What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-05-05 compared with 2021-11-04 · 246 added, 336 removed, 324 unchanged (64% of the section changed)

13 unchanged sentences

We are not including any of the information contained on our website as part of, or incorporating it by reference into, this Form 10-Q.

Citizens, Inc.

("Citizens" or the "Company") is an insurance holding company incorporated in Colorado serving the life insurance needs of individuals in the United States since 1969 and internationally since 1975.

Through our insurance subsidiaries, we provide insurance benefits to residents in 31 U.S.

For over 45 years, we have been fulfilling the needs of our policyholders and their families by providing insurance products that offer both living and death benefits.

Citizens conducts insurance related operations through its insurance subsidiaries, which provide benefits to residents in 31 U.S.

states and more than 70 different countries.

We pursue a strategy of offering traditional insurance products in niche markets where we believe we are able to achieve competitive advantages.

We operate in two business segments:

• Life Insurance segment - U.S.

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 and whole life insurance sold domestically through independent agents;

• 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.

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 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;

• 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.

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

We specialize in offering primarily ordinary whole life insurance, endowment products and final expense insurance in niche markets where we believe we can optimize our competitive position.

As an insurance provider, we collect premiums on an ongoing basis from our policyholders and invest the majority of the premiums to pay future benefits, including claims and surrenders and policyholder dividends.

Accordingly, the Company derives its revenues principally from:

(1) life insurance premiums earned for insurance coverages provided to insureds in our two operating segments – Life Insurance and Home Service Insurance;

and (2) net investment income.

In addition to paying and reserving for insurance benefits that we pay to our policyholders, our expenses consist primarily of the costs of selling our insurance products (e.g., commissions, underwriting, marketing expenses), operating expenses and income taxes.

Objective of our Management's Discussion and Analysis

We refer to our Management’s Discussion and Analysis of Financial Condition and Results of Operations as our “MD&A”.

The objective of our MD&A is to provide investors with information in order to assess the material changes in our financial condition from December 31, 2021 to March 31, 2022 and the material changes in our results of operations from March 31, 2021 to March 31, 2022.

We also discuss in the MD&A any trends that we believe may materially affect our future operations or financial condition.

March 31, 2022 | 10-Q 25

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 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 $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

The Factors that Drive our Operating Results

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

• Sales ( i.e.

, premium revenues)

• Investments

• Death claims and surrenders

• Operating expenses

As premium revenues and investment income are our two primary sources of income, both new sales and "resells" ( i.e .

retaining the policy) as well as our investments and the interest we receive on such investments, are key to our profitability.

Our premium revenue increased in the first three months of 2022 compared to 2021 as growth in renewal premiums in both segments more than offset lower first-year premiums in our Life Insurance segment, which in 2022 decreased by 19.8% compared to 2021.

Renewal premiums increased 2.4% in 2022 as compared to 2021, which we believe is due to strong first year sales in 2021 and continued retention and collection efforts.

While interest rates have recently started to increase, our yield declined 1 basis point to 4.20% in the first three months of 2022 as a substantial portion of our fixed maturity portfolio was called or matured over the past few years and we faced challenges in finding comparable yields.

Our net investment income increased by $0.2 million from the 2021 period to the 2022 period due to a growing asset base and positive returns from our middle market private equity investment.

As part of the ongoing process of managing our portfolio and optimizing performance we have been diversifying our investment portfolio in order to help mitigate the effects of the sustained low interest rate environment, however, this diversification comes with some volatility and accordingly, due to the general market decline in the first quarter of 2022, we incurred investment related losses of $0.6 million in the current period compared to gains of $0.3 million in prior year quarter.

Payment of policyholder benefits for death claims and surrenders is our largest expense and thus also key to our profitability.

In the first quarter of 2022, our death claims decreased.

Death claims in the 2021 period in our Life Insurance segment were negatively impacted by higher reported claims, including COVID-19 related deaths and the average dollar amount of claims incurred.

Our surrenders decreased in the first quarter of 2022 compared to the

March 31, 2022 | 10-Q 26

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

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

same period in 2021, which we believe was in large part due to our retention initiatives.

