CITIZENS, INC. 10-Q

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS This section and other parts of this Quarterly Report on Form 10-Q ("Form 10-Q") contain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Forward-looking statements can also be identified by words such as “future,” “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “will,” “would,” “could,” “can,” “may,” and similar terms. Forward-looking statements are not guarantees of future performance and the Company’s actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, statements concerning any potential future impact of the coronavirus disease (“COVID-19”) pandemic on our business, as well as factors discussed in the "Risk Factors" contained in our Annual Report on Form 10-K for the year ended December 31, 2021, which are incorporated herein by reference. The Company assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law. The following discussion should be read in conjunction with the consolidated financial statements and accompanying notes included in Part I, Item 1 of this Form 10-Q. The Company assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law. The U.S. Securities and Exchange Commission ("SEC") maintains a website that contains reports, proxy and information statements, and other information regarding issuers, including the Company, that file electronically with the SEC. The public can obtain any documents that the Company files with the SEC at http://www.sec.gov. We also make available, free of charge, through our Internet website (http://www.citizensinc.com), our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Section 16 Reports filed by officers and directors, news releases, and, if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable after we electronically file such reports with, or furnish such reports to, the SEC. 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. OVERVIEW For over 45 years, we have been fulfilling the needs of our policyholders and their families by providing insurance products that offer both living and death benefits. Citizens conducts insurance related operations through its insurance subsidiaries, which provide benefits to residents in 31 U.S. states and more than 70 different countries. We specialize in offering primarily ordinary whole life insurance, endowment products and final expense insurance in niche markets where we believe we can optimize our competitive position. As an insurance provider, we collect premiums on an ongoing basis from our policyholders and invest the majority of the premiums to pay future benefits, including claims and surrenders and policyholder dividends. Accordingly, the Company derives its revenues principally from: (1) life insurance premiums earned for insurance coverages provided to insureds in our two operating segments – Life Insurance and Home 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 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS 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 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS 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; fixed maturity securities comprised 89.6% of total investments. • Total assets of $1.7 billion. • Total stockholders' equity of $0.2 billion. • $4.6 billion of direct insurance in force. • No debt. • Fully diluted loss per share of Class A common stock of $0.03. 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 Table of Contents 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. While the Company has implemented new strategies and processes to mitigate this impact, the scope, duration and magnitude of the direct and indirect effects of COVID-19 are difficult or impossible to anticipate. As a result, it is not possible to predict its impact on the Company's results in 2022 or beyond. 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; and • 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. See the discussion under Segment Operations below for detailed analysis. The amount of insurance, number of policies, and average face amounts of ordinary life policies issued during the periods indicated are shown below. Three Months Ended March 31, 2022 2021 Amount of Insurance Issued Number of Policies Issued Average Policy Face Amount Issued Amount of Insurance Issued Number of Policies Issued Average Policy Face Amount Issued Life Insurance $ 42,524,454 633 $ 67,179 $ 50,330,540 863 $ 58,320 Home Service Insurance 54,823,369 5,431 10,095 44,658,259 6,361 7,021 Total $ 97,347,823 6,064 $ 94,988,799 7,224 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 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS CONSOLIDATED RESULTS OF OPERATIONS A discussion of consolidated results is presented below, followed by a discussion of segment operations and financial results by segment. REVENUES 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 March 31, (In thousands) 2022 2021 Revenues: Premiums: Life insurance $ 37,746 37,642 Accident and health insurance 286 343 Property insurance 1,332 1,047 Net investment income 15,487 15,244 Investment related gains (losses), net (582) 292 Other income 1,088 915 Total revenues $ 55,357 55,483 Premium Income. 