What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-08-04 compared with 2021-05-05 · 256 added, 208 removed, 400 unchanged (54% of the section changed)

5 unchanged sentences

Forward-looking statements are not guarantees of future performance and the Company’s actual results may differ significantly from the results discussed in the forward-looking statements.

Factors that might cause such differences include, but are not limited to, those discussed in Part II, Item 1A of this Form 10-Q as well as in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020 under the heading “Risk Factors,” which are incorporated herein by reference.

Factors that might cause such differences include, but are not limited to, statements concerning any potential future impact of the coronavirus disease (“COVID-19”) pandemic on our business, as well as factors discussed in the "Risk Factors" contained in our Annual Report on Form 10-K for the year ended December 31, 2020 which are incorporated herein by reference.

The Company assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law.

The impacts of COVID-19 and related economic conditions on the Company's financial results, which began to affect the Company late in the first quarter of 2020, continue to be highly uncertain and outside the Company’s control.

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 for the remainder of 2021.

Currently, some of the most significant factors that could cause our actual results to differ significantly from our forward-looking statements are those relating to the adverse effects of the COVID-19 pandemic, including:

• Decreased premium revenue and cash flow from disruption to our distribution channel of independent agents, customer self-isolation, travel limitations, business restrictions and decreased economic activity;

• An unusually high level of claims, lapses or surrenders in our insurance operations, which could affect our liquidity and cash flow.

The following discussion should be read in conjunction with the consolidated financial statements and accompanying notes included in Part I, Item 1 of this Form 10-Q.

12 unchanged sentences

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

residents, located principally in Latin America and the Pacific Rim, through independent marketing consultants;

March 31, 2021 | 10-Q 27

residents, located principally in Latin America and the Pacific Rim through independent marketing consultants and whole life insurance sold domestically through independent agents;

• Home Service Insurance segment - final expense life insurance and limited liability property insurance policies marketed to middle- and lower-income households, as well as whole life products with higher allowable face values, in Louisiana, Mississippi and Arkansas, sold through independent agents and through funeral homes.

IMPACT OF COVID-19 PANDEMIC

The 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 for the remainder of 2021.

June 30, 2021 | 10-Q 29

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

• Home Service Insurance segment - final expense life insurance and limited liability property insurance policies marketed to middle- and lower-income households in Louisiana, Mississippi and Arkansas, sold through independent agents and through funeral homes.

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

• decreased premium revenue due to disruption to our distribution channel and quarantines, travel limitations, business restrictions and decreased economic activity;

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

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

While we believe that the COVID-19 pandemic did not materially impact our results of operations during the first six months of 2021, the Delta variant of COVID-19, which is now becoming the predominant strain of COVID-19 globally, is leading to new or reinstated lock-downs and quarantines, and higher rates of transmission and deaths, particularly in unvaccinated individuals, and may materially impact future operations.

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

CURRENT FINANCIAL HIGHLIGHTS

In both the three months ended March 31, 2021 and 2020, we had a net loss of $3.6 million;

however, our net loss before federal income tax increased by $0.5 million in the three months ended March 31, 2021 compared to prior year period.

The increase in the pre-tax net loss in the 2021 period was driven by a $4.1 million increase in claims and surrender benefits, which was higher in both our Life Insurance and our Home Service Insurance segments.

The higher claim expense was a result of a higher volume of reported claims, including those COVID-19 related, in addition to an increase in the average death claim amount in both segments.

We also continued to experience an increase in surrender benefits and matured endowments in the Life Insurance segment, which we believe is due primarily to the aging block of business and other economic circumstances.

Our realized investment gains improved by $1.6 million in the three months ended March 31, 2021, to $0.3 million, from a $1.3 million loss in the prior year period.

As discussed in Part I, Item 1, Note 5 .

Investments , changes in realized gains reflect the changes in fair values of our equity securities.

In the three months ended March 31, 2020, we recorded realized losses of $1.1 million, which were primarily the result of the sudden stock market decline resulting from the onset of the COVID-19 pandemic.

Our other general expenses continued to be negatively impacted in the three months ended March 31, 2021 by the expenses related to professional fees incurred in connection with the change in control of the Company.

A detailed description of the change in control of the Company and expenses related thereto are included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020 ("Form 10-K").

The settlement of all legal issues related to the change in control occurred in the first quarter of 2021 and thus, we do not expect any additional expenses related to this matter.

See Part I, Item 1, Business – "Change in Control;

Agreement to Purchase the Class B Shares;

Anticipated Divestiture of Control” in our Form 10-K and Part I, Item 1, Note.

11 Subsequent Events in the notes to our consolidated financial statements herein for a further discussion of the change in control.

Despite the change in control costs, our other general expenses decreased slightly for the three months ended March 31, 2021 compared to the same period in 2020.

The change in control costs were offset by lower salary and benefit expenses resulting from converting our Home Service Insurance sales agents to independent agents and lower audit and consulting fees.

Net income increased by $6.0 million during both the three and six months ended June 30, 2021 to $5.0 million and $1.4 million, respectively, compared to the prior year periods due primarily to an increase in realized gains of $3.4 million and $5.0 million, respectively in the three and six months ended June 30, 2021.

The realized gains primarily reflect changes in the fair value of our limited partnership investments during the second quarter of 2021.

We did not sell these investments in the second quarter of 2021, but as discussed in Part I, Item 1, Note 5.

Investments , changes in fair values of our equity securities are reflected in realized gains, in addition to executed transactions that result in a gain or loss.

Net income in the three months ended June 30, 2021 was also positively impacted by an increase in premiums and more favorable mortality experience in our Home Service Insurance segment as compared to the three months ended June 30, 2020, and a $0.8 million reduction to increase in future policy benefit reserves due to the conversion of a block of business to our new actuarial valuation system as described in Part I, Item 1, Note 1.

Financial Statements .

Total benefits and expenses of $58.0 million and $116.2 million, respectively, in the three and six months ended June 30, 2021 were $0.1 million and $0.3 million higher than the respective periods in 2020.

The increase was primarily due to increases in claims and surrender benefits paid in our Life Insurance segment.

Death claim benefits paid in the Life Insurance Segment, increased by $0.6 million, or 48.8%, in the three months ended June 30, 2021 as compared to the 2020 period and increased by $1.6 million, or 52.7%, in the six months ended June 30, 2021 as compared to the 2020 period.

The higher claim expense was a result of a higher volume of reported claims, including those COVID-19 related, in addition to an increase in the average death claim amount.

We also continued to experience an increase in surrender benefits in the Life Insurance segment, which increased by 28.1% and 17.7%, respectively, in the three and six months ended June 30, 2021, as compared to the prior year periods.

We believe the continued trend of higher surrenders is due primarily to the aging block of business, as the business ages, the surrender charges decrease, and to a lesser extent, global economic circumstances.

June 30, 2021 | 10-Q 30

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

Consolidated Revenue Highlights

Insurance premiums and investment income are our primary sources of revenue.