Operating expenses are our second largest expense and thus drive our operating results.

Our general operating expenses decreased by $0.4 million in 2022 as compared to 2021.

FINANCIAL HIGHLIGHTS

Financial Condition at March 31, 2022

• Total investments of $1.5 billion;

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

OUR OPERATING SEGMENTS

Our business is comprised of two operating business segments, as detailed below.

• Life Insurance

• Home Service Insurance

September 30, 2021 | 10-Q 33

Our net loss decreased by $2.2 million in the three months ended March 31, 2022 to $1.3 million compared to $3.6 million in prior year period.

The decrease in our net loss was primarily due to a decrease in death claims, federal income tax and other general expenses partially offset by investment losses reflecting changes in fair value of our equity investments, as discussed in Part I, Item 1, Note 5.

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

March 31, 2022 | 10-Q 27

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

COVID-19 PANDEMIC

The overall impact of COVID-19 and its related economic conditions on the Company's financial results continue to be highly uncertain and unpredictable.

As a result, it is not possible to predict its impact on the Company's results in 2022 or beyond.

While we don't believe that COVID-19 materially impacted our results of operations for the quarter ended March 31, 2022, some of the most significant factors related to COVID-19 that could cause our future results to differ significantly from our prior results or expectations include:

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

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

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

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

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

OUR OPERATING SEGMENTS

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

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.

Nine Months Ended September 30, 2021 2020

Three Months Ended March 31, 2022 2021

Issued Number of

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Total $ 97,347,823 6,064 $ 94,988,799 7,224

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

Total insurance issued increased by 2.5% in the three months ended March 31, 2022, from $95.0 million in the first three months of 2021 to $97.3 million in 2022.

The growth was driven by our Home Service Insurance segment.

Total insurance issued in our Home Service Insurance segment increased by $10.2 million, or 22.8% in the three months ended March 31, 2022 as compared to the same period in 2021, despite the decrease in the number of policies issued.

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

Despite higher average policy face values, total insurance issued in our Life Insurance segment decreased in the three months ended March 31, 2022 as compared to the prior year period as the number of policies issued decreased 26.7%.

We continue to prioritize recruiting new independent consultants.

March 31, 2022 | 10-Q 28

CITIZENS, INC.

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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 from invested assets.

Three Months Ended Nine Months Ended

September 30, September 30,

Our revenues are generated primarily by insurance renewal premiums and investment income from invested assets, both of which increased in the first quarter of 2022 as compared to the first quarter of 2021.

Three Months Ended

(In thousands) 2022 2021

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Net investment income 15,487 15,244

Realized investment gains, net 2,126 527 7,277 669

Investment related gains (losses), net (582) 292

Other income 1,088 915

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Premium Income.

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.

MANAGEMENT'S DISCUSSION & ANALYSIS

Total premium income increased $0.3 million, or 0.9%, for the three months ended March 31, 2022 compared to the same period in 2021 due to higher renewal year premiums in both our segments.

Net Investment Income.

Our annualized net investment income performance is summarized as follows:

September 30, December 31, September 30,

A summary of our net investment income and annualized net investment income performance are summarized as follows:

Three Months Ended

(In thousands, except for %) 2022 2021

Net investment income, annualized $ 61,357 60,197 60,108

Average invested assets, at amortized cost 1,448,615 1,420,129 1,409,993

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

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

Gross investment income:

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Net investment income $ 15,487 15,244

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 $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

Net investment income, annualized $ 61,948 60,976

Average invested assets, at amortized cost 1,473,240 1,449,518

Annualized yield on average invested assets 4.20 % 4.21 %

March 31, 2022 | 10-Q 29

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

Our total investment income increased by 0.8%.

Income from fixed maturity securities income decreased 1.5% for the three months ended March 31, 2022, compared to the same period in 2021 as the three months ended March 31, 2021 included a non-recurring "make-whole" call redemption.

Long-term investment income increased as our limited partnership investments asset base grew, in addition to some early distribution income.

Annualized net investment income increased by $1.0 million in the three months ended March 31, 2022 as compared to the same three months of 2021 despite a slightly lower annualized yield due to our growing asset base and to strong yields from our middle market private equity investment.

