio mixes and durations in the segments. The consolidated yields include our other non-insurance enterprises. The sustained low interest rate environment of the past several years for fixed maturity assets, which account for the majority of our investment portfolio, has required us to reinvest a portion of our portfolio at lower interest rates; however, diversification of our investment portfolio into limited partnership investments helped offset a challenging investment environment for fixed maturity securities in 2021.

Credit quality is an important feature of our investment guidelines for our fixed maturity securities. Credit ratings reported for the periods indicated are assigned by a Nationally Recognized Statistical Rating Organization ("NRSRO") such as Moody’s Investors Service, Standard & Poor’s and Fitch Ratings.  A credit rating assigned by a NRSRO is a quality-based rating, with AAA representing the highest quality and D the lowest, with BBB and above being considered investment grade.  If there is no NRSRO rating, the Company may use credit ratings of the NAIC Securities Valuation Office ("SVO") as assigned.  Securities rated by the SVO are grouped in the equivalent NRSRO category as stated by the SVO, and securities that are not rated by a NRSRO are included in the "other" category.

The following table shows the distribution of the credit ratings of our portfolio of fixed maturity securities by carrying value.

The Company made new investments in investment grade bonds during 2021.  Non-investment grade securities are the result of downgrades of issuers or securities acquired during acquisitions of other companies, as the Company has not purchased below investment grade securities.

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As of December 31, 2021, the Company held municipal fixed maturity securities that include third-party guarantees.  Detailed below is a presentation by credit rating of our municipal holdings by funding type.

The table below shows the categories in which the Company held investments in special revenue bonds that were greater than 10% of fair value based upon the Company's portfolio of municipal fixed maturity securities at December 31, 2021.

The Company's municipal holdings are spread across many states. However, municipal fixed maturity securities from Texas and California comprise the most significant concentration of the total municipal holdings portfolio as of December 31, 2021.

The Company holds 21.6% and 12.9% of its municipal holdings in Texas and California issuers, respectively, as of December 31, 2021. There were no other states or individual issuer holdings that represented or exceeded 10% of the total municipal portfolio as of December 31, 2021.

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

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

IMPAIRMENT CONSIDERATIONS RELATED TO INVESTMENTS IN FIXED MATURITY AND EQUITY SECURITIES

Beginning January 1, 2020, in connection with the adoption of a new accounting standard, the Company assesses available-for-sale ("AFS") fixed maturity securities in an unrealized loss position for expected credit losses. See Note 1. Summary of Significant Accounting Policies for a discussion regarding our application of this accounting standard. The Company recorded no credit losses on securities in 2021 or 2020.

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Gross unrealized losses on AFS fixed maturity securities amounted to $3.0 million as of December 31, 2021 and $1.9 million as of December 31, 2020.  This increase in gross unrealized losses during 2021 was a result of the increase in average interest rates compared to 2020.

Information on both unrealized and realized gains and losses by category is set forth in Note 2. Investments of the notes to our consolidated financial statements.

REINSURANCE

As is customary among insurance companies, our insurance company subsidiaries reinsure, with other companies, portions of the life insurance risks they underwrite.  A primary purpose of reinsurance agreements is to enable an insurance company to reduce the amount of risk by reinsuring the amount exceeding the maximum amount the insurance company is willing to retain.  Even though a portion of the risk may be reinsured, our insurance company subsidiaries remain liable to perform all the obligations imposed by the policies issued by them and could be liable if their reinsurers were unable to meet their obligations under the reinsurance agreements.

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

The effect of reinsurance on premiums is as follows.

Our insurance subsidiaries monitor the solvency of their reinsurers in seeking to minimize the risk of loss in the event of default by a reinsurer.  The primary reinsurers of our insurance subsidiaries are large, well-capitalized entities.

The effect of reinsurance on life insurance in force is as follows.

Virtually all of the Company's non-credit accident and health insurance has been reinsured and is administered by Unified Life Insurance Company, an unaffiliated party.

The Company monitors the credit ratings of our life and property reinsurers.  The ratings by A.M. Best Company range from B+ (Good) to A+ (Superior).