In the three months ended March 31, 2021 as compared to the same period in 2020:

• Insurance premiums declined by $2.3 million, or 5.5%, to $39.0 million from $41.3 million in the same period in 2020.

Life insurance premiums and investment income are our primary sources of revenue.

In the three months ended June 30, 2021 compared to the same period in 2020, total revenue increased by $5.2 million.

• Insurance premiums increased by $1.3 million, or 3.2%, due to an increase in first year premiums in our Life Insurance segment and an increase in both first year and renewal premiums in our Home Service Insurance segments.

We believe these increases were driven by our focused marketing campaigns and improved sales practices, as well as lower sales in prior year period due to COVID 19 impacts previously described.

• Net investment income increased by $0.4 million, or 2.7%, despite a lower average portfolio yield in the current year period due to a growing base of assets.

In the six months ended June 30, 2021 as compared to the same period in 2020, total revenue increased by $5.0 million.

• Insurance premiums declined by $1.0 million, or 1.2%.

The decline was driven by our Life Insurance segment, as renewal premiums declined 6.4% to $52.0 million in the first quarter of 2021 from $55.6 million in the same period in 2020.

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

• Net investment income was $15.2 million in both periods.

Additionally, realized investment gains increased by $1.6 million primarily for the reason discussed above.

Other income increased 68.8% to $0.9 million from $0.5 million for the same period in 2020.

Other income consists primarily of policyholders selecting supplemental contracts upon maturity of their original policies, which has been increasing over the past few quarters.

March 31, 2021 | 10-Q 28

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

• Net investment income increased by $0.5 million, or 1.6%, due to the growing asset base and the make-whole call redemption described below in the "Consolidated Results of Operations".

Additionally, as discussed above, realized investment gains increased by $3.4 million and $5.0 million, respectively, in the three and six months ended June 30, 2021 as compared to the prior year periods.

Other income consists primarily of policyholders in our Life Insurance segment selecting supplemental contracts upon maturity of their original policies, which has been increasing over the past few quarters.

Consolidated Benefits and Expenses Highlights

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

As discussed above, our claims and surrender benefits increased by $4.1 million in the three months ended March 31, 2021 as compared to the same period in prior year;

The primary use of our funds is the payment of insurance benefits for claims, surrenders and matured endowments.

As discussed above, our claims and surrender benefits incurred increased by $1.5 million and $5.7 million, respectively, in the three and six months ended June 30, 2021 as compared to the same periods in the prior year;

however, total insurance benefits paid or provided was essentially flat year-over-year, as the increase in claims and surrender benefits was offset by a decrease in future policy benefit reserves.

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.

Costs incurred related to selling our insurance products remained flat in the three months ended March 31, 2021 as compared to the same period in prior year and as discussed above, general expenses slightly decreased for the period.

2021 First Quarter Financial Condition

Future policy benefit reserves decreased due to the decline in the in force block of business and the conversion of a block of policies to our new actuarial valuation system mentioned above.

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

Costs incurred related to selling our insurance products were higher for the three and six months ended June 30, 2021 as compared to the same period in the prior year.

First year sales for both our Life Insurance and Home Service Insurance segments increased substantially in the second quarter of 2021 compared to the comparable period last year, when premiums were materially impacted by the COVID-19 pandemic as disclosed previously.

Commissions on our first year sales are much higher than commissions on our renewal business.

Other general expenses were slightly higher for the three and six months ended June 30, 2021 due to higher rent at our new headquarters and higher legal fees due to the various legal proceedings described in our Form 10-K for the year ended December 21, 2020.

June 30, 2021 | 10-Q 31

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

Financial Condition at June 30, 2021

• Total investments of $1.6 billion;

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• Total assets of $1.8 billion.

• Total stockholders' equity of $0.3 billion.

• $4.6 billion of direct insurance in force.

• Fully diluted earnings per share of Class A common stock of $0.03.

OUR OPERATING SEGMENTS

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The amount of insurance, number of policies, and average face amounts of ordinary life policies issued during the periods indicated are shown below.

Three Months Ended March 31, 2021 2020

Six Months Ended June 30, 2021 2020

Issued Number of

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Total $ 208,659,065 15,671 $ 149,257,388 10,545

We issued $95.0 million of insurance in the three months ended March 31, 2021 as compared to $85.7 million in 2020, as both our Life Insurance and Home Service Insurance segments experienced growth.

We issued 7,224 new policies in 2021, as compared to 5,902 new policies in 2020.

The number of policies issued in the three months ended March 31, 2021 increased 18.5% in the Life Insurance segment.

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

March 31, 2021 | 10-Q 29

Total insurance issued increased by 39.8% in the six months ended June 30, 2021, from $149.3 million in the first six months of 2020 to $208.7 million in 2021, as both our Life Insurance and Home Service Insurance segments experienced growth.

We issued 15,671 new policies in the 2021 period, as compared to 10,545 new policies in the 2020 period.

Our sales for the second quarter of 2020 were unusually low, especially for our Life Insurance segment due to the impact of the COVID-19 pandemic during this time.

The number of policies issued in the six months ended June 30, 2021 increased 37.1% in the Life Insurance segment from the same period in 2020.

We believe the increase in the first half of 2021 was primarily due to enhancements to our business operations and sales practices to account for the impact of the COVID-19 pandemic, new sales promotions and campaigns, focused training on virtual selling and strategically prioritizing selling lower face amount policies, which typically have less stringent underwriting requirements and, in some cases, may not require the completion of medical tests, as many of our top international markets remain in quarantine due to the COVID-19 pandemic.

In addition, in order to address the decreasing first year premiums we have seen in recent years in this segment, we prioritized recruiting new independent contractors in the first quarter of 2021, and we began to see the impact of these efforts through June.

Although applications increased during the first six months of 2021 compared to the same period last year due to these enhancements, average policy face amount declined, as we continued to emphasize the selling of lower face amount policies, as noted above.

The number of policies issued in the six months ended June 30, 2021 increased 50.2% in the Home Service Insurance segment compared to the same period in 2020.

We believe the increase in our Home Service Insurance segment was driven by the broadening of a sales campaign introduced during the third quarter of last year targeted at existing policyholders that emphasizes increased coverage as well as fewer applications received in the prior

June 30, 2021 | 10-Q 32

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

addition, in order to address the decreasing first year premiums we have seen in recent years in this segment, we prioritized recruiting new independent contractors in the first quarter of 2021, and we began to see the impact of these efforts in March.

Although applications increased during the first quarter of 2021 compared to the same period last year due to these enhancements, average policy face amount declined by almost $10,000 per policy, as we continued to emphasize the selling of lower face amount policies, as noted above.

The number of policies issued in the three months ended March 31, 2021 increased 22.9% in the Home Service Insurance segment compared to the same period in 2020.