Investment Related Gains (Losses), Net.

We recorded investment related losses of $0.6 million during the three months ended March 31, 2022 as compared to investment gains of $0.3 million during the three months ended March 31, 2021.

The gains and losses are related to fair value change in our equity securities owned.

BENEFITS AND EXPENSES

Three Months Ended Nine Months Ended

September 30, September 30,

Three Months Ended

(In thousands) 2022 2021

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Total benefits and expenses $ 56,331 58,231

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

Claims and surrenders benefits and general expenses are our primary uses of cash, both of which decreased in the first quarter of 2022 as compared to the first quarter of 2021.

March 31, 2022 | 10-Q 30

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

Claims and Surrenders.

Three Months Ended Nine Months Ended

September 30, September 30,

Three Months Ended

(In thousands) 2022 2021

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Property claims 142 321

Accident and health benefits 98 33 200 147

Other policy benefits 1,159 923 3,050 2,585

A&H and other policy benefits 748 998

Total claims and surrenders $ 28,434 30,589

• 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 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

• 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.

Death claim benefits decreased 21.5% for the three months ended March 31, 2022 compared to the same period in 2021.

Death claims in our Life Insurance segment decreased 63.1% during the first three months of 2022 compared to the same period in 2021 and Home Service Insurance segment claims decreased 3.7%.

The decrease in both segments during the first three months of 2022 compared to the same period last year was due primarily a lower volume of reported death claims, including COVID-19 related deaths.

Surrender benefits decreased 4.3% for the three months ended March 31, 2022 compared to the same period in 2021.

Surrender benefits represented less than 0.3% of total direct ordinary whole life insurance in force of $4.6 billion as of March 31, 2022.

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

Matured endowment benefits increased 19.8% for the three months ended March 31, 2022, compared to the same period in 2021.

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

Property claims decreased 55.8% in the three months ended March 31, 2022 compared to the same period in 2021 due to lower hurricane property claims.

Other General Expenses.

General expenses decreased 3.1% in the three months ended March 31, 2022 compared to the same period in 2021.

In the first quarter of 2022 we had lower operating expenses primarily due to consulting fees paid to our former CEO and professional fees incurred in connection with the change in control of the Company, both in the first quarter of 2021, partially offset by higher current quarter expenses associated with our home office.

Explanation of other benefits and expenses

Increase in Future Policy Benefit Reserves.

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.

Future policy benefit reserves reflect the liability established to provide for the payment of policy benefits that we expect to pay in the future and thus increase when we have a higher in force block of business due to higher sales and persistency (i.e., more policies on which we expect to pay future benefits) and decrease when we have lower sales and persistency.

The change in future policy benefit reserves increased 25.6% for the three months ended March 31, 2022, compared to the same period in 2021 due to better persistency.

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 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 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 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 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.

In addition, CICA Ltd., a wholly-owned Bermuda subsidiary of Citizens, is considered a controlled foreign corporation for federal tax purposes and CICA Ltd.'s activity gives rise to taxable income in the U.S.

as Subpart F Income, which is treated as a permanent tax difference and therefore included in the Company's effective tax rate calculation.

See Part I, Item 1, Note 8.

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

September 30, 2021 | 10-Q 38

First year commission rates are higher than renewal commission rates and thus commissions fluctuate directly in relation to first year sales.

March 31, 2022 | 10-Q 31

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

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 and thus fluctuate primarily with first year sales.

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

SEGMENT OPERATIONS

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

Three Months Ended Nine Months Ended

September 30, September 30,

Three Months Ended

(In thousands) 2022 2021

6 unchanged sentences

LIFE INSURANCE

Our Life Insurance segment primarily operates through CICA Ltd.

(a Bermuda company), which issues ordinary whole life insurance and endowment policies in U.S.

Dollar-denominated amounts to non-U.S.

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.

The endowment contracts are principally accumulation contracts that incorporate an element of life insurance protection.

For the majority of our business, we retain the first $0.1 million on any one life and reinsure the remainder of the risk.

We operate the Life Insurance segment internationally through CICA Ltd.

and domestically through our CICA and CNLIC insurance subsidiaries.

