What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2021-11-04 compared with 2021-08-04 · 256 added, 252 removed, 404 unchanged (56% of the section changed)

22 unchanged sentences

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.

• Home Service Insurance segment - final expense life insurance and 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 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.

June 30, 2021 | 10-Q 29

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.

While the Company has implemented new strategies and processes to mitigate this impact, the scope, duration and magnitude of the direct and indirect effects of COVID-19 are difficult or impossible to anticipate.

As a result, it is not possible to predict its

September 30, 2021 | 10-Q 30

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

impact on the Company's results for the remainder of 2021 or beyond.

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;

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

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

• 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.

• the vulnerability of our Home Service Insurance business in particular to any future increase in the intensity of the pandemic, and any related or unrelated material health crisis or negative health trend, especially if concentrated in or directly impacting the southeastern part of the United States.

We believe that in the third quarter of 2021, we experienced higher than normal death claims due to the impact of COVID-19.

As we previously disclosed, the Delta variant of COVID-19, which has become the predominant strain of COVID-19 globally, is associated with higher rates of transmission and deaths, particularly in unvaccinated individuals.

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

CURRENT FINANCIAL HIGHLIGHTS

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

IMPACT OF HURRICANE IDA

Hurricane Ida was a destructive Category 4 hurricane that made landfall in Louisiana on August 29, 2021 and became the second-most damaging and intense hurricane in the U.S.

state of Louisiana on record, behind Hurricane Katrina in 2005.

We sell property insurance through Security Plan Fire Insurance Company in the state of Louisiana.

Hurricane Ida negatively affected our income in the third quarter by approximately $2.3 million.

For hurricanes, we pay the first $0.5 million in claims and our non-affiliated catastrophic reinsurance carriers pay the next $10.5 million in claims.

We expect claims from Hurricane Ida to exceed our reinsurance by approximately $0.8 million and thus the total claim impact to us is expected to be approximately $1.2 million.

In addition, due to Hurricane Ida, we incurred a reinstatement premium for reinsurance coverage in case of a second major storm this year, resulting in an additional premium charge during the third quarter of 2021 of approximately $1.1 million, which offsets premium revenue for the Home Service Insurance segment.

Our catastrophic event reinsurance agreement allows coverage on a maximum of two catastrophic events per calendar year per reinsurance layer.

September 30, 2021 | 10-Q 31

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

CURRENT FINANCIAL HIGHLIGHTS

Our net loss decreased by $5.1 million in the three months ended September 30, 2021 and $11.2 million in the nine months ended September 30, 2021, to $2.8 million and $1.4 million, respectively, compared to $7.9 million and $12.5 million in prior year periods.

The decrease in our net loss in both periods was primarily due to a decrease in other general expenses of $8.8 million and $8.6 million, respectively, in the current year periods, due to executive severance costs and professional fees paid in 2020 in connection with a change in control of the Company.

The decrease in our net loss was also due to an increase in realized gains of $1.6 million and $6.6 million, respectively in the three and nine months ended September 30, 2021.

The realized gains primarily reflect changes in the fair value of our limited partnership investments and the sale of our offsite training facility located near Austin, Texas, which resulted in a gain of $1.0 million during the third quarter of 2021.

We did not sell any of our limited partnership investments or receive any distributions in the third 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.

As discussed above, decreases in general expenses and increases in realized gains in the three and nine-months ended September 30, 2021 as compared to the same periods in 2020, were offset by higher death claims due to COVID-19 and the impact of Hurricane Ida on our premiums and claims in the current year.

Consolidated Revenue Highlights

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.

In the three months ended September 30, 2021 compared to the same period in 2020, total revenue increased by $1.8 million.

• Life insurance premiums increased by $0.5 million due primarily to an increase in first year premiums in our Life Insurance and Home Service Insurance segments and an increase in renewal premiums in our Home Service Insurance segment.

Total first year premiums increased by 35.5% year over year during the third quarter.

We believe this increase was driven by our focused marketing campaigns, as well as lower sales in the prior year period due to COVID 19 impacts as previously described.