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. A summary of our net investment income and annualized net investment income performance are summarized as follows: Three Months Ended March 31, (In thousands, except for %) 2022 2021 Gross investment income: Fixed maturity securities $ 13,883 14,100 Equity securities 151 207 Policy loans 1,589 1,644 Long-term investments 523 73 Other investment income 21 15 Total investment income 16,167 16,039 Investment expenses (680) (795) Net investment income $ 15,487 15,244 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 Table of Contents 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. 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. BENEFITS AND EXPENSES Three Months Ended March 31, (In thousands) 2022 2021 Benefits and expenses: Insurance benefits paid or provided: Claims and surrenders $ 28,434 30,589 Increase in future policy benefit reserves 6,569 5,232 Policyholders' dividends 1,353 1,306 Total insurance benefits paid or provided 36,356 37,127 Commissions 7,673 8,157 Other general expenses 11,030 11,382 Capitalization of deferred policy acquisition costs (4,781) (4,985) Amortization of deferred policy acquisition costs 5,817 6,183 Amortization of cost of insurance acquired 236 367 Total benefits and expenses $ 56,331 58,231 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 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS Claims and Surrenders. Three Months Ended March 31, (In thousands) 2022 2021 Claims and Surrenders: Death claim benefits $ 7,017 8,940 Surrender benefits 12,259 12,807 Endowment benefits 2,134 2,401 Matured endowment benefits 6,134 5,122 Property claims 142 321 A&H and other policy benefits 748 998 Total claims and surrenders $ 28,434 30,589 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. 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. Commissions. Commission expenses are a cost of acquiring business, as commissions are the primary compensation paid to our independent consultants and independent agents for selling our products. First year 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 Table of Contents 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 Our business is comprised of two operating business segments, as detailed below. • Life Insurance • Home Service Insurance These segments are reported in accordance with U.S. GAAP. 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 March 31, (In thousands) 2022 2021 Income (loss) before federal income tax expense: Segments: Life Insurance $ 1,030 (106) Home Service Insurance (1,240) (758) Total segments (210) (864) Other Non-Insurance enterprises (764) (1,884) Total income (loss) before federal income tax expense $ (974) (2,748) LIFE INSURANCE 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 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS Detailed results of operations for the Life Insurance segment for the periods indicated are as follows: Three Months Ended March 31, (In thousands) 2022 2021 Revenues: Premiums $ 26,931 27,063 Net investment income 11,971 11,598 Investment related gains (losses), net (293) (108) Other income 1,088 913 Total revenues 39,697 39,466 Benefits and expenses: Insurance benefits paid or provided: Claims and surrenders 21,458 23,270 Increase in future policy benefit reserves 5,130 3,658 Policyholders' dividends 1,350 1,296 Total insurance benefits paid or provided 27,938 28,224 Commissions 3,806 4,231 Other general expenses 5,691 5,226 Capitalization of deferred policy acquisition costs (3,306) (3,561) Amortization of deferred policy acquisition costs 4,482 5,348 Amortization of cost of insurance acquired 56 104 Total benefits and expenses 38,667 39,572 Income (loss) before federal income tax expense $ 1,030 (106) Life Insurance segment premium breakout is detailed below. Three Months Ended March 31, (In thousands) 2022 2021 Premiums: First year $ 1,987 2,479 Renewal 24,944 24,584 Total premiums $ 26,931 27,063 Premiums. 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 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS 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 March 31, (In thousands) 2022 2021 Country: Colombia $ 5,531 5,244 Taiwan 4,515 4,484 Venezuela 3,751 4,368 Ecuador 2,775 2,921 Argentina 1,707 1,828 Other Non-U.S. 7,690 8,105 Total $ 25,969 26,950 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: March 31, March 31, (In thousands, except for %) 2022 2021 Net investment income, annualized $ 47,883 46,393 Average invested assets, at amortized cost 1,134,903 1,107,540 Annualized yield on average invested assets 4.22 % 4.19 % 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 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS 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 March 31, (In thousands) 2022 2021 Claims and Surrenders: Death claim benefits $ 990 2,684 Surrender benefits 11,637 12,251 Endowment benefits 2,129 2,399 Matured endowment benefits 6,007 4,980 A&H and other policy benefits 695 956 Total claims and surrenders $ 21,458 23,270 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 