For over 45 years, we have been meeting the needs of our policyholders and their families by providing insurance products that provide both living and death benefits. Citizens conducts operations through its insurance subsidiaries, who provide benefits to residents in 31 U.S. states and more than 75 different countries. We specialize in offering primarily ordinary whole life insurance, endowment products and final expense insurance in niche markets where we believe we can achieve competitive advantages.
Beginning in 2017, we endeavored to transform Citizens, setting the course for a sustainable future. We took clear and decisive actions to improve internal controls, remediate weaknesses in our financial and operational structures and redefine our culture. We assessed the strength of our people, products and operations. Based on clearly defined values and priorities, we made the hard decisions to recruit new talent, exit unprofitable or undesirable markets, realign our distributors and improve the profitability of our product offerings.
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.
As discussed above, insurance premiums and investment income are our primary sources of revenue.
•Insurance premiums declined 4.9% in 2020 compared to 2019, totaling $175.3 million and $184.3 million, respectively, driven by lower first year and renewal premiums in our Life Insurance segment.
The primary use of our funds is payment of insurance benefits. Total insurance benefits paid or provided in 2020 increased by 1.3%, from $154.6 million in 2019, to $156.7 million in 2020. This expense consists primarily of the following:
•Claims and surrender benefits, which increased 13.4% in 2020 compared to 2019. This increase was primarily due to an increase in surrender benefits and matured endowments in the Life Insurance segment, due primarily to the aging block of business and other economic circumstances.
•Increase in future policy benefit reserves, which decreased 28.3% in 2020 compared to 2019. Future policy benefit reserves decreased due to the lower in force block of business.
The other primary use of funds are the costs of selling our insurance products (e.g., commissions, underwriting, marketing expenses) and general expenses. These costs increased in 2020 primarily due to an increase in general expenses, which rose 10.8% in 2020 compared to 2019, driven by the change in control and executive severance expenses as described above. Our general expenses in 2020 benefited from a $2.2 million reduction in our 7702 tax compliance best estimate liability from the estimate at year end 2019. The increase in general expenses was also offset by a reduction in costs directly related to the selling of our insurance products, including commissions and capitalization of deferred policy acquisition costs, which decreased in 2020 compared to 2019, as they are directly related to premium production, and primarily first year premium production, which declined in 2020.
While it is difficult to quantify the full impact that the COVID-19 pandemic has had on our business and industry in 2020, as we have previously disclosed, our results of operations for the year ended December 31, 2020 were negatively impacted by the COVID-19 pandemic in the U.S. and other countries where we do business. The
•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:
Although our investment strategy has not changed, the Company has attempted to mitigate the risk of the low interest rate environment by making new investments in securities of states, municipalities, essential services and corporate issuers as well as identifying investment opportunities in other asset classes such as private equity to increase our yields while maintaining a prudent risk profile for our overall portfolio.
•Aging population. According to data from the United Nations, "World Population Prospects: the 2019 Revision", virtually every country in the world is experiencing growth in the number and proportion of older persons in their population. 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 find it difficult to obtain reinsurance in the future, forcing us to seek reinsurers who are more expensive to us. If we cannot obtain affordable reinsurance coverage, either our net exposures will increase or we will have to reduce our underwriting commitments.
Endowment product sales are the primary driver of sales in this segment. The twenty-year endowment is our top selling product, followed by an endowment product that matures at age sixty-five.
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 2020 and 2019 are shown below.
Revenues are primarily generated from insurance premium revenues and investment income on invested assets.
As discussed in “2020 Highlights”, we believe that our consolidated first year premium revenue was negatively impacted by the COVID-19 pandemic. The decrease in renewal premiums in our Life Insurance segment resulted from a decline in our in force business in this segment over the past few years, which is due in part to changes we made to our products and distribution. Renewal premiums in our Home Services segment were strong but were negatively impacted by catastrophic reinsurance premiums paid in the second half of 2020, as described below.