SPFIC generally carries first and second event catastrophe reinsurance coverage of $10.5 million per event and a retention level of $0.5 million per event.  Thus, the first $0.5 million of incurred claims and any claims in excess of $11.0 million per event are SPFIC's responsibility.  The reinsurance premium for catastrophe reinsurance was $2.3 million in 2021, $1.4 million in 2020 and $0.8 million in 2019.

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LIQUIDITY AND CAPITAL RESOURCES

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

Liquidity refers to a company's ability to generate sufficient cash flows to meet the needs of its operations.  In the year ended December 31, 2021, our operations provided $40.5 million in net cash. We manage our insurance operations as described herein in order to ensure that we have stable and reliable sources of cash flows to meet our obligations. We currently anticipate meeting our short-term and long-term cash needs with cash generated by our insurance operations and from our invested assets. From time-to-time we may raise capital by selling shares in our SIP (as defined below) and we may also access our Credit Facility if needed (both as described below).

PARENT COMPANY LIQUIDITY AND CAPITAL RESOURCES

Citizens is a holding company and has had minimal operations of its own. Our assets consist of the capital stock of our subsidiaries, cash and investments. Our liquidity requirements are met primarily from two sources: cash generated from our operating subsidiaries and our invested assets. Our ability to obtain cash from our insurance subsidiaries depends primarily upon the availability of statutorily permissible payments, including payments Citizens receives from service agreements with our life insurance subsidiaries and dividends from the subsidiaries. The ability to make payments to the holding company is limited by applicable laws and regulations of Bermuda and U.S. states of domicile which subject insurance operations to significant regulatory restrictions. As discussed in Part I, Item 1, Business and Part I. Item 1A. Risk Factors, these laws and regulations require, among other things, that our insurance subsidiaries maintain minimum capital requirements, which limit the amount of dividends that can be paid to the holding company. The regulations also require approval of our service agreements with the applicable regulatory authority in order to prevent insurance subsidiaries from moving large amounts of cash to the unregulated holding company.

In addition to the above-mentioned sources of cash, we offer a Stock Investment Plan ("SIP"), whereby investors, policyholders, independent contractors and agents, employees and directors can directly purchase our stock. At our option, purchases of stock under the SIP can be made from newly issued or treasury stock, rather than in the open market, in which case, we can raise capital by selling our shares.

On May 5, 2021, we entered into a Credit Facility with Regions Bank. See Part IV, Item 1, Note 7, Commitments and Contingencies in the notes to our consolidated financial statements, herein, for a description of the Credit Facility. The Credit Facility provides additional liquidity to the Company for short-term and longer-term needs. As of December 31, 2021, we have not borrowed any money under the Credit Facility and have no immediate plans to do so.

INSURANCE COMPANY SUBSIDIARY LIQUIDITY AND CAPITAL RESOURCES

The liquidity requirements of our insurance operations are primarily met by premium revenues, investment income and investment maturities. Our primary uses of cash are for payments of policy benefits to policyholders, investment purchases, and operating expenses. Historically, cash flow from our operations has been sufficient to meet our cash needs and we have not had to liquidate a material amount of investments to pay our expenses and we did not do so in 2021. Premium revenue was $174.7 million and $175.3 million in the years ended December 31, 2021 and 2020, respectively. See Contractual Obligations and Off-balance Sheet Arrangements below for a discussion of known and estimated cash needs related to payments of future policy benefits and policy claims. Cash flow projections and cash flow tests under various market interest rate scenarios are performed annually to assist in evaluating liquidity needs and adequacy.

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

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make strategic acquisitions. Cash provided by operating activities was $40.5 million and $48.8 million for the years ended December 31, 2021 and 2020, respectively. Cash provided by operations was lower in 2021 due to (i) the $8.8 million severance payment to our former CEO, (ii) decreased renewal premiums in our international business; and (iii) increased first year premiums, which have higher costs associated with them than renewal premiums, such as commissions. During the third quarter of 2020, the Company used funds from matured securities to pay $6.0 million to the IRS for the tax compliance matter described in Note 7. Commitments and Contingencies in the notes to our consolidated financial statements. As noted in Note 7. Commitments and Contingencies, the IRS processed these withholding tax returns in 2021, and the Company considers this matter closed.