Total premiums, however, decreased by $0.8 million due to decreased property insurance premiums related to the reinstatement of catastrophic reinsurance as a result of Hurricane Ida, as discussed above.

• Net investment income increased by $0.5 million, or 3.0%, despite a lower average portfolio yield in the current year period due to a growing asset base and strong results from our Middle market private equity investment.

• As mentioned above, realized investment gains increased by $1.6 million.

In the nine months ended September 30, 2021 as compared to the same period in 2020, total revenue increased by $6.7 million.

• Insurance premiums declined by $1.7 million, or 1.4%.

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 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 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 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

The $2.4 million increase in first year premiums was offset by a decline in renewal premiums in our Life Insurance segment to $81.2 million in the first nine months of 2021 from $85.6 million in the same period in 2020.

September 30, 2021 | 10-Q 32

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

Financial Condition at June 30, 2021

in renewal premiums resulted primarily from a decline in our in force business in this segment, due in part to changes we made to our products and distribution over the last several years, which offset the positive impact from reduced COVID-related impact and the Company's premium retention efforts.

• Net investment income increased by $0.9 million, or 2.1%.

• As mentioned above, realized investment gains increased by $6.6 million.

Other income consists primarily of policyholders in our Life Insurance segment selecting supplemental contracts upon the surrender or 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 the payment of insurance benefits for claims, surrenders and matured endowment as well as our general operating expenses.

In the three months ended September 30, 2021 compared to the same period in 2020, total benefits and expenses decreased by $3.7 million.

Other general expenses decreased by $8.8 million for the reasons discussed above.

Decreased general expenses were offset primarily by:

• $5.8 million increase in total insurance benefits paid or provided due to an increase in future policy benefit reserves as a result of higher sales production and better persistency;

• Higher commissions paid in 2021 due to higher sales of new insurance policies in both of our segments in the third 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.

In the nine months ended September 30, 2021 compared to the same period in 2020, total benefits and expenses decreased by $3.4 million.

Other general expenses decreased by $8.6 million for the reasons discussed above.

Decreased general expenses were offset primarily by:

• $4.5 million increase in claims and surrender benefits due primarily to a higher volume of reported claims, including those COVID-19 related, in addition to an increase in the average death claim amount;

• Higher commissions paid in 2021 for the reasons discussed above.

Financial Condition at September 30, 2021

• Total investments of $1.6 billion;

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• $4.6 billion of direct insurance in force.

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

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

OUR OPERATING SEGMENTS

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• Home Service Insurance

September 30, 2021 | 10-Q 33

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

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

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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.

Six Months Ended June 30, 2021 2020

Nine Months Ended September 30, 2021 2020

Issued Number of

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Total $ 315,324,762 21,406 $ 245,847,393 22,475

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

Total insurance issued increased by 28.3% in the nine months ended September 30, 2021, from $245.8 million in the first nine months of 2020 to $315.3 million in 2021, as both our Life Insurance and Home Service Insurance segments experienced growth.

We issued 21,406 new policies in the 2021 period, compared to 22,475 new policies in the 2020 period.

The number of policies issued in the nine months ended September 30, 2021 increased 29.8% in the Life Insurance segment from the same period in 2020.

We believe the increase was primarily due to enhancements to our business operations and sales practices to account for the impact of the COVID-19 pandemic as well as continued sales promotions and campaigns, focused training on virtual selling, and strategically prioritizing selling lower face amount policies due to the COVID-19 pandemic.

In 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 have seen the impact of these efforts through September.

Although applications increased during the first nine 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 nine months ended September 30, 2021 decreased 8.5% in the Home Service Insurance segment compared to the same period in 2020;

however, the amount of insurance issued increased by 38% due to higher average policy face amounts.

We believe the higher average policy face amounts issued are attributable to sales campaigns that focused on increasing the face amount of insurance sold as well as the introduction of our new whole life product in this segment, which has a higher maximum face value.

September 30, 2021 | 10-Q 34

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

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 during the six months ended June 30, 2021 compared to the same period last year.