September 30, 2021 | 10-Q 39

Income before federal income tax expense in our Life Insurance segment increased by $1.1 million in the first three months of 2022 as compared to the prior year period driven by higher net investment income and lower death benefits, partially offset by higher investment related losses and higher operating expenses.

March 31, 2022 | 10-Q 32

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

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

Three Months Ended Nine Months Ended

September 30, September 30,

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

Three Months Ended

(In thousands) 2022 2021

1 unchanged sentence

Net investment income 11,971 11,598

Realized investment gains, net 1,205 133 5,741 1,259

Investment related gains (losses), net (293) (108)

Other income 1,088 913

13 unchanged sentences

Income (loss) before federal income tax expense $ 1,030 (106)

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 Nine Months Ended

September 30, September 30,

Three Months Ended

(In thousands) 2022 2021

2 unchanged sentences

Total premiums $ 26,931 27,063

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

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

We derive most of our premium revenue in the Life Insurance segment from renewal premiums, which increased 1.5% in the three months ended March 31, 2022 as compared to the same period in 2021.

Despite this increase, total premium revenues decreased slightly for the three months ended March 31, 2022 compared to the same period in 2021 due to a decrease in first year premiums.

We believe that the decline in first year premiums in our Life Insurance segment is primarily related to a reduction of sales in existing products in anticipation of our new whole life product, which was released March 10, 2022, as well as a continued decline in production in Venezuela due to one of our top distributors leaving our Company.

We discussed in Item 3 - Legal Proceedings in our Annual Report on Form 10-K for the year ended December 31, 2021 this agent who we believe is illegally competing with us and stealing our trade secrets and business.

March 31, 2022 | 10-Q 33

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

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,

International Life Insurance Premiums.

The following graph sets forth, for our top five producing countries, our direct premiums from our international life insurance business for the three months ended March 31, 2022 and 2021.

Three Months Ended

(In thousands) 2022 2021

Colombia $ 5,531 5,244

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

Taiwan 4,515 4,484

Venezuela 3,751 4,368

Ecuador 2,775 2,921

1 unchanged sentence

Other Non-U.S.

10,259 10,346 28,447 27,894

Total $ 25,969 26,950

DOMESTIC SALES

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.

We discontinued new sales of domestic ordinary whole life and endowment life insurance products within our Life Insurance segment in 2017 while we evaluated our domestic life strategy;

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.

September 30, 2021 | 10-Q 42

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

Domestic Life Insurance Premiums.

Domestic premiums in our Life Insurance segment were $1.0 million in the three months ended March 31, 2022, compared to $1.2 million in the prior year period.

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

We discontinued new sales in these blocks in 2017 and therefore the majority of the premium recorded is related to renewal business that has been decreasing over the last several years.

Net Investment Income .

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

September 30, December 31, September 30,

March 31, March 31,

(In thousands, except for %) 2022 2021

2 unchanged sentences

Annualized yield on average invested assets 4.22 % 4.19 %

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 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 nine months ended September 30, 2021 compared to the same period in 2020.

September 30, 2021 | 10-Q 43

Annualized net investment income in our Life Insurance segment increased in the three months ended March 31, 2022 compared to the same period annualized in 2021 due to continued growth in average invested assets,

March 31, 2022 | 10-Q 34

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

Three Months Ended Nine Months Ended

September 30, September 30,

including strong results from our middle market private equity investment.

See " Investments " below for more detailed information on our investments.

Investment Related Gains (Losses), Net.

The investment related loss for the three months ended March 31, 2022 was due primarily to equity securities negatively impacted by fair value changes.

Claims and Surrenders.

The following table shows the primary claims and surrender benefits paid within the Life Insurance segment for the three months ended March 31, 2022 compared to the same period in 2021.

Three Months Ended

(In thousands) 2022 2021

4 unchanged sentences

Matured endowment benefits 6,007 4,980

Accident and health benefits 38 34 77 102

Other policy benefits 1,155 918 3,039 2,573

A&H and other policy benefits 695 956

Total claims and surrenders $ 21,458 23,270

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 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 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

During the three months ended March 31, 2022 and 2021, the majority of our claims and surrender benefits in our Life Insurance segment were related to payment of surrender benefits.