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS 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 March 31, (In thousands) 2022 2021 Revenues: Premiums $ 12,433 11,969 Net investment income 3,244 3,345 Investment related gains (losses), net (242) 223 Other income — 2 Total revenues 15,435 15,539 Benefits and expenses: Insurance benefits paid or provided: Claims and surrenders 6,976 7,319 Increase in future policy benefit reserves 1,439 1,574 Policyholders' dividends 3 10 Total insurance benefits paid or provided 8,418 8,903 Commissions 3,867 3,926 Other general expenses 4,350 3,794 Capitalization of deferred policy acquisition costs (1,475) (1,424) Amortization of deferred policy acquisition costs 1,335 835 Amortization of cost of insurance acquired 180 263 Total benefits and expenses 16,675 16,297 Loss before federal income tax expense $ (1,240) (758) 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 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS Claims and Surrenders. 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 March 31, (In thousands) 2022 2021 Claims and Surrenders: Death claim benefits $ 6,027 6,256 Surrender benefits 622 556 Endowment benefits 5 2 Matured endowment benefits 127 142 Property claims 142 321 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 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. Property claims decreased due to fewer hurricane property claims. Other General Expenses. 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 March 31, (In thousands) 2022 2021 Income (loss) before income tax expense $ (764) (1,884) This operating unit represents the administrative support entities to the insurance operations whose revenues are primarily intercompany and have been eliminated in consolidation under U.S. GAAP, which typically results in a segment loss. Revenue in this operating unit consists primarily of net investment income and investment related gains or losses, while expenses consist of other general expenses 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. INVESTMENTS Our investments are an integral part of our business success. 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 Table of Contents 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 March 31, 2022 December 31, 2021 (In thousands, except for %) Amount % Amount % Cash, Cash Equivalents and Invested Assets Fixed maturity securities: U.S. Treasury and U.S. Government-sponsored enterprises $ 14,319 0.9 % $ 15,070 0.9 % Corporate 814,130 53.1 % 893,008 54.0 % States and political subdivisions (1) 358,395 23.4 % 383,958 23.3 % Mortgage-backed (2) 123,162 8.0 % 133,795 8.1 % Asset-backed 45,297 3.0 % 44,676 2.7 % Foreign governments 107 — % 110 — % Total fixed maturity securities 1,355,410 88.4 % 1,470,617 89.0 % Cash and cash equivalents 21,298 1.3 % 27,294 1.7 % Other investments: Policy loans 79,345 5.2 % 80,307 4.9 % Equity securities 13,902 0.9 % 14,844 0.9 % 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 $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 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 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS 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 March 31, 2022. General Obligation Special Revenue Other Total % Based on Amortized Cost (In thousands, except for %) Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost State and political subdivision fixed maturity securities including third-party guarantees AAA $ 18,182 17,366 3,193 3,073 — — 21,375 20,439 5.8 % AA 49,708 47,453 116,639 118,395 13,238 12,620 179,585 178,468 50.3 % A 16,527 16,099 102,645 101,891 4,789 4,410 123,961 122,400 34.5 % BBB 2,683 2,548 15,530 15,559 1,458 1,450 19,671 19,557 5.5 % BB and other 4,415 4,406 9,388 9,243 — — 13,803 13,649 3.9 % Total $ 91,515 87,872 247,395 248,161 19,485 18,480 358,395 354,513 100.0 % State and political subdivision fixed maturity securities excluding third-party guarantees AAA $ 1,873 1,862 — — — — 1,873 1,862 0.5 % AA 32,505 31,154 46,278 46,249 7,001 6,522 85,784 83,925 23.7 % A 28,828 27,941 126,766 127,238 7,622 7,139 163,216 162,318 45.8 % BBB 4,746 4,458 36,542 36,506 1,836 1,855 43,124 42,819 12.1 % BB and other 23,563 22,457 37,809 38,168 3,026 2,964 64,398 63,589 17.9 % 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 March 31, 2022. (In thousands) Fair Value Amortized Cost % of Total Fair Value Education $ 64,873 65,009 18.1 % Utilities 55,101 53,629 15.4 % 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 March 31, 2022. 