CONSOLIDATED RESULTS OF OPERATIONS

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

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

Three Months Ended Six Months Ended

June 30, June 30,

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

Three Months Ended Nine Months Ended

September 30, September 30,

(In thousands) 2021 2020 2021 2020

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Premium Income.

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.

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 to economic circumstances in Latin America.

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

June 30, 2021 | 10-Q 33

Total premium income decreased $0.8 million, or 1.8%, for the third quarter, and decreased $1.7 million, or 1.4% for the nine months ended September 30, 2021 compared to the same periods in 2020.

• Three months ended September 30, 2021 :

Life insurance premiums increased by $0.5 million 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 segment;

however, total premiums decreased due to a $1.4 million decline in property insurance premiums primarily related to the reinstatement of catastrophic reinsurance as a result of Hurricane Ida, as discussed above.

• Nine months ended September 30, 2021:

Despite higher first year premiums in both our segments and slightly higher renewal premiums in our Home Service Insurance segment, total premiums declined due to lower renewal premiums in our Life Insurance segment and the decrease in property insurance premiums in the third quarter as discussed above.

The decrease in renewal premiums in the Life Insurance segment in both the three and nine months ended September 30, 2021, as compared to the prior year periods, is mainly due to a continuing decline in our in force business in this segment over the last several years due to an aging block of business and changes we made to our products and distribution beginning in 2017.

The prior-year surrenders negatively impacted the current period renewal premiums even though total surrender benefits paid declined in the current three-month period as compared to the prior year period and were basically flat in the current nine-month period as compared to the same period in 2020.

We believe that first year premiums were negatively affected in the three and nine months ended September 30, 2020 due to the impacts of the COVID-19 pandemic, especially the initial global stay-at-home orders.

September 30, 2021 | 10-Q 35

CITIZENS, INC.

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Our annualized net investment income performance is summarized as follows:

June 30, December 31, June 30,

September 30, December 31, September 30,

(In thousands, except for %) 2021 2020 2020

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Annualized yield on average invested assets 4.24 % 4.24 % 4.26 %

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,

Annualized net investment income increased by $1.2 million in the nine months ended September 30, 2021 as compared to the same nine months of 2020 despite a lower annualized yield.

The increase is due to our growing asset base and the make-whole call redemptions described below, and to strong yields from our Middle market private equity investment.

The annualized yield decreased by two basis points during the first nine 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, in addition to fixed maturity securities, we have been investing in new asset classes, including limited partnerships;

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

Investment income from fixed maturity securities accounted for approximately 86.1% and 87.2% of total investment income for the three and nine months ended September 30, 2021, respectively.

Three Months Ended Nine Months Ended

September 30, September 30,

(In thousands) 2021 2020 2021 2020

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Net investment income $ 15,454 14,997 46,018 45,081

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.

Income from fixed maturity securities income increased 1.4% and 1.7% for the three and nine months ended September 30, 2021, respectively, compared to the same periods in 2020, and our total investment income increased by 3.0% and 2.5% in the same periods.

These increases were primarily due to two non-recurring events, (i) a "make-whole" call redemption, and (ii) early distributions from our limited partnership investments.

Realized Investment Gains (Losses), Net.

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

We recorded realized gains of $1.3 million and $5.8 million related to fair value changes in our investments in limited partnerships during the three and nine months ended September 30, 2021, respectively.

We also recorded realized losses of $0.4 million and realized gains of $0.2 million during the three and nine months ended September 30, 2021, respectively, related to fair value changes in our equity securities owned at September 30, 2021.

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

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

September 30, 2021 | 10-Q 36

CITIZENS, INC.

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BENEFITS AND EXPENSES

Three Months Ended Six Months Ended

June 30, June 30,

Three Months Ended Nine Months Ended

September 30, September 30,

(In thousands) 2021 2020 2021 2020

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Total benefits and expenses $ 64,311 67,996 180,500 183,856

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

Claims and Surrenders.

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,

Three Months Ended Nine Months Ended

September 30, September 30,

(In thousands) 2021 2020 2021 2020

8 unchanged sentences

Total claims and surrenders $ 31,816 32,958 91,701 87,161

• 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.

• Death claim benefits increased 25.9% and 18.0% for the three and nine months ended September 30, 2021, respectively, compared to the same periods in 2020.

Claims in our Life Insurance segment increased 88.4% during the third quarter and 65.2% during the first nine months of 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

Home Service Insurance segment claims increased 9.6% and 5.2% for the three and nine months ended September 30, 2021, respectively, as compared to the prior year periods.

The increases during the first three and nine months of 2021 compared to the same periods last year was due primarily to COVID-19 related deaths, which we believe materially impacted our consolidated results of operations in the third quarter of 2021, as described above.

September 30, 2021 | 10-Q 37

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

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.

• Surrender benefits decreased 22.9% and 0.2% for the three and nine months ended September 30, 2021, respectively, compared to the same periods in 2020.

Surrender benefits represented less than 0.8% of total direct ordinary whole life insurance in force of $4.6 billion as of September 30, 2021.

Prior to the three months ended September 30, 2021, our surrender benefits had been increasing due to international policies that have been in force for an extended period and have little or no associated surrender charges.

We have focused our efforts on retaining policyholders and believe we have begun to see positive benefits from these efforts starting in the third quarter of 2021.

• Matured endowment benefits decreased 4.4% and increased 4.8% for the three and nine months ended September 30, 2021, respectively, compared to the same periods in 2020.

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

• Property claims increased 82.7% and 35.7% in the three and nine months ended September 30, 2021, respectively, compared to the same periods in 2020, due to higher hurricane property claims.

Increase in Future Policy Benefit Reserves.

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.

The change in future policy benefit reserves increased 161.9% and 2.5% for the three and nine months ended September 30, 2021, respectively, compared to the same periods in 2020 due to better persistency and higher production in our Home Service Insurance and Life Insurance segments.

See Segment Operations below for more detail.

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 and six months ended June 30, 2021.

Commissions fluctuate directly in relation to sales and were higher in the three and nine months ended September 30, 2021 as compared to the same periods in 2020 due to higher first year sales in 2021.

Other General Expenses.

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

General expenses decreased 45.6% and 20.4% in the three and nine months ended September 30, 2021 compared to the same periods in 2020.

As discussed above, the three and nine months ended September 30, 2020 were negatively impacted by severance payments, professional fees related to our change in control.

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 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.

Capitalized costs increased during the three and nine months ended September 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 lower during the three and nine months ended September 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 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.

Tax expense increased for the three months and decreased for the nine months ended September 30, 2021 resulting in effective tax rates of (2.8)% and 1,180.0% compared to 3.1% and (25.8)% 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.

3 unchanged sentences

Income Taxes in the notes to our consolidated financial statements herein.

September 30, 2021 | 10-Q 38

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

SEGMENT OPERATIONS

3 unchanged sentences

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

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 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.

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

Three Months Ended Six Months Ended

June 30, June 30,

Three Months Ended Nine Months Ended

September 30, September 30,

(In thousands) 2021 2020 2021 2020

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and domestically through our CICA and CNLIC insurance subsidiaries.

June 30, 2021 | 10-Q 37

September 30, 2021 | 10-Q 39

CITIZENS, INC.

1 unchanged sentence

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

Three Months Ended Six Months Ended

June 30, June 30,

Three Months Ended Nine Months Ended

September 30, September 30,

(In thousands) 2021 2020 2021 2020

17 unchanged sentences

Income (loss) before federal income tax expense $ 1,686 5,508 8,707 9,713

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.

Income before federal income tax expense declined in the three months ended September 30, 2021 as compared to the prior year periods due to a large increase in future policy benefit reserves this quarter due to better persistency and higher production.

In the nine months ended September 30, 2021, income before federal income tax expense decreased by $1.0 million.

Realized gains related to our limited partnership investments were negatively offset by lower renewal premiums and increased death claims, partly due to the COVID-19 pandemic and to higher commissions due to better first year sales in 2021.

The decline to net income in both the three and nine months ended September 30, 2021 was also due to lower other general expenses in this segment during the 2020 period due to the release of our tax compliance liability.

September 30, 2021 | 10-Q 40

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

Life Insurance segment premium breakout is detailed below.

Three Months Ended Six Months Ended

June 30, June 30,

Three Months Ended Nine Months Ended

September 30, September 30,

(In thousands) 2021 2020 2021 2020

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

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

Total premium revenues decreased slightly for the three months and declined 3.0% for the nine months ended September 30, 2021 compared to the same periods in 2020.

While first year premiums increased in both periods in 2021, renewal premiums declined by 2.8% and 5.2% for the same three and nine 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 29.8% in the nine months ended September 30, 2021, but due to lower issued face amounts, first year premiums during the period rose slightly less at 25.8%.

September 30, 2021 | 10-Q 41

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

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,

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

Three Months Ended Nine Months Ended

September 30, September 30,

(In thousands) 2021 2020 2021 2020

Colombia $ 6,368 5,858 17,635 17,727

Taiwan 4,743 3,882 9,227 8,856

Venezuela 4,729 5,000 13,593 14,890

Taiwan 3,905 4,157 13,132 13,013

Ecuador 3,420 3,443 9,687 9,781

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Total $ 31,466 31,270 89,515 90,027

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 $1.3 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.

Domestic premiums in our Life Insurance segment were $1.2 million and $3.7 million in the three and nine months ended September 30, 2021, compared to $1.1 million and $3.7 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

June 30, 2021 | 10-Q 39

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.

September 30, 2021 | 10-Q 42

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:

June 30, December 31, June 30,

September 30, December 31, September 30,

(In thousands, except for %) 2021 2020 2020

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Annualized yield on average invested assets 4.26 % 4.28 % 4.31 %

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.

Annualized net investment income in our Life Insurance segment increased in the nine months ended September 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 nine months of 2021 decreased compared to the same period in 2020 and from December 31, 2020 as we have faced challenges in finding investments with attractive 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 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.

The realized gain for the nine months ended September 30, 2021 was due primarily 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 six months ended June 30, 2021 compared to the same period in 2020.

June 30, 2021 | 10-Q 40

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

September 30, 2021 | 10-Q 43

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

Three Months Ended Six Months Ended

June 30, June 30,

Three Months Ended Nine Months Ended

September 30, September 30,

(In thousands) 2021 2020 2021 2020

7 unchanged sentences

Total claims and surrenders $ 22,565 25,023 69,366 66,071

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.

During the three and nine months ended September 30, 2021 and 2020, the majority of our claims and surrender benefits in our Life Insurance segment are related to payment of surrender benefits.

As previously discussed, surrender benefits have been higher than usual the last several years as many of our policies have reached the age where surrender charges have expired.

However, policy surrenders decreased 23.2% and were basically flat in the three and nine months ended September 30, 2021, respectively, as compared to the prior year periods, as we have instituted new programs to curb surrenders.

Matured endowment benefits paid, our next largest claims and surrenders expense, decreased by 4.3% and increased 5.1%, respectively, during the current year periods as compared to the same periods in 2020.

These expenses are consistent with our expectations, as the endowment products are reaching their stated maturities.

In addition, as discussed in Consolidated Results of Operations above, the COVID-19 pandemic has contributed to the higher death claims in the 2021 periods.

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.

The change in future policy benefit reserves increased 186.2% and decreased 9.2% for the three and nine months ended September 30, 2021, respectively, compared to the same periods in 2020 due to better persistency as discussed above.

In addition, the change in future policy reserves for the nine months ended September 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 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

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

Premium revenue of 89.2% and 90.0% in the nine months ended September 30, 2021 and 2020, respectively, were from policyholders living 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.

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

September 30, 2021 | 10-Q 44

CITIZENS, INC.

1 unchanged sentence

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

Three Months Ended Six Months Ended

June 30, June 30,

Three Months Ended Nine Months Ended

September 30, September 30,

(In thousands) 2021 2020 2021 2020

16 unchanged sentences

Total benefits and expenses 18,431 16,458 50,327 47,374

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 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 stock market decline and subsequent increase in the previous year due to the COVID-19 pandemic.

June 30, 2021 | 10-Q 42

Loss before federal income tax expense $ (4,099) (1,026) (4,319) (3,197)

Total revenue declined by 7.1% and increased by 4.1% in the three and nine months ended September 30, 2021, respectively, compared to the same periods in 2020.

The changes were primarily due to increases in both first year premiums and renewal premiums in life policies, offset by negative property premiums in the current three-month period due to the impact of Hurricane Ida.

First year life premiums increased due mainly to the sales campaigns that focused on increasing the face amount of insurance sold as well as the introduction of our new whole life product in this segment, which has a higher maximum face value.

Renewal premiums increased during the nine months ended September 30, 2021 due to improvements in our collection and payment processes, strong collection efforts by our independent agents and our insureds' increased disposable income due to government stimulus and assistance programs related to the COVID-19 pandemic.

Sales during the 2020 period were negatively impacted by the COVID-19 pandemic.

September 30, 2021 | 10-Q 45

CITIZENS, INC.

1 unchanged sentence

Claims and Surrenders.

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

Three Months Ended Six Months Ended

June 30, June 30,

Claims and surrender benefits, which are the largest portion of our expenses in the Home Service Insurance segment, are summarized as follows:

Three Months Ended Nine Months Ended

September 30, September 30,

(In thousands) 2021 2020 2021 2020

8 unchanged sentences

Total claims and surrenders $ 9,251 7,935 22,335 21,090

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

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.

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

Death claim benefits increased 9.6% and 5.2% in the three and nine months ended September 30, 2021, respectively, compared to the 2020 periods.

The increase during the first nine months of the year compared to the same period last year was due primarily to COVID-19 related deaths as discussed above.

Mortality experience is closely monitored by the Company as a key performance indicator and fluctuates from quarter-to-quarter based on reported claims.

As discussed above, property claims were higher due to Hurricane Ida.

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.

The increase in reserves was higher during the three and nine months ended September 30, 2021 compared to the same period last year due to higher sales and improved 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 general expenses decreased for the three and nine months ended September 30, 2021 due to changes we made to our distribution structure in the prior year.

OTHER NON-INSURANCE ENTERPRISES

Three Months Ended Six Months Ended

June 30, June 30,

Three Months Ended Nine Months Ended

September 30, September 30,

(In thousands)

3 unchanged sentences

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.

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

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

In the three and nine months ended September 30, 2021, the Other Non-Insurance Enterprises had a loss of $0.3 million and $4.3 million, respectively, compared to a loss of $12.7 million and $16.5 million for the same periods 2020, as other general expenses decreased in the current year periods due to the change of control expenses paid in 2020, as previously discussed.

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

September 30, 2021 | 10-Q 46

CITIZENS, INC.

1 unchanged sentence

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.

Our cash and invested assets at September 30, 2021 were $1.6 billion, of which 89.7% 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.

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

Carrying Value September 30, 2021 December 31, 2020

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

17 unchanged sentences

Total cash, cash equivalents and invested assets $ 1,623,231 100.0 % $ 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.

(1) Includes $159.4 million and $164.0 million of securities guaranteed by third parties at September 30, 2021 and December 31, 2020, respectively.

(2) Includes $134.4 million and $139.8 million of U.S.

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

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

The carrying value of the Company’s fixed maturity securities investment portfolio at both September 30, 2021 and December 31, 2020 was $1.5 billion.

The distribution of the credit ratings of our portfolio of fixed maturity securities by carrying value as of September 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 nine months.

Cash and cash equivalents decreased as of September 30, 2021 from 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, offset by cash from matured investments that we are holding as we search for suitable investments in the ongoing low interest rate environment.

Real estate and other long-term investments increased by $4.1 million as of September 30, 2021 from 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 in February 2021 and completed the sale of our former training facility in July 2021, investments in our limited partnerships, which are considered long-term investments, increased by $20.7 million in 2021.

September 30, 2021 | 10-Q 47

CITIZENS, INC.

1 unchanged sentence

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 fixed maturity securities investment portfolio at September 30, 2021 and December 31, 2020 included $382.3 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.

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

General Obligation Special Revenue Other Total % Based on Amortized

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Total $ 100,694 93,707 262,889 243,254 18,739 16,692 382,322 353,653 100.0 %

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 June 30, 2021.

(In thousands) Fair

4 unchanged sentences

Transportation 39,530 37,917 10.3 %

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

The Company holds 21.7% and 10.4% of its municipal bond portfolio in Texas and California issuers, respectively, as of September 30, 2021.

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

September 30, 2021 | 10-Q 48

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

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

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

September 30, 2021 General Obligation Special Revenue Other Total

(In thousands) Fair

17 unchanged sentences

Total $ 41,457 39,962 41,414 40,040 57 55 82,928 80,057

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

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

September 30, 2021 General Obligation Special Revenue Other Total

(In thousands) Fair

14 unchanged sentences

Total $ 1,655 1,650 35,359 33,599 2,929 2,729 39,943 37,978

June 30, 2021 | 10-Q 46

September 30, 2021 | 10-Q 49

CITIZENS, INC.

1 unchanged sentence

IMPAIRMENT CONSIDERATIONS RELATED TO INVESTMENTS IN FIXED MATURITY AND EQUITY SECURITIES

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

For the three and nine months ended September 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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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 June 30, 2021, we had $30.1 million in cash and cash equivalents and $1.6 billion in invested assets.

At September 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

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

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

7 unchanged sentences

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 $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") 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.

In addition to the above-mentioned sources of cash, we offer a Stock Investment Plan ("SIP"), whereby investors, policyholders, independent contractors and agents, employees and directors can directly purchase our stock.

At our option, purchases of stock under the SIP can be made from newly issued or treasury stock, rather than in the open market, in which case, we can raise capital by selling our shares.

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

2 unchanged sentences

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

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

INSURANCE COMPANY SUBSIDIARY LIQUIDITY AND CAPITAL RESOURCES

The liquidity requirements of our insurance operations are primarily met by premium revenues, investment income and investment maturities.

Primary cash needs 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 six months ended June 30, 2021.

The liquidity requirements of our insurance operations are primarily met by premium revenues, investment income and investment maturities or sales.

Primary cash needs relate to payments of policyholder benefits, 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 nine months ended September 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 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 first year premiums continued to be outpaced by increased surrenders and decreased renewal premiums in our international business.

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CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

In the nine months ended September 30, 2021, our operations provided $23.8 million in net cash as compared to $34.0 million provided by operations in the same period in 2020.

As previously disclosed, we used $8.8 million in cash in the first quarter of 2021 to pay a contractually obligated severance to our former CEO.

Cash provided by operations was also lower, as first year premiums continued to be outpaced by 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 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.

These cash flows, for the most part, are reinvested in new investments.

Net cash used in investing activities totaled $19.4 million for the nine months ended September 30, 2021 as opposed to $39.2 million used in investing activities for the nine months ended September 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 $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 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.

Cash used in financing activities was $8.4 million in the nine months ended September 30, 2021, due primarily to the purchase of 100% of the outstanding Class B common stock from the Harold E.

Riley Foundation for $9.1 million in March 2021.

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

Accordingly, we have been aggressively managing policyholder retention efforts and in the nine months ended September 30, 2021, surrender benefits slightly decreased.

Prior to this year, surrender benefits had been increasing due 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.

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

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

As of June 30, 2021, CICA Ltd.

As of September 30, 2021, CICA Ltd.

was above the TCL threshold.

June 30, 2021 | 10-Q 48

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

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

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

As of September 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.

CRITICAL ACCOUNTING POLICIES

We believe that the accounting policies set forth in Part I, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations - "Critical Accounting Policies" and Part IV, Item 15, Note 1.

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

Commitments and Contingencies in the notes to our consolidated

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CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

financial statements herein and in Part II, Item 7, Contractual Obligations and Off-Balance Sheet Arrangements in our Form 10-K .

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