The increase in new business applications in our Home Service Insurance segment was driven by the broadening of a sales campaign introduced during the third quarter of last year targeted at existing policyholders that emphasizes increased coverage as well as lower applications received in the prior year period as the onset of the COVID-19 pandemic and stay-at-home orders negatively impacted our business.

year period as the onset of the COVID-19 pandemic and stay-at-home orders negatively impacted our business.

During the first quarter of 2021, as part of the campaign, we increased the target face amount of insurance.

As a result, the overall average face amount of policies issued for the Home Service Insurance segment increased slightly compared to the first quarter of 2020.

As a result, the overall average face amount of policies issued for the Home Service Insurance segment increased during the six months ended June 30, 2021 compared to the same period last year.

CONSOLIDATED RESULTS OF OPERATIONS

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Our revenues are generated primarily by insurance renewal premiums and investment income on invested assets.

Three Months Ended

Three Months Ended Six Months Ended

June 30, June 30,

(In thousands) 2021 2020 2021 2020

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Net investment income 15,320 14,915 30,564 30,084

Realized investment gains (losses), net 292 (1,306)

Realized investment gains, net 4,859 1,448 5,151 142

Other income 553 482 1,468 1,024

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Premium Income.

Premium income derived from life, accident and health, and property insurance sales decreased $2.3 million, or 5.5% for the three months ended March 31, 2021 compared to the same period in 2020.

The overall decrease in premium income was driven primarily by a $2.5 million decline throughout the first three months of 2021 in renewal premiums in our Life Insurance segment.

The decrease in renewal premiums in the Life Insurance segment continues to result 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 and surrenders outpacing new sales.

Premium revenues continue to be negatively impacted by high levels of surrenders, which we believe are due not only to an aging block of business (i.e., maturities and surrenders of products where the surrender charges are close to expiring or have expired) and our decision to cease issuing new policies in Brazil in 2017 (where we see many policies lapsing), but also due to economic circumstances in Latin America.

Premium income derived from life, accident and health, and property insurance sales increased $1.3 million, or 3.2%, for the second quarter, and decreased $1.0 million, or 1.2% for the six months ended June 30, 2021 compared to the same periods in 2020.

The increase in the three-month period was due to higher first year premiums in both our segments and slightly higher renewal premiums in our Home Services Insurance segment.

First year premiums were negatively affected in the three and six months ended June 30, 2020 due to the impacts of the COVID-19 pandemic.

Despite higher first year premiums in both our segments and slightly higher renewal premiums in our Home Services Insurance segment for the six months ended June 30, 2021, overall premiums declined due to lower renewal premiums in our Life Insurance segment.

The decrease in renewal premiums in the Life Insurance segment is mainly due to a continuing decline in our in force business in this segment over the last several years as we have made changes to our products and distribution and as surrenders outpace new sales.

See the detailed distribution of premiums within Segment Operations discussed below.

March 31, 2021 | 10-Q 30

June 30, 2021 | 10-Q 33

CITIZENS, INC.

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Our annualized net investment income performance is summarized as follows.

March 31, December 31, March 31,

June 30, December 31, June 30,

(In thousands, except for %) 2021 2020 2020

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Annualized yield on average invested assets 4.22 % 4.24 % 4.29 %

Annualized net investment income increased slightly in the three months ended March 31, 2021 as compared to the same annualized performance in the 2020 period as an increase in average invested assets derived from cash flows from our insurance operations and a one-time benefit described below offset a lower portfolio yield.

The annualized yield decreased by ten basis points during the first quarter of 2021 compared to the same period in 2020, as we continue to face a challenging investment environment for fixed maturity assets, which account for the majority of our investment portfolio.

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

Investment income from fixed maturity securities accounted for approximately 87.9% of total investment income for the three months ended March 31, 2021.

Three Months Ended

Annualized net investment income increased by $1.0 million in the six months ended June 30, 2021 as compared to the same six months of 2020 despite a lower annualized yield.

The increase is due to the growing asset base and the make-whole call redemptions described below.

The annualized yield decreased by seven basis points during the first six months of 2021 compared to the same period in 2020, as we continue to face a challenging investment environment for fixed maturity assets, which account for the majority of our investment portfolio.

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

Investment income from fixed maturity securities accounted for approximately 87.5% and 87.7% of total investment income for the three and six months ended June 30, 2021, respectively.

Three Months Ended Six Months Ended

June 30, June 30,

(In thousands) 2021 2020 2021 2020

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Net investment income $ 15,320 14,915 30,564 30,084

Income from fixed maturity securities income increased 1.7% for the three months ended March 31, 2021, compared to the same period in 2020 and our total investment income increased by 1.9% in the same period due to the recognition of accelerated interest payments resulting from a “make-whole” call redemption, whereby the borrower was required to pay a lump sum based on the net present value of interest payments foregone due to the call.

Investment expenses were slightly higher due to our increased investments in private equity, which often include start-up fees.

Income from fixed maturity securities income increased 2.1% and 1.9% for the three and six months ended June 30, 2021, respectively, compared to the same periods in 2020, and our total investment income increased by 2.5% and 2.2% in the same periods.

However, when adjusted for two non-recurring events, a "make-whole" call redemption and early distributions from our limited partnership investments, net investment income was flat year-over-year.

Investment expenses primarily reflect investment in limited partnerships.

Realized Investment Gains (Losses), Net.

We recorded realized gains of $0.3 million during the first quarter of 2021 related to fair value changes in our equity securities owned at March 31, 2021.

The fair value of our equity securities owned at March 31, 2020 was negatively impacted by the onset of the COVID-19 pandemic as discussed above.

March 31, 2021 | 10-Q 31

We recorded realized gains of $4.5 million related to fair value changes in our investments in limited partnerships during the second quarter of this year.

We also recorded realized gains of $0.3 million and $0.6 million during the three and six months ended June 30, 2021, respectively, related to fair value changes in our equity securities owned at June 30, 2021.

The fair value of our equity securities owned at June 30, 2020 was negatively impacted by the onset of the COVID-19 pandemic as discussed previously.

June 30, 2021 | 10-Q 34

CITIZENS, INC.

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BENEFITS AND EXPENSES

Three Months Ended

Three Months Ended Six Months Ended

June 30, June 30,

(In thousands) 2021 2020 2021 2020

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Claims and Surrenders.

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

As reflected in the table below, claims and surrender benefits increased 16.6%, from $18.6 million in the three months ended March 31, 2020, to $21.7 million in the three months ended March 31, 2021.

Three Months Ended

Death claims and surrender benefits are our primary uses of cash.

As reflected in the table below, death claim and surrender benefits combined increased 13.3% and 15.0%, respectively, in the three and six months ended June 30, 2021 as compared to the same periods in 2020.