Surrenders decreased 5.0% in the three months ended March 31, 2022, as compared to the prior year period, as we have instituted retention programs aimed at curbing surrenders.

The $1.8 million decrease in claims and surrenders expense drove our improved income in this segment in the three months ended March 31, 2022 as compared to the prior year period.

We believe that the COVID-19 pandemic contributed to high death claims in the 2021 period.

The decrease in death claims and surrenders was partially offset by higher matured endowment benefits paid, which we expected due to the timing of maturities.

Other General Expenses.

General expenses increased in the three months ended March 31, 2022 compared to the same period in 2021 due primarily to expenses associated with our home office and convention expenses.

We did not have a convention in 2021 due to COVID-19.

March 31, 2022 | 10-Q 35

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

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

Three Months Ended Nine Months Ended

September 30, September 30,

HOME SERVICE INSURANCE

Investment related losses and higher general expenses led to an increase loss in the Home Service Insurance segment in the three months ended March 31, 2022 as compared to the 2021 period.

The current year period benefited from lower hurricane property claims.

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

Three Months Ended

(In thousands) 2022 2021

1 unchanged sentence

Net investment income 3,244 3,345

Realized investment gains (losses), net (36) 388 393 (405)

Investment related gains (losses), net (242) 223

Other income — 2

13 unchanged sentences

Loss before federal income tax expense $ (1,240) (758)

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

Total premium revenue increased by 3.9% in the three months ended March 31, 2022, compared to the same period in 2021.

The increase is a result of higher renewal year premiums during the three months ended March 31, 2022 due to improvements in our collection and payment processes and strong collection efforts by our independent agents.

March 31, 2022 | 10-Q 36

CITIZENS, INC.

2 unchanged sentences

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,

Three Months Ended

(In thousands) 2022 2021

5 unchanged sentences

Property claims 142 321

Accident and health benefits 60 (1) 123 45

Other policy benefits 4 5 11 12

A&H and other policy benefits 53 42

Total claims and surrenders $ 6,976 7,319

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.

Death claim benefits decreased 3.7% in the three months ended March 31, 2022, compared to the 2021 periods.

The decrease in death claim benefits was due primarily to a slightly lower volume of reported claims, including COVID-19 related deaths.

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 nine months ended September 30, 2021 compared to the same period last year due to higher sales and improved retention in 2021.

Property claims decreased due to fewer hurricane property claims.

Other General Expenses.

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.

General expenses increased in the three months ended March 31, 2022 compared to the same period in 2021, primarily due to higher employee health benefit costs and insurance department examination fees.

OTHER NON-INSURANCE ENTERPRISES

Three Months Ended Nine Months Ended

September 30, September 30,

Three Months Ended

(In thousands)

2021 2020 2021 2020

Income (loss) before income tax expense $ (764) (1,884)

1 unchanged sentence

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 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.

MANAGEMENT'S DISCUSSION & ANALYSIS

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

In the three months ended March 31, 2022, the Other Non-Insurance Enterprises had a loss of $0.8 million compared to a loss of $1.9 million for the same period in 2021, as other general expenses decreased in the current year period due to the change of control expenses paid in 2021.

Our investments are an integral part of our business success.

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.

Our cash and invested assets at March 31, 2022 were $1.5 billion, of which 88.4% 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, 2022 | 10-Q 37

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

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 September 30, 2021 December 31, 2020

Carrying Value March 31, 2022 December 31, 2021

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

15 unchanged sentences

Equity securities 13,902 0.9 % 14,844 0.9 %

Real estate and other long-term investments 34,013 2.1 % 29,865 1.8 %

Other long-term investments 63,927 4.2 % 57,399 3.5 %

Total cash, cash equivalents and invested assets $ 1,533,882 100.0 % $ 1,650,461 100.0 %

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

(1) Includes $154.8 million and $161.8 million of securities guaranteed by third parties at March 31, 2022 and December 31, 2021, respectively.

(2) Includes $122.9 million and $132.0 million of U.S.