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 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS 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 Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Texas state and political subdivision fixed maturity securities including third-party guarantees AAA $ 17,641 16,858 3,193 3,073 — — 20,834 19,931 AA 20,732 20,152 12,861 12,821 — — 33,593 32,973 A — — 19,122 21,827 — — 19,122 21,827 BBB — — 1,952 1,824 — — 1,952 1,824 BB and other — — 519 504 — — 519 504 Total $ 38,373 37,010 37,647 40,049 — — 76,020 77,059 Texas state and political subdivision fixed maturity securities excluding third-party guarantees AAA $ 1,873 1,862 — — — — 1,873 1,862 AA 29,345 28,221 3,103 3,023 — — 32,448 31,244 A 5,974 5,780 26,294 28,984 — — 32,268 34,764 BBB 1,181 1,147 5,491 5,252 — — 6,672 6,399 BB and other — — 2,759 2,790 — — 2,759 2,790 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 March 31, 2022. March 31, 2022 General Obligation Special Revenue Other Total (In thousands) Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost California state and political subdivision fixed maturity securities including third-party guarantees AA $ — — 29,405 30,825 2,833 2,729 32,238 33,554 A 1,507 1,650 7,362 8,108 — — 8,869 9,758 BBB — — 4,684 4,647 — — 4,684 4,647 Total $ 1,507 1,650 41,451 43,580 2,833 2,729 45,791 47,959 California state and political subdivision fixed maturity securities excluding third-party guarantees AA $ — — 2,374 2,632 — — 2,374 2,632 A 1,507 1,650 15,180 16,465 2,833 2,729 19,520 20,844 BBB — — 7,996 7,833 — — 7,996 7,833 BB and other — — 15,900 16,650 — — 15,900 16,650 Total $ 1,507 1,650 41,450 43,580 2,833 2,729 45,790 47,959 March 31, 2022 | 10-Q 40 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS IMPAIRMENT CONSIDERATIONS RELATED TO INVESTMENTS IN FIXED MATURITY AND EQUITY 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. Investments of the notes to our consolidated financial statements herein. 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 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 Citizens is a holding company and has minimal operations of its own. Our assets consist of the capital stock of our subsidiaries, cash and investments. Our liquidity requirements are met primarily from two sources: cash generated from our operating subsidiaries and our invested assets. Our ability to obtain cash from our insurance subsidiaries depends primarily upon the availability of statutorily permissible payments, including payments Citizens receives from service agreements with our life insurance subsidiaries and dividends from the subsidiaries. The ability to make payments to the holding company is limited by applicable laws and regulations of Bermuda and U.S. states of domicile which subject insurance operations to significant regulatory restrictions. These laws and regulations require, among other things, that our insurance subsidiaries maintain minimum solvency requirements, which limit the amount of dividends that can be paid to the holding company. The regulations also require approval of our service agreements with the applicable regulatory authority in order to prevent insurance subsidiaries from moving large amounts of cash to the unregulated holding company. In addition to the above-mentioned sources of cash, we offer a Stock Investment Plan ("SIP"), whereby investors, policyholders, independent contractors and agents, employees and directors can directly purchase our stock. At our option, purchases of stock under the SIP can be made from newly issued or treasury stock, rather than in the open market, in which case, we can raise capital by selling our shares. In 2021, we entered into a Credit Facility with Regions Bank. See Part I, Item 1, Note 7. Commitments and Contingencies in the notes to our consolidated financial statements, herein, for a description of the Credit Facility. The Credit Facility provides additional liquidity to the Company for short-term and longer-term needs. As of 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 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS 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 or sales. Primary cash needs relate to payments of policyholder benefits, investment purchases and operating expenses. 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. 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 $19.8 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 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. March 31, 2022 | 10-Q 42 Table of Contents CITIZENS, INC. 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. Our domestic companies are subject to minimum capital requirements set by the NAIC in the form of risk-based capital ("RBC"). RBC considers the type of business written by an insurance company, the quality of its assets, and various other aspects of an insurance company's business to develop a minimum level of capital called "Authorized Control Level Risk-Based Capital". This level of capital is then compared to an adjusted statutory capital that includes capital and surplus as reported under statutory accounting principles, plus certain investment reserves. Should the ratio of adjusted statutory capital to control level RBC fall below 200% for our domestic companies, a series of remedial actions by the affected company would be required. Additionally, we have a parental guarantee between Citizens and CICA, Citizens' wholly-owned subsidiary domiciled in Colorado, to maintain a RBC level above 350%. At 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 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 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 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. March 31, 2022 | 10-Q 43 Table of Contents CITIZENS, INC.