Three Months Ended Six Months Ended

June 30, June 30,

(In thousands) 2021 2020 2021 2020

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Total claims and surrenders $ 29,296 27,754 59,885 54,203

• Death claim benefits increased 35.7% for the three months ended March 31, 2021, compared to the same period in 2020 - Life Insurance segment claims increased 55.6% and Home Service Insurance segment claims increased 28.6%.

As discussed above in "Current Financial Highlights", the increase was due to increases in reported claims, including COVID-19 related deaths, and the average dollar amount of claims incurred.

• Surrender benefits increased 6.2% for the three months ended March 31, 2021, compared to the same period in 2020.

Surrender benefits represented less than 0.3% of total direct ordinary whole life insurance in force of $4.6 billion as of March 31, 2021.

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

March 31, 2021 | 10-Q 32

• Death claim benefits decreased 7.1% and increased 13.6% for the three and six months ended June 30, 2021, respectively, compared to the same periods in 2020.

Claims in our Life Insurance segment increased 48.8% during the second quarter and 52.7% during the first half of the year 2021 compared to the same periods in 2020.

The increases were due to both a higher volume and a higher average amount of reported claims.

Home Service Insurance segment claims decreased 19.1% and increased 2.7% for the three and six months ended June 30, 2021, respectively, as compared to the prior year periods.

The increase during the first six months of the year compared to the same period last year was due primarily to COVID-19 related deaths during the first quarter of this year.

• Surrender benefits increased 26.7% and 15.9% for the three and six months ended June 30, 2021, respectively, compared to the same periods in 2020.

Surrender benefits represented less than 0.6% of total direct ordinary whole life insurance in force of $4.6 billion as of June 30, 2021.

June 30, 2021 | 10-Q 35

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

• Matured endowment benefits increased 36.5% for the three months ended March 31, 2021, compared to the same period in 2020.

We anticipated this increase based upon the dates when our endowment contracts were sold and the maturity dates set forth in the contracts.

significant portion of surrender benefits relates to international policies that have been in force for an extended period and have little or no associated surrender charges.

In addition, we saw an unusually high number of policyholders in our Life Insurance segment who had outstanding loans on their policies select the reduced paid up insurance ("RPU") conversion option in the second quarter of this year.

These loans are considered surrenders upon conversion.

We believe that the higher RPU policy elections and increased surrenders are results of the continuing economic uncertainty in Latin America due to the COVID-19 pandemic.

• Matured endowment benefits decreased 7.9% and increased 8.9% for the three and six months ended June 30, 2021, respectively, compared to the same periods in 2020.

We anticipated this overall increase based upon the dates when our endowment contracts were sold and the maturity dates set forth in the contracts.

Increase in Future Policy Benefit Reserves.

The change in future policy benefit reserves decreased 44.8% for the three months ended March 31, 2021, compared to the same period in 2020.

Future policy benefit reserves decreased as our block of in force business decreased.

The change in future policy benefit reserves decreased 23.7% and 35.0% for the three and six months ended June 30, 2021, respectively, compared to the same periods in 2020.

Future policy benefit reserves decreased as our in force block of business decreased and also decreased by $0.8 million in the three months ended June 30, 2021 due to the conversion of a small block of policies to our new actuarial valuation system mentioned above.

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

First year commission rates are higher than renewal commission rates.

Commissions fluctuate directly in relation to sales and were higher in the three months ended March 31, 2021 due to the increase in first year sales in our Home Service Insurance segment.

Commissions fluctuate directly in relation to sales and were higher in the three and six months ended June 30, 2021.

Other General Expenses.

As mentioned above, general expenses decreased slightly in the three months ended March 31, 2021 compared to the same period in 2020, driven primarily by lower incentive compensation costs, and lower audit and consulting costs.

General expenses were generally consistent during the three and six months ended June 30, 2021 compared to the same periods in 2020.

Capitalization and Amortization of Deferred Policy Acquisition Costs.

Costs capitalized include certain commissions, policy issuance costs, and underwriting and agency expenses that relate to successful sales efforts for insurance contracts.

Capitalized costs decreased slightly during the three months ended March 31, 2021 compared to the same period in 2020 as we experienced a decrease in first year premium production in our Life Insurance segment as previously discussed.

Amortization of deferred policy acquisition costs was slightly higher during the three months ended March 31, 2021 compared to the same period in the prior year.

Capitalized costs increased during the three and six months ended June 30, 2021 compared to the same periods in 2020 as we experienced an increase in first year premium production as previously discussed.

Amortization of deferred policy acquisition costs was slightly higher during the three and six months ended June 30, 2021 compared to the same periods in the prior year.

Amortization is impacted by persistency, surrenders, and new sales production and thus it may fluctuate from quarter to quarter.

Federal Income Tax.

Tax expense decreased for the three months ended March 31, 2021 compared to the same period in 2020 resulting in effective tax rates of (30.0)% and (60.3)%, respectively.

For the three months ended March 31, 2020, the Company's federal income tax expense was impacted by the gain realized on the sale of our former corporate headquarters.

Tax expense decreased for the three and six months ended June 30, 2021 resulting in effective tax rates of 10.4% and 49.2% compared to 334.6% and (156.7)% for the same periods in 2020, respectively.

The Company's tax rate was impacted by differences between our effective tax rate and the statutory tax rate resulting from income and expense items that are treated differently for financial reporting and tax purposes.

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These segments are reported in accordance with U.S.

The Company's Other Non-Insurance enterprises include non-insurance operations such as IT and corporate-support functions, which are included in the table presented below to properly reconcile the segment information with the consolidated financial statements of the Company.

March 31, 2021 | 10-Q 33

The Company's Other Non-Insurance enterprises include non-insurance operations such as IT and corporate-support functions, which are included in the table

June 30, 2021 | 10-Q 36

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

presented below to properly reconcile the segment information with the consolidated financial statements of the Company.

The following table shows income (loss) before federal income taxes by segments during the periods indicated.

Three Months Ended

Three Months Ended Six Months Ended

June 30, June 30,

(In thousands) 2021 2020 2021 2020

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Other Non-Insurance enterprises (2,065) (1,655) (3,949) (3,831)

Total loss before federal income tax expense $ (2,748) (2,235)

Total income (loss) before federal income tax expense $ 5,600 438 2,852 (1,797)

LIFE INSURANCE

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Dollar-denominated amounts to non-U.S.

residents in more than 75 countries through independent marketing consultants.

residents in more than 75 different countries through independent marketing consultants.

The whole life products are designed to provide a fixed amount of insurance coverage over the life of the insured and can include rider benefits to provide additional coverage and annuity benefits to enhance accumulations.

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and domestically through our CICA and CNLIC insurance subsidiaries.

March 31, 2021 | 10-Q 34

June 30, 2021 | 10-Q 37

CITIZENS, INC.