Net Investment Income. Net investment income increased 1.1% to $60.2 million in 2020 compared to $59.5 million in 2019 driven by a growing asset base derived from cash flows from our insurance operations. The annualized yield decreased by twelve basis points in 2020 compared to 2019 as we continue to face a challenging investment environment for fixed maturity assets, which account for the majority of our investment portfolio.
Yield on average invested assets 4.24 % 4.36 % 4.17 %
The sustained low interest rate environment of the past several years has required us to reinvest a portion of our portfolio at lower interest rates, which led to a lower portfolio yield in 2020. As part of the ongoing process of managing our portfolio and optimizing performance, we are continuing to identify and invest in new asset classes, including private equity.
Investment income from fixed maturity securities accounted for approximately 87.6% of total investment income for the year ended December 31, 2020 and 87.8% for 2019.
Investment income from fixed maturity securities increased 1.5% in 2020 compared to 2019. We have strategically increased our exposure to both private and public equity this year to improve our overall investment performance, endeavoring to increase our portfolio yields in a prudent manner. In addition, the increase in the policy loans asset balance, which represents policyholders utilizing their accumulated policy cash value to pay for premiums, contributed to the increase in investment income for 2020.
In 2020, we recorded realized gains of $1.6 million primarily related to fair value changes in a preferred stock exchange traded fund investment owned at December 31, 2020. In 2019, we recognized a gain of $1.9 million related to the redemption of two fixed maturity securities. We also recorded a net realized gain of $2.4 million from Citizens-owned real estate transactions in 2019.
•Matured endowment benefits increased 42.5% in 2020 compared to 2019. These increases were anticipated based upon the dates when our policy endowment contracts were sold and their expected maturities as set forth in their contracts.
•Property claim expenses increased 79.6% in 2020 compared to 2019 due to the three hurricanes that hit Louisiana in the second half of 2020.
Increase in Future Policy Benefit Reserves. The change in future policy benefit reserves decreased 28.3% in 2020 compared to 2019. Future policy benefit reserves decrease as our block of in force business decreases and thus the decline was driven largely by lower policyholder retention. In 2019, changes in actuarial valuation estimates associated with the conversion to a new actuarial valuation system also contributed $2.4 million to the decline.
Other General Expenses. Total general expenses increased 10.8% in 2020 compared to 2019 due primarily to change in control and severance expenses as described above, partially offset by a $2.2 million reduction in our 7702 compliance best estimate liability and decreases in audit and long-term incentive compensation expenses.
Capitalization of DAC. Capitalized DAC was $20.5 million and $22.3 million in 2020 and 2019, respectively. Decreases in capitalized amounts are in line with the decreases noted in sales activity. These costs will vary based upon successful efforts related to newly issued policies and renewal business. 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 Cost of Insurance Acquired ("COIA"). Amortization of COIA increased in 2020 compared to 2019 due primarily to an update in our Home Service Insurance segment's expected earned rate assumptions used within annuity models that resulted in additional amortization of approximately $0.2 million in 2020.
Federal Income Tax. Federal income tax benefit of $1.3 million in 2020 and federal income tax expense of $7.1 million in 2019 resulted in effective tax rates of 10.8% and 126.0%, respectively. Subsequent to the novation of all of the international policies issued by CICA to CICA Ltd., the earnings of CICA Ltd. are subject to Subpart F of the IRC and, therefore, are included in Citizens' taxable income. The Subpart F income inclusion generated $2.2 million of federal income tax expense in 2020, as compared to $5.9 million in 2019. The decrease in tax from Subpart F income was partially offset in 2019 and 2020 by foreign income tax rate differential of $1.6 million and $1.8 million, respectively. 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.
92% of our Life Insurance premium revenue in each of the past three years was generated by renewal premiums. The Company has taken actions over the past few years to pursue long-term growth and stability, including reducing discretionary dividends on existing international policies in response to the sustained low interest environment and making changes to our distribution, which has negatively impacted sales levels. These changes also included the discontinuance of new business in Brazil in April 2018, following the review of our international business model and regulatory risks. Brazil had been one of our top premium-producing countries in our international life insurance business for the prior several years. Finally, Venezuela, which has historically been one of our top premium-producing countries, has experienced prolonged economic and political turmoil, which has negatively impacted our sales in the country, decreasing approximately 10% in each of 2020 and 2019. As discussed in Part I. Item 1, Business - Strategic Initiatives, we are beginning to implement on our growth strategies in the Life Insurance segment, by expanding our product offerings to the U.S. market.