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

Government-sponsored enterprises at March 31, 2022 and December 31, 2021, respectively.

The carrying value of the Company’s fixed maturity securities investment portfolio at March 31, 2022 was $1.4 billion compared to $1.5 billion at December 31, 2021.

This decline reflects interest rate sensitivity on fixed maturity securities.

The distribution of the credit ratings of our portfolio of fixed maturity securities by carrying value as of March 31, 2022 did not materially change from December 31, 2021 – the weighted average was “A” at both dates.

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

Cash and cash equivalents decreased as of March 31, 2022 from December 31, 2021 due primarily to the reinvestment of funds in higher interest rate securities.

Other long-term investments increased by $6.5 million as of March 31, 2022 from December 31, 2021 due to additional contributions to our limited partnerships.

Obligations of States and Political Subdivisions

The Company’s fixed maturity securities investment portfolio at March 31, 2022 and December 31, 2021 included $358.4 million and $384.0 million, respectively, of securities that are obligations of states and political subdivisions, including municipalities (collectively referred to as the municipal bond portfolio).

March 31, 2022 | 10-Q 38

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

Obligations of States and Political Subdivisions

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 September 30, 2021.

Detailed below is a presentation by the Nationally Recognized Statistical Rating Organization ("NRSRO") rating of these holdings by funding type as of March 31, 2022.

General Obligation Special Revenue Other Total % Based on Amortized

18 unchanged sentences

Total $ 91,515 87,872 247,395 248,161 19,485 18,480 358,395 354,513 100.0 %

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 September 30, 2021.

(In thousands) Fair

4 unchanged sentences

Transportation 40,411 42,552 11.3 %

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 September 30, 2021.

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

The Company holds 21.2% and 12.8% of its municipal bond portfolio in Texas and California issuers, respectively, as of March 31, 2022.

There were no other states or individual issuer holdings that represented or exceeded 10% of the total municipal bond portfolio as of March 31, 2022.

March 31, 2022 | 10-Q 39

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

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

The table below represents the Company's detailed exposure to municipal bond portfolio in Texas at March 31, 2022.

March 31, 2022 General Obligation Special Revenue Other Total

(In thousands) Fair

17 unchanged sentences

Total $ 38,373 37,010 37,647 40,049 — — 76,020 77,059

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

The table below represents the Company's detailed exposure to municipal bond portfolio in California at March 31, 2022.

March 31, 2022 General Obligation Special Revenue Other Total

(In thousands) Fair

14 unchanged sentences

Total $ 1,507 1,650 41,450 43,580 2,833 2,729 45,790 47,959

September 30, 2021 | 10-Q 49

March 31, 2022 | 10-Q 40

CITIZENS, INC.

1 unchanged sentence

IMPAIRMENT CONSIDERATIONS RELATED TO INVESTMENTS IN FIXED MATURITY AND EQUITY SECURITIES

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

For the three months ended March 31, 2022 and 2021, 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.

1 unchanged sentence

LIQUIDITY AND CAPITAL RESOURCES

Below are our primary capital resources (based on carrying value of each) as of the periods indicated below.

(In thousands)

March 31, 2022 December 31, 2021

Fixed maturity securities $ 1,355,410 1,470,617

Cash and cash equivalents 21,298 27,294

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

We manage our insurance operations as described herein in order to ensure that we have stable and reliable sources of cash flows to meet our obligations.

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

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

We currently anticipate meeting our short-term and long-term cash needs with cash generated by our insurance operations and from our invested assets.

At March 31, 2022, we had $21.3 million in cash and cash equivalents and $1.5 billion in invested assets.

From time-to-time we may raise capital by selling shares in our SIP (as defined below) and we may also access our Credit Facility if needed (both as described below).

PARENT COMPANY LIQUIDITY AND CAPITAL RESOURCES

10 unchanged sentences

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.

In 2021, we entered into a Credit Facility with Regions Bank.

See Part I, Item 1, Note 7.

1 unchanged sentence

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

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

As of March 31, 2022, we have not borrowed any money under the Credit Facility and have no immediate plans to do so.