1 unchanged sentence

The results of operations for the Life Insurance segment for the periods indicated are as follows:

Three Months Ended

Three Months Ended Six Months Ended

June 30, June 30,

(In thousands) 2021 2020 2021 2020

1 unchanged sentence

Net investment income 11,879 11,345 23,477 22,825

Realized investment gains (losses), net (108) 735

Realized investment gains, net 4,644 391 4,536 1,126

Other income 553 482 1,466 1,006

13 unchanged sentences

Income (loss) before federal income tax expense $ 7,127 2,119 7,021 4,205

As discussed above in Current Financial Highlights , net income increased in both the three and six months ended June 30, 2021 as compared to the same prior year periods primarily due to our realized investment gains from the increased fair value of our limited partnership investments.

These gains were attributable to the Life Insurance segment.

Life Insurance segment premium breakout is detailed below.

Three Months Ended

Three Months Ended Six Months Ended

June 30, June 30,

(In thousands) 2021 2020 2021 2020

3 unchanged sentences

We derive most of our premium revenue in the Life Insurance segment from renewal premiums.

Total premium revenues declined 9.2% for the three months ended March 31, 2021 compared to the same period in 2020 and renewal premiums declined by 9.3%.

See “Consolidated Results of Operations” above for a discussion regarding the decline in renewal premiums in this segment.

As previously mentioned, first year policies issued increased in the three months ended March 31, 2021, but lower issued face amounts led to the decline in first year premium revenue.

Endowment sales totaled approximately $2.2 million of first year premiums in the three months ended March 31, 2021, as compared to $2.0 million in the prior year period.

March 31, 2021 | 10-Q 35

Total premium revenues increased slightly for the three months and declined 4.5% for the six months ended June 30, 2021 compared to the same periods in 2020.

While first year premiums increased in both periods in 2021, renewal

June 30, 2021 | 10-Q 38

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

The following table sets forth, for our top five producing countries, our direct premiums from our international life insurance business for the three months ended March 31, 2021 and 2020.

Three Months Ended

premiums declined by 3.7% and 6.4% for the same three and six periods, respectively.

See “Consolidated Results of Operations” above for a discussion regarding the increase in first year premiums and the decline in renewal premiums in this segment.

First year policies issued increased by 37.1% in the six months ended June 30, 2021, but due to lower issued face amounts, first year premiums during the period rose more modestly at 20.9%.

Endowment sales totaled approximately $4.5 million of first year premiums in the six months ended June 30, 2021, as compared to $2.3 million in the prior year period.

The following graph sets forth, for our top five producing countries, our direct premiums from our international life insurance business for the six months ended June 30, 2021 and 2020.

Three Months Ended Six Months Ended

June 30, June 30,

(In thousands) 2021 2020 2021 2020

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Other Non-U.S.

10,083 9,347 18,188 17,548

Total $ 31,099 29,807 58,049 58,757

Sales from Colombia, Taiwan and Venezuela continued to represent the majority of the new and renewal business premiums in our international business in the three months ended March 31, 2021.

Overall, four of our top five countries listed above experienced a decline in premium levels in the current year period due primarily to decreases in renewal premiums.

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

Sales from Colombia, Taiwan and Venezuela continued to represent the majority of the new and renewal business premiums in our international business in the three and six months ended June 30, 2021.

DOMESTIC SALES

Domestic premiums in our Life Insurance segment were $1.2 million in the three months ended March 31, 2021, down from $1.3 million in the prior year period.

Domestic premiums in our Life Insurance segment were $1.3 million and $2.5 million in the three and six months ended June 30, 2021, compared to $1.3 million and $2.6 million, respectively, in the prior year periods.

Our domestic in force business results from blocks of business of insurance companies we have acquired over the years.

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therefore, the majority of the premium recorded is related to renewal business.

We began marketing our products again domestically in early 2021, beginning in Florida.

We believe that our experience in developing and selling products in Latin America will help us expand into the large Hispanic market in the U.S.

March 31, 2021 | 10-Q 36

We began marketing our products again domestically in early

June 30, 2021 | 10-Q 39

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

2021, beginning in Florida.

We believe that our experience in developing and selling products in Latin America will help us expand into the large Hispanic market in the U.S.

Net Investment Income .

Annualized net investment income in our Life Insurance segment was as follows:

March 31, December 31, March 31,

June 30, December 31, June 30,

(In thousands, except for %) 2021 2020 2020

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Annualized yield on average invested assets 4.24 % 4.28 % 4.34 %

Annualized net investment income in our Life Insurance segment increased in the three months ended March 31, 2021 compared to the same period annualized in 2020 and the twelve months ended December 31, 2020, due to continued growth in average invested assets.

The annualized yield in the first three months of 2021 decreased compared to the same period in 2020 and from December 31, 2020 as a substantial portion of our fixed maturity investments were called or matured during the past year and we face challenges in finding investments with comparable yields in the continued low interest rate environment.

Annualized net investment income in our Life Insurance segment increased in the six months ended June 30, 2021 compared to the same period annualized in 2020 and the twelve months ended December 31, 2020, due to continued growth in average invested assets and $0.7 million in non-recurring income as noted previously.

The annualized yield in the first six months of 2021 decreased compared to the same period in 2020 and from December 31, 2020 as a substantial portion of our fixed maturity investments were called or matured during the past year and we have faced challenges in finding investments with comparable yields in the continued low interest rate environment.

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

Realized Investment Gains (Losses), Net.

The realized loss for the three months ended March 31, 2021 and the realized gain for the prior year period were primarily due to changes in the market value of a preferred stock exchange traded fund purchased during the first quarter of 2020.

The realized gain for the six months ended June 30, 2021 was due to the change in estimated fair market value for our limited partnerships, as previously discussed.

Claims and Surrenders.

The following table shows the claims and surrender benefits paid within the Life Insurance segment for the three months ended March 31, 2021 compared to the same period in 2020.

March 31, 2021 | 10-Q 37

The following table shows the claims and surrender benefits paid within the Life Insurance segment for the six months ended June 30, 2021 compared to the same period in 2020.

June 30, 2021 | 10-Q 40

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

Three Months Ended

Three Months Ended Six Months Ended

June 30, June 30,

(In thousands) 2021 2020 2021 2020

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Total claims and surrenders $ 23,531 20,888 46,801 41,048

The majority of our claims and surrender benefits in our Life Insurance segment are related to payment of surrender benefits and matured endowment benefits.

Policy surrenders increased 8.4% in the three months ended March 31, 2021 as compared to the prior year period and matured endowment benefits increased by 38.3% in the current year.

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 expenses are within expected levels.

The other key component of claims and surrender benefits is death claim benefits, which increased 55.6% in the three months ended March 31, 2021 as compared to the prior year period due to the reasons discussed above in “Current Financial Highlights”.

The majority of our claims and surrender benefits in our Life Insurance segment are related to payment of surrender and matured endowment benefits.

Policy surrenders increased 28.1% and 17.7% in the three and six months ended June 30, 2021 as compared to the prior year period and matured endowment benefits decreased by 8.0% and increased 9.4%, respectively, during the same period.