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.
Colombia $ 25,783 20.4 % $ 26,768 20.1 % $ 27,605 20.0 %
Annualized yield on average invested assets 4.28 % 4.41 % 4.17 %
Realized Investment Gains, Net. The realized gain for 2020 was primarily due to the appreciation in the value of a preferred stock exchange traded fund purchased during the first quarter as we were able to take advantage of the market dislocation to identify an attractive risk-adjusted investment opportunity. Realized gains for 2019 were primarily due to a realized gain of $5.5 million during the first quarter of 2019 related to the sale of our former corporate headquarters in Austin, Texas and $1.3 million gain on fixed maturity redemptions above par.
Claims and Surrenders. A breakout of death claim and surrender benefits for the Life Insurance segment is detailed below.
78% of our claims and surrender benefits in 2020 and 73% in 2019 were related to payment of surrender benefits and matured endowment benefits. Policy surrenders increased 13.4% in 2020 as compared to 2019 and matured endowment benefits increased by 43.6% in 2020. These expenses have been increasing over the last several years, which is expected, due to the aging of this block of business - a significant portion of surrenders relates to policies that have been in force and have little to no associated surrender charges and endowment products reaching their stated maturities. These charges are within expected levels.
We operate in the Home Service Insurance market through our subsidiaries Security Plan Life Insurance Company ("SPLIC"), Magnolia Guaranty Life Insurance Company ("MGLIC") and Security Plan Fire Insurance Company ("SPFIC"), and focus on the life insurance needs of the middle- and lower-income markets, primarily in Louisiana, Mississippi and Arkansas. Our policies are sold and serviced through a home service insurance marketing distribution system of 415 independent agents who work on a debit route system and through funeral homes that sell policies, collect premiums and service policyholders.
covering dwellings and contents. We provide $30,000 maximum coverage on any one dwelling and contents, while content only coverage and dwelling only coverage are both limited to $20,000.
We provide final expense ordinary life insurance and annuity products primarily to middle- and lower-income individuals and families in Louisiana, Mississippi and Arkansas, a demographic that has been disproportionally impacted by the COVID-19 pandemic.
Premiums. First year premiums in this segment were negatively impacted by the COVID-19 pandemic and thus declined slightly in 2020 as compared to 2019. We had temporary office closures in Louisiana during the second and third quarters due to the COVID-19 pandemic and we have also had to curtail the sales of certain product offerings that require extensive person-to-person sales interaction. Premiums were also negatively affected due to three hurricanes in Louisiana during 2020 that increased reinsurance premiums paid to our reinsurers, which we net against premium revenue.
Total premiums $ 47,590 100.0 % $ 47,502 100.0 % $ 47,535 100.0 %
•Surrender benefits decreased in 2020 compared to 2019 but were within anticipated ranges based on management expectations.
•Property claims increased materially in 2020 compared to 2019. During the third quarter of 2020, SPFIC was impacted by Hurricane Laura, a Category 4 hurricane that caused significant damage in Louisiana. During the fourth quarter of 2020 SPFIC was also impacted by Hurricanes Delta and Zeta, both of which were Category 2 storms that also hit Louisiana. The Company has a reinsurance agreement that covers catastrophic events such as a hurricane. The reinsurance agreement specifies a maximum coverage per event of $11.0 million and a retention level of $0.5 million per event. We have paid the $0.5 million retention in claim amounts for each of Hurricane Laura and Delta and do not believe we will exceed the maximum coverage; however, any claims in excess of $11.0 million would have to be paid by SPFIC. Hurricane Zeta has been a less significant storm and at this point, we do not expect the impact of this storm to have a material effect on our consolidated financial statements.
This operating unit represents the administrative support entities to the insurance operations whose revenues are primarily intercompany and have been eliminated in consolidation under U.S. GAAP, which typically results in a segment loss. Revenue in this operating unit consists primarily of net investment income and realized investment gains or losses, while expenses consist of other general expenses. The loss reported for 2020 was negatively impacted by the change in control costs described above, which contributed to the $19.9 million of other general expenses. The loss in 2019 was impacted by an impairment loss of $3.1 million in connection with reclassifying our Citizens Academy training facility located near Austin, Texas as real estate held for sale. This facility is no longer being used by the Company and is for sale.
Our investments are an integral part of our business success, as we invest the majority of premiums collected to pay for future benefits and rely on net investment income for our ongoing operations. The administration of our investment portfolio is handled by our management and a third-party investment manager, pursuant to Board-approved investment guidelines, with all trading activity approved by each board of Citizens and its insurance subsidiaries. State insurance statutes prescribe the quality and percentage of the various types of investments that may be made by insurance companies and generally permit investment in qualified state, municipal, federal and foreign government obligations, high quality corporate bonds, preferred and common stock, mortgage loans and real estate within certain specified percentages. Our investment guidelines comply with the applicable statutes and require that fixed maturity securities, both government and corporate, are investment grade and comprise a majority of the investment portfolio. 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.
U.S. Treasury and U.S. Government-sponsored enterprises $ 16,117 1.0 % $ 15,878 1.0 %
(2) Includes $139.8 million and $130.1 million of U.S. Government agencies and government-sponsored enterprises for the years ended December 31, 2020 and 2019, respectively.
Cash and cash equivalents decreased as of December 31, 2020 compared to December 31, 2019 due to timing of cash inflows and investments of cash into marketable securities.
The following table shows annualized investment yields by segment operations as of December 31 for each year presented.
Total $ 115,373 108,115 275,037 252,691 19,255 16,656 409,665 377,462 100.0 %
AAA $ 4,530 4,419 - - - - 4,530 4,419 1.2 %
BB and other 25,400 22,650 29,897 28,031 3,260 2,968 58,557 53,649 14.2
The table below shows the categories in which the Company held investments in special revenue bonds that were greater than 10% of fair value based upon the Company's portfolio of fixed maturity securities at December 31, 2020.
The Company's municipal holdings are spread across many states, however, municipal fixed maturity securities from Texas comprise the most significant concentration of the total municipal holdings portfolio as of December 31, 2020.
IMPAIRMENT CONSIDERATIONS RELATED TO INVESTMENTS IN FIXED MATURITY AND EQUITY SECURITIES
Gross unrealized losses on AFS fixed maturity securities amounted to $1.9 million as of December 31, 2020 and $1.6 million as of December 31, 2019. This increase in gross unrealized losses during 2020 was a result of the market disruption caused by the COVID-19 pandemic.
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.
SPFIC generally carries first and second event catastrophe reinsurance coverage of $10.0 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 $10.0 million per event are SPFIC's responsibility. The reinsurance premium for catastrophe reinsurance was $1.4 million in 2020 and $0.8 million in 2019 and 2018, respectively.
Liquidity is the ability to generate amounts of cash adequate to meet our cash needs. Citizens is a holding company and has had minimal operations of its own. 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
Additionally, as discussed in Part I. Item 1. Business, on March 5, 2021, the Company paid $9.1 million to the Foundation to hold in escrow in order to purchase, upon obtaining final regulatory approval, 100% of the outstanding Class B common stock.
We have been closely monitoring the impact that the COVID-19 pandemic may have on our liquidity and capital resources. To the extent that we continue to experience decreases in sales or collections of renewal premiums, increases in surrenders, decreases in our investment income and/or increases in claim payments as a result of the COVID-19 pandemic, the liquidity of our insurance subsidiaries would be negatively impacted, inhibiting their ability to make dividends to the Company, and we may have to sell some of our investments to meet operational cash flow requirements.
Our investments consist of 91.7% of marketable fixed maturity securities classified as available-for-sale and 1.4% of equity securities that could be readily converted to cash for liquidity needs. Over the last several years, a large portion of our fixed maturity security investment portfolio has matured, which required us to reinvest in fixed maturity securities with lower interest rates. We are seeking to diversify our portfolio with private equity investments in order to earn higher interest rates to mitigate the effect of a decrease in our spread between our policy liability crediting rates and our investment earned rates (our gross margin), which could also negatively impact our liquidity. 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.
Because claims and surrenders are our largest expense, a primary liquidity concern is the risk of an extraordinary level of early policyholder surrenders. We include provisions in our insurance policies, such as surrender charges, that help limit and discourage early withdrawals. Since these contractual withdrawals, as well as the level of surrenders experienced, have been largely consistent with our assumptions, our associated cash outflows for claims and surrender benefits historically have not had an adverse impact on our overall liquidity. Although we experienced an increase in surrenders in the Life Insurance segment during 2020 compared to 2019, we believe that such surrenders were not materially impacted by the COVID-19 pandemic. To the extent that we continue to experience an increase in surrenders in our Life Insurance segment, whether due to the COVID-19 pandemic or otherwise, our liquidity could be negatively impacted. We continue to monitor surrenders and early withdrawals.
For reasons previously discussed, we have experienced increased death claim benefits in our Home Service Insurance segment in 2020 compared to 2019. Additionally, we are closely monitoring claim volumes to evaluate whether there is a delay in reporting or filing for benefits as a result of the COVID-19 pandemic in our Home Service Insurance segment and Life Insurance segment. To the extent we continue to experience increased claims and the associated death benefit payouts in our Home Service Insurance segment and, possibly our Life Insurance segment, as a result of the COVID-19 pandemic, our liquidity could be negatively impacted. Some of our policies include pandemic exclusions, and we carry reinsurance to offset some of these risks. While our mortality experience is closely monitored by the Company and the activity has historically been within expected levels, we cannot predict whether we will see increased death benefit payouts above expected levels due to the COVID-19 pandemic. Cash flow projections and cash flow tests under various market interest rate scenarios are performed annually to assist in evaluating liquidity needs and adequacy.
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, 2020, our domestic insurance subsidiaries were above the required minimum RBC levels.
We have committed to the following contractual obligations as of December 31, 2020, with the payments due by the period indicated below:
Year 1 to 3 Years 3 to 5 Years More than 5
Real Estate and Equipment Leases. The Company entered into a long-term lease agreement with an unrelated party for its new home office in Austin, Texas and moved into its new home office in the first week of November 2020. Payments under this new long-term lease agreement average approximately $112,340 per month.
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.
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 of AFS fixed maturity securities.
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 93.3% of our capitalized DAC are attributed to first year and renewal excess commissions. The remaining 6.7% 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.
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
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.
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.
We performed our annual goodwill impairment test and the fair value was in excess of the segment's carrying value for the years ended 2020, 2019 or 2018. As of December 31, 2020, the Company had $12.6 million of goodwill allocated to the Life Insurance segment and the segment's fair value exceeded the carrying value by approximately 8%. We apply significant judgment when determining the estimated fair value of our reporting unit. These judgements incorporate multiple inputs including discounted cash flow calculations based on assumptions that market participants would make in valuing the reporting unit, levels of economic capital, production levels and profitability of new business, pricing changes, spread compression, value of in force and earnings projections. Estimates of fair value are inherently uncertain and represent management’s reasonable expectations regarding future developments. Unfavorable changes to assumptions or factors that decrease the fair value and could result in future impairment include, but are not limited to, lower expectations for future sales, higher maintenance expenses, unfavorable mortality, higher discount rates and market-based inputs. Increases in the carrying value of the segment caused by recognition of uncertain tax benefits could also result in future impairment.
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.
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. If we were to have a gain contingency, we would disclose it in the notes to our consolidated financial statements.
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 Ltd., a wholly-owned subsidiary of Citizens, is considered a controlled foreign corporation for federal tax purposes. As a result, the insurance activity of CICA Ltd. is subject to Subpart F of the IRC and is included in Citizens taxable income on its US federal income tax return and due to the 0% enacted tax rate in Bermuda there are no deferred taxes recorded for CICA Ltd.'s temporary differences.