Cash from/used in Investments. We have traditionally also had significant cash flows from both scheduled and unscheduled investment security maturities, redemptions, and prepayments. These cash flows, for the most part, are reinvested in fixed income securities and to a lesser extent limited partnerships or other alternative investments. Net cash outflows from investing activities totaled $41.1 million and $61.8 million for the years ended December 31, 2021 and 2020, respectively. The investing activities fluctuate from period to period due to timing of securities activities such as calls and maturities and reinvestment of those funds. Our investments consist of 90.6% of marketable fixed maturity securities classified as available-for-sale and 0.9% of equity securities that could be readily converted to cash for liquidity needs. Over the last several years, a large portion of our fixed maturity security investment portfolio has matured or called, which required us to reinvest in fixed maturity securities with lower interest rates. We are seeking to diversify our portfolio with limited partnership investments in order to earn higher investment income to mitigate the effect of a decrease in our spread between our policy liability crediting rates and our investment earned rates (our gross margin), which could also negatively impact our liquidity. Our investment portfolio (and, specifically, the valuations of investment assets we hold) has also been, and may continue to be, adversely affected as a result of market developments from the COVID-19 pandemic and uncertainty regarding its outcome. Moreover, changes in interest rates, reduced liquidity or a continued slowdown in the U.S. or in global economic conditions may also adversely affect the values and cash flows of these assets.

Cash from/used in Financing Activities. Cash used in financing activities was $6.2 million for the year ended December 31, 2021 due primarily to the purchase of 100% of the outstanding Class B common stock from the Harold E. Riley Foundation for $9.1 million in March 2021. This amount was partially offset by $2.3 million we received from issuing shares under our SIP and $1.1 million net in annuity deposits received higher than annuity withdrawals.

Trends, Demands and Restrictions on our Uses of Cash

Because claims and surrenders are our largest expense, a primary liquidity concern is the risk of either (i) an extraordinary level of early policyholder surrenders, or (ii) higher than expected mortality experience. In order to mitigate the risk of early policyholder surrenders, we include provisions in our insurance policies, such as surrender charges, that help limit and discourage early withdrawals. As previously discussed, surrender benefits have been higher than usual the last several years as many of our policies have reached the age where surrender charges have expired and due to other reasons, like the loss of one of our biggest distributors in Venezuela (see Item 3. Legal Proceedings). However, policy surrenders decreased 5.3% in 2021 when compared to 2020 as we have instituted new programs seeking to curb surrenders. To the extent that early surrenders are higher than expected, our liquidity could be negatively impacted. We continue to monitor surrenders and early withdrawals.

Our whole life and endowment products provide the policyholder with alternatives once the policy matures - they can choose to take a lump sum payout or leave the money on deposit at interest with the Company. As of December 31, 2021, 40% of the Company's total insurance in force was in endowment products. Approximately 15% of the endowments in force will mature in the next five years. Policyholder election behavior is unknown, but if too many policyholders elect lump sum distributions, the Company could be exposed to liquidity risk in years of high maturities. Meeting these distributions could require the Company to sell securities at inopportune times to pay policyholder withdrawals. Alternatively, if the policyholders were to leave the money on deposit with the Company at interest, our profitability could be impacted if the product guaranteed rate is higher than the market rate we are earning on our investments. We currently anticipate that our available operating cash flow and capital resources will be adequate to meet our needs for funds, but we will monitor closely our policyholder behavior patterns.

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Primarily due to the COVID-19 pandemic, we have experienced increased death claim benefits over the last two years. Because the pandemic was an unforeseen event that was not priced into our product assumptions, to the extent we continue to experience increased claims and the associated death benefit payouts as a result of the COVID-19 pandemic, our liquidity could be negatively impacted. Some of our policies include pandemic exclusions, and we carry reinsurance to offset some of these risks.

As discussed above, we are subject to regulatory capital requirements that could affect the Company’s ability to access capital from our insurance operations or cause the Company to have to put additional cash in our wholly-owned subsidiaries. We experienced substantial increases in property claims in the 2021 and the last half of 2020 due in large part to four hurricanes that hit Louisiana. As a result, SPLIC had to contribute capital to SPFIC in both 2021 and 2020 in order to maintain statutory capital requirements.

Our domestic companies are subject to minimum capital requirements set by the NAIC in the form of risk-based capital ("RBC"). RBC considers the type of business written by an insurance company, the quality of its assets, and various other aspects of an insurance company's business to develop a minimum level of capital called "Authorized Control Level Risk-Based Capital". This level of capital is then compared to an adjusted statutory capital that includes capital and surplus as reported under statutory accounting principles, plus certain investment reserves. Should the ratio of adjusted statutory capital to control level RBC fall below 200% for our domestic companies, a series of remedial actions by the affected company would be required. Additionally, we have a parental guarantee between Citizens and CICA, Citizens' wholly-owned subsidiary domiciled in Colorado, to maintain a RBC level above 350%. At December 31, 2021, our domestic insurance subsidiaries were above the required minimum RBC levels.

CICA International is a Bermuda domiciled company. The BMA requires Bermuda insurers to maintain available statutory economic capital and surplus at a level equal to or in excess of the BMA's Enhanced Capital Requirement, which requires a certain Target Capital Level ("TCL"). As of December 31, 2021, CICA International was above the TCL threshold. At the request of the BMA, on April 15, 2021, Citizens and CICA International entered into a Keep Well Agreement. The Keep Well Agreement requires Citizens to contribute up to $10 million in capital to CICA International as necessary to ensure that CICA International has a minimum capital level of 120%. Since CICA International's capital level currently exceeds 120%, Citizens is not currently required to make a capital contribution. Any capital injection that Citizens is required to make under the parental guarantee with CICA or under the Keep Well Agreement with CICA International could negatively impact the Company's capital resources and liquidity.

CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS

Our material cash requirements from known contractual and other obligations primarily relate to our policy liabilities. Expected timing of those payments are as follows:

Future Policy Benefit Reserves and Policy Claims Payable. As a life insurance company, the vast majority of our known cash requirements are for payments related to future policy benefits and policy claims payable, which we estimated in the table above. These amounts have been projected utilizing assumptions based upon our historical experience and anticipated future experience. Because the exact timing and amount of the future policy benefit reserves are subject to significant uncertainty, we have reflected the majority of the obligation in the more than five-years category.

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Real Estate Lease. The Company entered into a long-term lease agreement with an unrelated party for its home office in Austin, Texas and moved into its new home office in 2020. Payments under this long-term lease agreement average approximately $112,340 per month.

The Company does not have off-balance sheet arrangements at December 31, 2021. We do not utilize special purpose entities as investment vehicles, nor do we invest in any such entities that engage in speculative activities of any nature. In addition, we do not hedge our investment positions.

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

CRITICAL ACCOUNTING POLICIES

The preparation of consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect reported amounts and related disclosures.  Management considers an accounting estimate to be critical if: (1) it requires assumptions to be made that were uncertain at the time the estimate was made; and (2) changes in the estimate, or different estimates that could have been selected, could have a material effect on our consolidated results of operations or financial condition.  While we believe that our estimates, assumptions and judgments are reasonable, they are based on information presently available.  Changes in our assumptions, estimates or assessments as a result of unforeseen events or otherwise could have a material impact on our financial position or results of operations.

Management has discussed the development and selection of its critical accounting estimates with the Audit Committee of the Board of Directors, and the Audit Committee has reviewed the disclosure presented.  See Note 1. Summary of Significant Accounting Policies in the notes to our consolidated financial statements for further information on our critical accounting policies.

VALUATION OF INVESTMENTS IN FIXED MATURITY SECURITIES

Based upon current accounting guidance, investment securities must be classified as held-to-maturity, 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 held-to-maturity 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 held-to-maturity 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 do not affect earnings until realized. The Company currently does not hold any fixed maturity securities classified as held-to-maturity.

The Company monitors all 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 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

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flows may change based upon new information regarding the performance of the issuer. Any credit losses are presented as an allowance rather than as a write-down of AFS fixed maturity securities.

DEFERRED POLICY ACQUISITION COSTS

Acquisition costs, consisting of commissions and policy issuance, underwriting and agent convention expenses that are directly related to and vary with the successful production of new business 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 are attributed to first year and renewal excess commissions.  The remaining 5.4% are attributed to other 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 considers, among other things, actual experience and projected future experience and 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 related to interest rates, mortality and lapses. Based on the results of DAC recoverability and loss recognition testing, management believes that our DAC for the years ended December 31, 2021 and 2020 is recorded at its estimated realizable value. However, if mortality increases by more than 125% from our underlying assumptions a loss recognition event could occur in our Home Service Insurance segment. Likewise, if interest rates decline significantly, a loss recognition event could occur in both of our operating segments.

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

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liabilities for future policy benefits. The change in these adjustments, net of tax, is included with the change in net unrealized appreciation of investments that is credited or charged directly to other comprehensive income.

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 about the ending asset balance and the annual amortization.  The key assumptions used 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 using best estimate assumptions related to interest rates, mortality and lapses.  Management 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.

GOODWILL

Current accounting guidance requires that goodwill balances be reviewed for impairment at least annually or more frequently if events occur or circumstances change that would indicate a triggering event has occurred.  A reporting unit is defined as an operating segment or one level below an operating segment.  The Company's reporting units, for which goodwill has been allocated, are equivalent to the Company's operating segment, as there is no discrete financial information reviewed and analyzed by management for the separate components of the segment or all of the components of the segment have similar economic characteristics.

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.  Management’s determination of the fair value of each reporting unit under the accounting guidance incorporates multiple inputs including discounted cash flow calculations based on assumptions that market participants would make in valuing the reporting unit. Other assumptions can include levels of economic capital, future business growth, discount rates and earnings projections. Spread compression and related effects to profitability caused by lower interest rates affect the valuation of in force business more significantly than the valuation of new business, as new business pricing assumptions reflect the current and anticipated future interest rate environment. Estimates of fair value are inherently uncertain and represent management's reasonable expectations regarding future developments.

The Company completes its annual goodwill assessment for the individual reporting units within the Life Insurance segment as of December 31 each year. We apply significant judgement when determining the estimated fair value of our reporting unit. These judgments incorporate multiple inputs, including discounted cash flow calculations based on assumptions that market participants would make in valuing the reporting unit, levels of economic capital, production levels and profitability of new business, pricing changes, spread compression, value of in force, discount rate and earnings projections. Estimates of fair value are inherently uncertain and represent management’s reasonable expectations regarding future developments. We recorded an impairment of $12.6 million in 2021 in our Life Insurance segment caused by increases in our carrying value of the segment due to the release of a $43.8 million uncertain tax position in the fourth quarter of 2021 following the expiration of the statute of limitations on the tax year ended December 31, 2017. This impairment is recorded on the Consolidated Statement of Operations. There was no impairment of goodwill in the years ended December 31, 2020 or 2019.

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POLICY LIABILITIES

Future policy benefit reserves have been computed using the net level premium method with assumptions as to investment yields, dividends on participating business, mortality, lapses and withdrawals based upon our experience.  The preparation of consolidated financial statements requires management to make estimates and assumptions that affect the reported amount of policy liabilities and the increase in future policy benefit reserves.  Management's judgments and estimates for future policy benefit reserves provide for possible adverse deviation.

We continue to use the original assumptions (including a provision for the risk of adverse deviation) in subsequent periods to determine the changes in the liability for future policy benefits (the "lock-in concept”) unless a premium deficiency exists.  Management monitors these assumptions and has determined that a premium deficiency did not exist as of December 31, 2021.  Management believes that our policy liabilities and increase in future policy benefit reserves as of the years ended December 31, 2021, 2020 and 2019 are based upon assumptions, including a provision for the risk of adverse deviation, that do not warrant revision. Annually, the Company completes experience studies with respect to mortality, lapse, interest and expenses. The results of these studies are used for current year reserve adequacy testing, which includes loss recognition, goodwill, and establishing benefit liabilities and DAC for the following year's new issues.

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 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 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.

TAX ACCOUNTING

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 or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in net income in the period in which the change is enacted.  CICA International, a wholly-owned subsidiary of Citizens, is considered a controlled foreign corporation for U.S. federal tax purposes. As a result, the insurance activity of CICA International is subject to Subpart F of the IRC and is included in Citizens taxable income on its U.S. federal income tax return. Due to the 0% enacted tax rate in Bermuda there are no deferred taxes recorded for CICA International's temporary differences.

RECENT ACCOUNTING PRONOUNCEMENTS

See Item 8. Financial Statements and Supplementary Data and "Accounting Pronouncements" in Note 1. Summary of Significant Accounting Policies in the notes to our consolidated financial statements.

December 31, 2021 | 10-K 59

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CITIZENS, INC.