These expenses have been increasing over the last several years, which is expected, due in part 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.

In addition, as discussed in Consolidated Results of Operations above, the COVID-19 pandemic and higher RPU policy elections by policyholders in the second quarter of this year have contributed to the higher surrenders in 2021.

However, these expenses are within expected levels.

The other key component of claims and surrender benefits in the Life Insurance segment is death claim benefits, which increased 48.8% and 52.7% in the three and six months ended June 30, 2021 due to both a higher volume and a higher average amount of reported claims.

Increase in future policy benefit reserves.

The change in future policy benefit reserves decreased 45.1% and 50.3%% for the three and six months ended June 30, 2021, respectively, compared to the same periods in 2020.

Future policy benefit reserves decreased as our in force block of business decreased.

In addition, the change in future policy reserves for the three and six months ended June 30, 2021 was lower due to an $0.8 million adjustment for the conversion of a small block of policies to our new actuarial valuation system for our Life Insurance segment during the second quarter.

HOME SERVICE INSURANCE

We operate in the Home Service Insurance market through our subsidiaries SPLIC, MGLIC and SPFIC, and focus on the life insurance needs of the middle- and lower-income markets, primarily in Louisiana, Mississippi and Arkansas.

Premium revenue of 89.4% and 89.7% in the three months ended March 31, 2021 and March 31, 2020, respectively, were from policyholders in Louisiana.

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

March 31, 2021 | 10-Q 38

Premium revenue of 88.7% and 89.9% in the six months ended June 30, 2021 and 2020, respectively, were from policyholders in Louisiana.

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

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

June 30, 2021 | 10-Q 41

CITIZENS, INC.

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The results of operations for the Home Service Insurance segment for the periods indicated are as follows:

Three Months Ended

Three Months Ended Six Months Ended

June 30, June 30,

(In thousands) 2021 2020 2021 2020

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Total benefits and expenses 15,599 15,640 31,896 30,916

Loss before federal income tax expense $ (758) (2,145)

Premiums increased by 4.1% in the three months ended March 31, 2021 compared to the same period in 2020, with increases in both first year premiums and renewal premiums despite the continuing effects of the COVID-19 pandemic in the states in which this segment operates.

First year premiums increased due to an automatic issue product we offered to existing policyholders, which resulted in a higher number of policies issued as well as lower premiums in the prior year period due to the onset of the COVID-19 pandemic and stay-at-home orders, which negatively impacted our business.

Renewal premiums increased based on continued strong collections by our independent agents.

Income (loss) before federal income tax expense $ 538 (26) (220) (2,171)

Premiums increased by 11.0% and 7.5% in the three and six months ended June 30, 2021, respectively, compared to the same periods in 2020, with increases in both first year premiums and renewal premiums.

First year premiums increased due mainly to the broadening of an automatic issue product offered to existing policyholders as discussed in Our Operating Segments , which contributed to a higher number of policies issued as well as a higher average face amount for policies issued during the first six months of 2021, compared to the same period last year.

The 2020 period was negatively impacted by the COVID-19 pandemic.

Renewal premiums increased during the six months ended June 30, 2021 primarily due to strong collection efforts by our independent agents as we believe disposable income of our insureds increased as a result of government stimulus and assistance programs related to the COVID-19 pandemic.

Net Investment Income.

Net investment income for the three months ended March 31, 2021 increased slightly compared to the same period in 2020 due to an increase in average invested assets and a one-time benefit from a “make-whole” call redemption offsetting a decline in portfolio yield.

Net investment income for the three and six months ended June 30, 2021 remained consistent to the same periods in 2020.

Realized Investment Gains (Losses), Net.

Changes in realized gains/losses, which reflect changes in fair values of our equity securities, were primarily due to the sudden stock market decline at the quarter ended March 31, 2020 due to the onset of the COVID-19 pandemic.

March 31, 2021 | 10-Q 39

Changes in realized gains/losses, which reflect changes in fair values of our equity securities, were primarily due to the stock market decline and subsequent increase in the previous year due to the COVID-19 pandemic.

June 30, 2021 | 10-Q 42

CITIZENS, INC.

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Claims and surrender benefits for the Home Service Insurance segment is summarized as follows:

Three Months Ended

Three Months Ended Six Months Ended

June 30, June 30,

(In thousands) 2021 2020 2021 2020

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

Death claim benefits increased 28.6% in the three months ended March 31, 2021 compared to the 2020 period due to the reasons discussed above in “Current Financial Highlights”.

Death claim benefits decreased 19.1% and increased 2.7% in the three and six months ended June 30, 2021, respectively, compared to the 2020 periods.

The increase during the first six months of the year compared to the same period last year was due primarily to COVID-19 related deaths during the first quarter of this year for reasons discussed above in “Current Financial Highlights”.

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

Increase in future policy benefit reserves.

The increase in reserves was higher during the three and six months ended June 30, 2021 compared to the same period last year is due to higher sales and better policyholder retention in 2021.

Other general expenses.

Other general expenses decreased for the three and six months ended June 30, 2021 due to changes we made to our distribution structure in the prior year.

OTHER NON-INSURANCE ENTERPRISES

Three Months Ended

Three Months Ended Six Months Ended

June 30, June 30,

(In thousands)

2021 2020 2021 2020

Income (loss) before income tax expense $ (2,065) (1,655) (3,949) (3,831)

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Revenue in this operating unit consists primarily of net investment income and realized investment gains or losses, while expenses consist of other general expenses.

In the three months ended March 31, 2021, the Other Non-Insurance Enterprises had a loss of $1.9 million compared to a loss of $2.2 million for the three months ended 2020 as realized investment gains improved.

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.

Our cash and invested assets at March 31, 2021 were $1.6 billion, of which 90.8% was invested in fixed maturity securities, all of which are classified as available-for-sale.

We closely monitor the duration of our fixed maturity investments, and investment purchases and sales are executed with the objective of having adequate funds available to satisfy our insurance obligations.

March 31, 2021 | 10-Q 40

In the three and six months ended June 30, 2021, the Other Non-Insurance Enterprises had a loss of $2.1 million and $3.9 million, respectively, compared to a loss of $1.7 million and $3.8 million for the same periods 2020, as other general expenses increased.

June 30, 2021 | 10-Q 43

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

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

Carrying Value March 31, 2021 December 31, 2020

Our investments are an integral part of our business success.

Our cash and invested assets at June 30, 2021 were $1.6 billion, of which 90.1% was invested in fixed maturity securities, all of which are classified as available-for-sale.

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

Carrying Value June 30, 2021 December 31, 2020

(In thousands, except for %) Amount % Amount %

Cash and Invested Assets

Cash, Cash Equivalents and Invested Assets

Fixed maturity securities:

14 unchanged sentences

Real estate and other long-term investments 28,959 1.8 % 29,865 1.8 %

Total cash and invested assets $ 1,565,038 100.0 % $ 1,658,799 100.0 %

(1) Includes $161.8 million and $164.0 million of securities guaranteed by third parties at March 31, 2021 and December 31, 2020, respectively.