March 31, 2022 | 10-Q 41

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

INSURANCE COMPANY SUBSIDIARY LIQUIDITY AND CAPITAL RESOURCES

1 unchanged sentence

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.

Historically, cash flow from our operations has been sufficient to meet our cash needs.

We have not had to liquidate a material amount of investments to pay our expenses and we did not do so in the three months ended March 31, 2022.

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.

September 30, 2021 | 10-Q 50

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.

Cash from Operations.

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

In the three months ended March 31, 2022, our operations provided $12.1 million in net cash.

Cash from/used in Investments.

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 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.

Net cash used in investing activities totaled $19.8 million for the three months ended March 31, 2022.

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 $8.4 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.

Cash from Financing Activities.

Cash provided by financing activities was $1.7 million in the three months ended March 31, 2022, due primarily to the issuance of shares under the SIP.

Trends, Demands and Restrictions on our Uses of Cash

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

In order to mitigate the risk of early policyholder surrenders, we include provisions in our insurance policies, such as surrender charges, that help limit and discourage early withdrawals.

As previously discussed, surrender benefits have been higher than usual the last several years as many of our policies have reached the age where surrender charges have expired and due to other reasons, like the loss of one of our biggest distributors in Venezuela (see Item 3.

Legal Proceedings).

However, we have been aggressively managing policyholder retention efforts and in the three months ended March 31, 2022, surrender benefits slightly decreased.

Our whole life and endowment products provide the policyholder with alternatives once the policy matures - they can choose to take a lump sum payout or leave the money on deposit at interest with the Company.

As of March 31, 2022, 40% of the Company's total insurance in force was in endowment products.

Approximately 13% of the endowments in force will mature in the next five years.

Policyholder election behavior is unknown, but if too many policyholders elect lump sum distributions, the Company could be exposed to liquidity risk in years of high maturities.

Meeting these distributions could require the Company to sell securities at inopportune times to pay policyholder withdrawals.

Alternatively, if the policyholders were to leave the money on deposit with the Company at interest, our profitability could be impacted if the product guaranteed rate is higher than the market rate we are earning on our investments.

We currently anticipate that our available operating cash flow and capital resources will be adequate to meet our needs for funds, but we will monitor closely our policyholder behavior patterns.

Death claims, which were high in 2021 due in part to COVID, have decreased to normal levels so far in 2022.

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.

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MANAGEMENT'S DISCUSSION & ANALYSIS

As discussed above, we are subject to regulatory capital requirements that could affect the Company’s ability to access capital from our insurance operations or cause the Company to have to put additional cash in our wholly-owned subsidiaries.

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

is a Bermuda domiciled company.

At March 31, 2022, our domestic insurance subsidiaries were above the required minimum RBC levels.

CICA International is a Bermuda domiciled company.

The BMA requires Bermuda insurers to maintain available statutory economic capital and surplus at a level equal to or in excess of the BMA's Enhanced Capital Requirement, which requires a certain Target Capital Level ("TCL").

As of September 30, 2021, CICA Ltd.

was above the TCL threshold.

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

entered into a Keep Well Agreement.

The Keep Well Agreement requires Citizens to contribute up to $10 million in capital to CICA Ltd.

as necessary to ensure that CICA Ltd.

has a minimum capital level of 120%.

Since CICA Ltd.’s capital level currently exceeds 120%, Citizens is not currently required to make a capital contribution.

Any capital injection that Citizens is required to make under the parental guarantee with CICA or under the Keep Well Agreement with CICA Ltd.

could negatively impact the Company’s capital resources and liquidity.

As of March 31, 2022, CICA International was above the TCL threshold.

At the request of the BMA, on April 15, 2021, Citizens and CICA International entered into a Keep Well Agreement.

The Keep Well Agreement requires Citizens to contribute up to $10 million in capital to CICA International as necessary to ensure that CICA International has a minimum capital level of 120%.

Since CICA International’s capital level currently exceeds 120%, Citizens is not currently required to make a capital contribution.

Any capital injection that Citizens is required to make under the parental guarantee with CICA or under the Keep Well Agreement with CICA International could negatively impact the Company’s capital resources and liquidity.

CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS

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

As of March 31, 2022, 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

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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 .

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.

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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