Total cash, cash equivalents and invested assets $ 1,630,129 100.0 % $ 1,658,799 100.0 %

(1) Includes $160.6 million and $164.0 million of securities guaranteed by third parties at June 30, 2021 and December 31, 2020, respectively.

(2) Includes $136.5 million and $139.8 million of U.S.

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

The carrying value of the Company’s fixed maturity securities investment portfolio at March 31, 2021 was $1.4 billion.

The distribution of the credit ratings of our portfolio of fixed maturity securities by carrying value as of March 31, 2021 did not materially change from December 31, 2020 – the weighted average was “A” at both dates.

Cash and cash equivalents decreased as of March 31, 2021 compared to December 31, 2020 due primarily to the purchase of 100% of the Company’s Class B common stock from the Foundation for $9.1 million.

Real estate and other long-term investments decreased to $19.9 million as of March 31, 2021 as compared to $29.9 million as of December 31, 2020 primarily due a $8.8 million payment from a Rabbi Trust (which was considered a long-term investment) to our former Chief Executive Officer, Geoffrey Kolander, representing the severance payments due to him in connection with his resignation following the change in control.

Obligations of States and Political Subdivisions

The Company’s fixed maturity securities investment portfolio at March 31, 2021 and December 31, 2020 included $393.9 million and $409.7 million, respectively, of securities that are obligations of states and political subdivisions, including municipalities (collectively referred to as the municipal bond portfolio).

March 31, 2021 | 10-Q 41

Government-sponsored enterprises at June 30, 2021 and December 31, 2020, respectively.

The carrying value of the Company’s fixed maturity securities investment portfolio at June 30, 2021 was $1.5 billion.

The distribution of the credit ratings of our portfolio of fixed maturity securities by carrying value as of June 30, 2021 did not materially change from December 31, 2020 – the weighted average was “A” at both dates.

Our portfolio mix did not materially change during the six months.

Cash and cash equivalents decreased as of June 30, 2021 compared to December 31, 2020 due primarily to the purchase of 100% of the Company’s Class B common stock from the Foundation for $9.1 million, but increased from March 31, 2021 due to the timing of reinvestment of available cash as we search for suitable investments in the ongoing low interest rate environment.

Real estate and other long-term investments decreased by $0.9 million as of June 30, 2021 to December 31, 2020.

Although we paid $8.8 million from a Rabbi Trust (which was considered a long-term investment) to our former Chief Executive Officer, Geoffrey Kolander in February 2021, investments in our limited partnerships increased by $9.0 million in the second quarter of 2021.

June 30, 2021 | 10-Q 44

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

As of March 31, 2021, the Company's municipal bond portfolio included third-party guarantees.

Detailed below is a presentation by the Nationally Recognized Statistical Rating Organization ("NRSRO") rating of these holdings by funding type as of March 31, 2021.

Obligations of States and Political Subdivisions

The Company’s fixed maturity securities investment portfolio at June 30, 2021 and December 31, 2020 included $388.0 million and $409.7 million, respectively, of securities that are obligations of states and political subdivisions, including municipalities (collectively referred to as the municipal bond portfolio).

The Company's municipal bond portfolio includes third-party guarantees.

Detailed below is a presentation by the Nationally Recognized Statistical Rating Organization ("NRSRO") rating of these holdings by funding type as of June 30, 2021.

General Obligation Special Revenue Other Total % Based on Amortized

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Total $ 103,119 96,067 265,989 244,700 18,862 16,699 387,970 357,466 100.0 %

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

(In thousands) Fair

4 unchanged sentences

Transportation 40,421 38,568 10.4 %

The Company's municipal bond portfolio are spread across many states, however, municipal bonds from Texas and California comprise the most significant concentration of the total municipal bond portfolio as of March 31, 2021.

The Company holds 21.1% and 10.0% of its municipal bond portfolio in Texas and California issuers, respectively, as of March 31, 2021.

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

March 31, 2021 | 10-Q 42

The Company's municipal bond portfolio is spread across many states, however, municipal bonds from Texas and California comprise the most significant concentration of the total municipal bond portfolio as of June 30, 2021.

The Company holds 21.8% and 10.4% of its municipal bond portfolio in Texas and California issuers, respectively, as of June 30, 2021.

There were no other states or individual issuer holdings that represented or exceeded 10% of the total municipal bond portfolio as of June 30, 2021.

June 30, 2021 | 10-Q 45

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

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

March 31, 2021 General Obligation Special Revenue Other Total

The table below represents the Company's detailed exposure to municipal bond portfolio in Texas at June 30, 2021.

June 30, 2021 General Obligation Special Revenue Other Total

(In thousands) Fair

17 unchanged sentences

Total $ 42,713 41,593 41,812 40,064 57 55 84,582 81,712

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

March 31, 2021 General Obligation Special Revenue Other Total

The table below represents the Company's detailed exposure to municipal bond portfolio in California at June 30, 2021.

June 30, 2021 General Obligation Special Revenue Other Total

(In thousands) Fair

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California state and political subdivision fixed maturity securities including third-party guarantees

AAA $ — — — — — — — —

AA $ — — 25,912 24,322 2,939 2,728 28,851 27,050

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BBB — — 4,841 4,663 — — 4,841 4,663

BB and other — — — — — — — —

Total $ 1,693 1,650 35,689 33,705 2,939 2,728 40,321 38,083

California state and political subdivision fixed maturity securities excluding third-party guarantees

AAA $ — — — — — — — —

AA $ — — 2,715 2,632 — — 2,715 2,632

3 unchanged sentences

Total $ 1,693 1,650 35,689 33,705 2,939 2,728 40,321 38,083

March 31, 2021 | 10-Q 43

June 30, 2021 | 10-Q 46

CITIZENS, INC.

1 unchanged sentence

IMPAIRMENT CONSIDERATIONS RELATED TO INVESTMENTS IN FIXED MATURITY AND EQUITY SECURITIES

For the three months ended March 31, 2021 and 2020, the Company recorded no credit valuation losses on fixed maturity securities.

For the three and six months ended June 30, 2021 and 2020, the Company recorded no credit valuation losses on fixed maturity securities.

Information on both unrealized and realized gains and losses by category is set forth in Part I, Item 1, Note 5.

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LIQUIDITY AND CAPITAL RESOURCES

Although the Company experienced increased death claim benefits in the first three months of 2021, we do not believe that the Company's liquidity and capital resources were materially impacted by COVID-19 in the period.

For further discussion regarding the potential future impacts of COVID-19 and related economic conditions on the Company's liquidity and capital resources, see Part I, Item 1A, Risk Factors in the Company's Form 10-K .

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

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We expect to meet our cash needs for the next 12 months with cash generated by our insurance operations and from our invested assets.

At March 31, 2021, we had $19.5 million in cash and cash equivalents and $1.5 billion in invested assets.

At June 30, 2021, we had $30.1 million in cash and cash equivalents and $1.6 billion in invested assets.

PARENT COMPANY LIQUIDITY AND CAPITAL RESOURCES

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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.

Our cash and cash equivalents decreased from $34.1 million at December 31, 2020 to $19.5 million at March 31, 2021.

In the three months ended March 31, 2021, uses of cash included:

• $8.8 million severance payment to our former Chief Executive Officer, Geoffrey Kolander, following his resignation pursuant to the terms of his employment agreement and the Chief Executive Officer Separation of Service and Consulting Agreement dated July 29, 2020 (See Part I, Item 1, Note 6 .

Our cash and cash equivalents decreased from $34.1 million at December 31, 2020 to $30.1 million at June 30, 2021, but increased by $10.6 million from March 31, 2021.

The decrease was primarily due to the following uses of cash in the first quarter of 2021:

• $8.8 million severance payment in February 2021 to our former Chief Executive Officer, Geoffrey Kolander, following his resignation pursuant to the terms of his employment agreement and the Chief Executive Officer Separation of Service and Consulting Agreement dated July 29, 2020 (See Part I, Item 1, Note 6.

Fair Value Measurements – "Other Long-Term Investments”, herein, and our Form 10-K for additional discussion about the severance payment to Mr.

• $9.1 million payment to the Harold E.

Riley Foundation ("Foundation") for the purchase of 100% of the outstanding Class B common stock.

See Part I, Item 1, Note 11.

Subsequent Events in the notes to our consolidated financial statements herein.

Riley Foundation ("Foundation") in March 2021 for the purchase of 100% of the outstanding Class B common stock.

Cash and cash equivalents increased by $10.6 million from March 31, 2021 to June 30, 2021 due to cash received from maturing securities and operations not yet reinvested as we search for suitable investment opportunities in the ongoing low interest rate environment.

On May 5, 2021, we entered into a Credit Facility with Regions Bank.

1 unchanged sentence

Commitments and Contingencies in the notes to our consolidated financial statements, herein, for a description of the Credit Facility.

March 31, 2021 | 10-Q 44

The Credit Facility provides additional liquidity to the Company for short-term and longer-term needs.

As of June 30, 2021, we have not borrowed any money under the Credit Facility and have no immediate plans to do so.

June 30, 2021 | 10-Q 47

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

The Credit Facility provides additional liquidity to the Company for short-term and longer-term needs.

As of May 5, 2021, we had not borrowed any money under the Credit Facility and do not expect to do so immediately.

INSURANCE COMPANY SUBSIDIARY LIQUIDITY AND CAPITAL RESOURCES

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

Historically, we have not had to liquidate a material amount of investments to provide cash flow for our insurance operations and we did not do so in the three months ended March 31, 2021.

Historically, we have not had to liquidate a material amount of investments to provide cash flow for our insurance operations and we did not do so in the six months ended June 30, 2021.

We believe that we have adequate capital resources to support the liquidity requirements of our insurance operations if the cash flow from our insurance operations is insufficient to meet our cash needs.

See Contractual Obligations and Off-balance Sheet Arrangements in our Form 10-K for a discussion of known and estimated cash needs.

In the three months ended March 31, 2021, our operations provided $1.8 million in net cash as compared to $14.1 million provided by operations in the same period in 2020.

As mentioned above, we used $8.8 million in cash in the quarter to pay Mr.

See Contractual Obligations and Off-balance Sheet Arrangements in our Form 10-K and below for a discussion of known and estimated cash needs.

In the six months ended June 30, 2021, our operations provided $9.0 million in net cash as compared to $28.6 million provided by operations in the same period in 2020.

As mentioned above, we used $8.8 million in cash in the first quarter to pay Mr.

Kolander’s severance.

Cash provided by operations was also lower, as surrenders and lower renewal premiums in our international business are not being replaced by new sales.

Cash provided by operations was also lower, as first year premiums continued to be outpaced by increased surrenders and decreased renewal premiums in our international business.

Additionally, increased first year premiums, which have higher costs associated with them than renewal premiums, such as commissions, led to lower cash provided by operations.

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

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

Net cash used in investing activities totaled $7.4 million for the three months ended March 31, 2021 as opposed to $26.2 million used in investing activities for the three months ended March 31, 2020.

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

Net cash used in investing activities totaled $4.2 million for the six months ended June 30, 2021 as opposed to $22.8 million used in investing activities for the six months ended June 30, 2020.

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

Cash used in financing activities was $9.1 million in the three months ended March 31, 2021, due to the purchase of the Class B common stock from the Foundation.

Cash used in financing activities was $8.8 million in the six months ended June 30, 2021, due primarily to the purchase of the Class B common stock from the Foundation for $9.1 million in March 2021.

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

While these expenses increased in the three months ended March 31, 2021 and have been increasing over the last several years, the increases are within expected levels 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.

For reasons previously discussed, death claim benefits in our Home Service Insurance segment increased in the first quarter of 2021.

While surrender benefit expenses increased in the six months ended June 30, 2021 and have been increasing over the last several years, the increases are within expected levels 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.

Death claims also increased in 2021 for the reasons discussed above, which included payment of COVID related death claims that materially impacted our operations.

We continue to closely monitor claim volumes to evaluate whether there is a delay in reporting or filing for benefits as a result of the COVID-19 pandemic.

5 unchanged sentences

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

At June 30, 2021, our domestic insurance subsidiaries were above the required minimum RBC levels.

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

March 31, 2021 | 10-Q 45

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 June 30, 2021, CICA Ltd.

was above the TCL threshold.

June 30, 2021 | 10-Q 48

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

requires a certain Target Capital Level ("TCL").

As of March 31, 2021, CICA Ltd.

was above the TCL threshold.

At the request of the BMA, on April 15, 2021, Citizens and CICA Ltd.

the request of the BMA, on April 15, 2021, Citizens and CICA Ltd.

entered into a Keep Well Agreement.

6 unchanged sentences

CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS

As of March 31, 2021, the Company is committed to fund investments up to $68.5 million related to private equity funds and other investments.

There have been no other material changes in contractual obligations from those described in Part II, Item 7, Contractual Obligations and Off-Balance Sheet Arrangements in our Form 10-K .

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

As of June 30, 2021, we have no additional contractual obligations or off-balance sheet arrangements other than those described in Part I .

Item 1 , Note 7.

Commitments and Contingencies in the notes to our consolidated financial statements herein and in Part II, Item 7, Contractual Obligations and Off-Balance Sheet Arrangements in our Form 10-K .

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

2 unchanged sentences

Summary of Significant Accounting Policies of our consolidated financial statements in our Form 10-K continue to describe the significant judgments and estimates used in the preparation of our consolidated financial statements.

June 30, 2021 | 10-Q 49

CITIZENS, INC.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis