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 and the inflationary environment that has led to market volatility and rising interest rates, 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 June 30, 2022 and the material changes in our results of June 30, 2022 | 10-Q 29 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS operations for the three and six months ended June 30, 2022 as compared to the same periods in 2021. We also discuss in the MD&A any trends that we believe may materially affect our future operations or financial condition. 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. We experienced slight decreases, 1.4% and 0.3%, respectively, in premium revenue in the three and six months ended June 30, 2022 compared to the prior year periods. In the three months ended June 30, 2022, premium revenue of $42.2 million decreased due primarily to lower renewal premiums in both of our segments, partially offset by increased first year premiums in our Life Insurance segment. In the six months ended June 30, 2022, premium revenue of $81.6 million decreased as growth in renewal premiums was more than offset by lower first year premiums in both of our insurance segments. Our net investment income increased during both the three and six months ended June 30, 2022 compared to the same prior year periods due primarily to a growing asset base, positive returns from our private equity investment and reinvestment into a higher interest rate environment. Our yield increased 3 basis points to 4.25% in the first six months of 2022 compared to the prior year period, reflecting higher yields on new fixed maturity investments and positive returns from our private equity investment. As part of the ongoing process of managing our portfolio and optimizing performance, we have been diversifying our investment portfolio over the last few years, however, this diversification comes with some volatility and accordingly, June 30, 2022 | 10-Q 30 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS due to the equity market decline in the first six months of 2022, we recorded investment related losses of $5.2 million in the current period compared to gains of $4.5 million in prior year period. Payment of policyholder benefits for death claims and surrenders is our largest expense and thus also key to our profitability. In both the first three and six months of 2022, our death claims decreased compared to the same prior year periods. Death claims in the 2021 periods in both of our segments were negatively impacted by higher reported claims, including COVID-19 related deaths, and a higher average dollar amount of claims incurred. Our surrenders decreased in the first three and six months of 2022 compared to the same periods 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 in both the first three and six months of 2022 decreased as compared compared to prior year periods. FINANCIAL HIGHLIGHTS Due to the market volatility and rising interest rates during the first six months of 2022, we had a net loss of $3.5 million and $4.9 million, respectively in the three and six months ended June 30, 2022, compared to net income of June 30, 2022 | 10-Q 31 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS $5.0 million and $1.4 million, respectively, in the prior year periods. As an insurance company, we hold significant invested assets in order to pay future policy liabilities. Changes in the fair value of our limited partnership investments drove investment related losses of $5.0 million and $5.6 million, respectively, in the current year periods. We did not sell these investments in the second quarter of 2022, but as discussed in Part I, Item 1, Note 5. Investments , changes in fair values of our equity securities are reflected as investment related gains or losses, in addition to executed transactions that result in a gain or loss. Due to these investment related losses driving our net loss, loss per share of Class A common stock was $0.10 for the six months ended June 30, 2022. All other revenues (premiums, net investment income and other income) collectively increased in the three and six months ended June 30, 2022 as compared to the same prior year periods and our total benefits and expenses decreased by $0.6 million and $2.5 million, respectively, in the current year periods as compared to the same prior year periods. Consolidated Revenue Highlights Life insurance premiums and investment income are our primary sources of revenue. In the three months ended June 30, 2022 compared to the same period in 2021: • Insurance premiums decreased by $0.6 million due primarily to decrease in renewal premiums in both of our segments partially offset by an increase in first year premiums in our Life Insurance segment. • Net investment income increased by $0.6 million, or 3.7%, from a higher average portfolio yield in the current year period, a growing asset base and strong results from our private equity investment. In the six months ended June 30, 2022 as compared to the same period in 2021: • Insurance premiums decreased by $0.3 million, or 0.3% as higher renewal premiums were more than offset by a decrease in first year premiums. • Net investment income increased by $0.8 million, or 2.7% for the same reasons discussed above. Consolidated Benefits and Expenses Highlights The primary use of our funds is the payment of insurance benefits for claims and surrenders as well as our general operating expenses. In the three months ended June 30, 2022 compared to the same period in 2021, total benefits and expenses decreased by $0.6 million due primarily to: • $2.2 million decrease in claims and surrenders benefits. This decrease was primarily related to lower death claims in both of our segments as 2021 included a higher number of reported death claims, including COVID-19 related deaths. Surrender benefits decreased as we have focused efforts on retaining policyholders; and • $1.1 million decrease in other general expenses; partially offset by • $3.1 million increase in future policy benefit reserves as a result of improved first year sales and better persistency. In the six months ended June 30, 2022 compared to the same period in 2021, total benefits and expenses decreased by $2.5 million due primarily to: • $4.4 million decrease in claims and surrender benefits due primarily to a higher volume of reported claims in 2021, including those COVID-19 related, in addition to an increase in the average death claim amount in that year; and • $1.5 million decrease in other general expenses; partially offset by • $4.4 million increase in future policy benefit reserves as a result of sales and improved persistency. June 30, 2022 | 10-Q 32 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS Financial Condition at June 30, 2022 • Total assets of $1.6 billion. • Total investments of $1.4 billion; fixed maturity securities comprised 88.7% of total investments. • Total stockholders' equity of $0.1 billion. • $4.7 billion of direct insurance in force. • No debt. IMPACT OF INFLATION AND RISING INTEREST RATES As mentioned above, the impact of inflation, which has led to market volatility and rising interest rates, has had a material impact on our results of operations and financial condition in the three and six months ended June 30, 2022. In addition to the market volatility that affected the fair value of our equity securities, leading to the investment related losses, higher interest rates typically reduce the market values of fixed income assets, as the interest payments from existing fixed income assets become less competitive relative to newer higher rate fixed income instruments. Because the vast majority of our total investments are invested in fixed maturity securities, we reported a pre-tax net unrealized loss of $125.4 million on our available-for-sale securities at June 30, 2022. This compares to net unrealized gains of $126.9 million at December 31, 2021, with the year-over-year decrease primarily driven by higher interest rates. In addition, we could experience higher surrenders and lapses and fewer sales in the coming months as our policyholders conserve cash due to concerns over inflation and rising costs, particularly in our Home Service Insurance segment , whose customer base is primarily middle- and lower-income individuals. COVID-19 PANDEMIC The overall impact of the COVID-19 pandemic 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 the COVID-19 pandemic materially impacted our results of operations for the three and six months ended June 30, 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 channels 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. June 30, 2022 | 10-Q 33 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS 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. Six Months Ended June 30, 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 $ 140,351,224 1,849 $ 75,907 $ 108,680,985 1,803 $ 60,278 Home Service Insurance 128,118,014 14,134 9,065 99,978,080 13,868 7,209 Total $ 268,469,238 15,983 $ 208,659,065 15,671 As we have previously disclosed, our strategic initiatives include the introduction of new products tailored to our specific markets. These new products helped drive the 28.7% increase in total insurance issued in the six months ended June 30, 2022, from $208.7 million in the first six months of 2021 to $268.5 million in 2022. The growth in insurance issued was a result of both a greater number of policies issued and higher average policy face amounts issued in both segments. The growth in our Life Insurance segment is attributable to strong sales from our new international whole life product, which accounted for 45% of total insurance issued in this segment for the six months ended June 30, 2022. In our Home Service Insurance segment, the increase in 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 than our legacy products. 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. Three Months Ended Six Months Ended June 30, June 30, (In thousands) 2022 2021 2022 2021 Revenues: Premiums: Life insurance $ 40,761 41,438 78,507 79,080 Accident and health insurance 280 291 566 634 Property insurance 1,183 1,097 2,515 2,144 Net investment income 15,892 15,320 31,379 30,564 Investment related gains (losses), net (5,016) 4,859 (5,598) 5,151 Other income 634 553 1,722 1,468 Total revenues $ 53,734 63,558 109,091 119,041 June 30, 2022 | 10-Q 34 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS Premium Income. Total premium income decreased $0.6 million and $0.3 million, or 1.4% and 0.3%, for the three and six months ended June 30, 2022, respectively, compared to the same periods in 2021. • Three months ended June 30, 2022 : Total premiums decreased primarily due to lower renewal premiums in both of our segments partially offset by an increase in first year premiums in our Life Insurance segment. Despite the increase in first year premiums in the Life Insurance segment, total first year premiums decreased by 5.4% year-over-year during the second quarter due to a decrease in the Home Service segment, which we believe is associated with a change in the mix of business sold as we introduce new products. • Six months ended June 30, 2022: Total premiums decreased slightly as higher renewal premiums were more than offset by a decrease in first year premiums. We believe the increase in renewal premiums resulted primarily from strong sales in 2021 and continued retention and collection efforts. The first year premiums decrease occurred in both of our segments. In our Life Insurance segment, we believe the decline is attributed to lower average premiums related to strong sales from our new international whole life product while the Home Service segment decline we believe is associated with a change in the mix of business as we continue the introduction of new products. Net Investment Income. A summary of our net investment income and annualized net investment income performance are summarized as follows: Three Months Ended Six Months Ended June 30, June 30, (In thousands, except for %) 2022 2021 2022 2021 Gross investment income: Fixed maturity securities $ 14,259 13,796 28,142 27,896 Equity securities 144 216 295 423 Policy loans 1,517 1,563 3,106 3,207 Long-term investments 576 180 1,099 253 Other investment income 31 5 52 20 Total investment income 16,527 15,760 32,694 31,799 Investment expenses (635) (440) (1,315) (1,235) Net investment income $ 15,892 15,320 31,379 30,564 Net investment income, annualized 62,758 61,128 Average invested assets, at amortized cost 1,476,336 1,447,241 Annualized yield on average invested assets 4.25 % 4.22 % Income from our fixed maturity securities constitutes the vast majority of our net investment income, as they comprise 88.7% of our investment portfolio based on fair value. Our total investment income increased by 4.9% and 2.8% for the three and six months ended June 30, 2022, respectively, compared to the same periods in 2021, primarily due to a higher average portfolio yield on our fixed maturity securities in the current year period. The activity in the six months ended June 30, 2021 included income from a non-recurring "make-whole" call redemption. Long-term investment income increased as our private equity investment asset base grew and we received some early distribution income. Investment Related Gains (Losses), Net. We recorded investment related losses of $5.0 million and $5.6 million during the three and six months ended June 30, 2022 as compared to investment related gains of $4.9 million and $5.2 million during the same prior year periods. The gains and losses are primarily related to the fair value change June 30, 2022 | 10-Q 35 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS of our limited partnership and equity securities investments, mostly in our Life Insurance segment, due to the inflationary environment and volatility in equity markets. Other Income. Other income consists primarily of supplemental contracts issued to policyholders in our Life Insurance segment upon the surrender or maturity of their original policies. We believe this income has been increasing over the past few quarters due to our retention initiatives. BENEFITS AND EXPENSES Three Months Ended Six Months Ended June 30, June 30, (In thousands) 2022 2021 2022 2021 Benefits and expenses: Insurance benefits paid or provided: Claims and surrenders $ 27,097 29,296 55,531 59,885 Increase in future policy benefit reserves 9,378 6,287 15,947 11,519 Policyholders' dividends 1,515 1,475 2,868 2,781 Total insurance benefits paid or provided 37,990 37,058 74,346 74,185 Commissions 8,924 8,801 16,597 16,958 Other general expenses 10,400 11,503 21,430 22,885 Capitalization of deferred policy acquisition costs (6,184) (5,787) (10,965) (10,772) Amortization of deferred policy acquisition costs 5,970 6,074 11,787 12,257 Amortization of cost of insurance acquired 263 309 499 676 Total benefits and expenses $ 57,363 57,958 113,694 116,189 Claims and surrenders benefits and other general expenses are our primary expenses, both of which decreased in the three and six months ended June 30, 2022 as compared to same periods in 2021. Claims and Surrenders. Three Months Ended Six Months Ended June 30, June 30, (In thousands) 2022 2021 2022 2021 Claims and Surrenders: Death claim benefits $ 5,873 6,544 12,890 15,484 Surrender benefits 11,607 13,529 23,866 26,336 Endowment benefits 2,152 2,251 4,286 4,652 Matured endowment benefits 6,133 5,662 12,267 10,784 Property claims 163 315 305 636 A&H and other policy benefits 1,169 995 1,917 1,993 Total claims and surrenders $ 27,097 29,296 55,531 59,885 Death claim benefits decreased 10.3% and 16.8% for the three and six months ended June 30, 2022, respectively, compared to the same periods in 2021. Death claims in our Life Insurance segment decreased 17.8% and 44.7% during the three and six months ended June 30, 2022, respectively, and Home Service Insurance segment claims decreased 7.3% and 5.2% during the three and six months ended June 30, 2022, respectively, compared to the same periods in 2021. The decrease in both segments during the three and six months ended June 30, 2022 June 30, 2022 | 10-Q 36 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS compared to the same periods last year was due primarily to a lower volume of reported death claims, including COVID-19 related deaths, and lower average death claim amounts. Surrender benefits decreased 14.2% and 9.4% for the three and six months ended June 30, 2022, respectively, compared to the same periods in 2021. Surrender benefits represented less than 0.5% of total direct ordinary whole life insurance in force of $4.7 billion as of June 30, 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 8.3% and 13.8% for the three and six months ended June 30, 2022, respectively, compared to the same periods 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. Other General Expenses. General expenses decreased 9.6% and 6.4% in the three and six months ended June 30, 2022, respectively, compared to the same periods in 2021. We had lower operating expenses primarily due to lower employee benefit costs in the three months ended June 30, 2022. In the six months ended June 30, 2022 we had lower consulting fees paid to our former CEO and lower professional fees incurred in connection with the change in control of the Company in 2021, partially offset by higher expenses associated with our home office and travel and convention expenses as we return to pre-pandemic business operations. 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 better 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 49.2% and 38.4% for the three and six months ended June 30, 2022, respectively, compared to the same periods in 2021 due to better sales and persistency. In addition, the change in future policy reserves for the three and six months ended June 30, 2021 was lower due to an $0.8 million adjustment for the conversion of a small block of policies to our new actuarial valuation system for our Life Insurance segment during the second quarter of 2021. 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. 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 period to period 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. June 30, 2022 | 10-Q 37 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS The following table shows income (loss) before federal income taxes by segment during the periods indicated. Three Months Ended Six Months Ended June 30, June 30, (In thousands) 2022 2021 2022 2021 Income (loss) before federal income tax expense: Segments: Life Insurance $ (2,363) 7,127 (1,333) 7,021 Home Service Insurance 106 538 (1,134) (220) Total segments (2,257) 7,665 (2,467) 6,801 Other Non-Insurance enterprises (1,372) (2,065) (2,136) (3,949) Total income (loss) before federal income tax expense $ (3,629) 5,600 (4,603) 2,852 LIFE INSURANCE We had a net loss of $2.4 million and $1.3 million, respectively in the three and six months ended June 30, 2022 as compared to net income of $7.1 million and $7.0 million, respectively, in the prior year periods. As discussed above in "Financial Highlights" this change was due primarily to investment related losses in the current year periods. We recorded investment related losses of $4.0 million and $4.3 million during the three and six months ended June 30, 2022, respectively, as compared to investment related gains of $4.6 million and $4.5 million during the same prior year periods. All other revenues (premiums, net investment income and other income) collectively increased in the three and six months ended June 30, 2022 as compared to the same prior year periods due primarily to higher net investment income. Total benefits and expenses in this segment benefited in each of the three and six months ended June 30, 2022 from lower claims and surrender benefits; however, increased overall in both periods compared to the prior year periods due to the increase in insurance issued and better persistency, which led to a higher increase in future policy benefit reserves and commissions. June 30, 2022 | 10-Q 38 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 Six Months Ended June 30, June 30, (In thousands) 2022 2021 2022 2021 Revenues: Premiums $ 29,834 30,138 56,765 57,201 Net investment income 12,347 11,879 24,318 23,477 Investment related gains (losses), net (3,984) 4,644 (4,277) 4,536 Other income 633 553 1,721 1,466 Total revenues 38,830 47,214 78,527 86,680 Benefits and expenses: Insurance benefits paid or provided: Claims and surrenders 21,568 23,531 43,026 46,801 Increase in future policy benefit reserves 7,576 4,054 12,706 7,712 Policyholders' dividends 1,509 1,466 2,859 2,762 Total insurance benefits paid or provided 30,653 29,051 58,591 57,275 Commissions 4,792 4,398 8,598 8,629 Other general expenses 5,358 5,147 11,049 10,373 Capitalization of deferred policy acquisition costs (4,307) (3,816) (7,613) (7,377) Amortization of deferred policy acquisition costs 4,613 5,200 9,095 10,548 Amortization of cost of insurance acquired 84 107 140 211 Total benefits and expenses 41,193 40,087 79,860 79,659 Income (loss) before federal income tax expense $ (2,363) 7,127 (1,333) 7,021 Life Insurance segment premium breakout is detailed below. Three Months Ended Six Months Ended June 30, June 30, (In thousands) 2022 2021 2022 2021 Premiums: First year $ 2,766 2,724 4,753 5,203 Renewal 27,068 27,414 52,012 51,998 Total premiums $ 29,834 30,138 56,765 57,201 Premiums. Total premiums for three and six months ended June 30, 2022 decreased 1.0% and 0.8%, respectively, compared to the same periods in 2021. We derive most of our premium revenue in the Life Insurance segment from renewal premiums, which decreased 1.3% and increased slightly in the three and six months ended June 30, 2022, respectively, as compared to the same periods in 2021, which we believe was due to strong sales in 2021 and the success of our retention programs. First year premiums increased slightly for three months ended June 30, 2022 compared to the same period in 2021, which we believe is due to sales campaigns and our new international whole life product launched in March 2022. First year premiums decreased for the six months ended June 30, 2022 as compared to the same period in 2021. We believe that the decline is primarily related to a decline in production in June 30, 2022 | 10-Q 39 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS Taiwan due in part to COVID lock downs and continued decline in production in Venezuela due to one of our top distributors leaving our Company. As we discussed in Item 3 - Legal Proceedings in our Annual Report on Form 10-K for the year ended December 31, 2021, we believe these distributors are illegally competing with us and stealing our trade secrets and business. International Life Insurance Premiums. The following table sets forth, for our top five producing countries, our direct premiums from our international life insurance business for the three and six months ended June 30, 2022 and 2021. Three Months Ended Six Months Ended June 30, June 30, (In thousands) 2022 2021 2022 2021 Country: Colombia $ 6,365 6,023 $ 11,896 11,267 Taiwan 4,163 4,743 8,678 9,227 Venezuela 4,204 4,496 7,955 8,864 Ecuador 3,319 3,346 6,094 6,267 Argentina 2,731 2,408 4,438 4,236 Other Non-U.S. 10,880 10,083 18,570 18,188 Total $ 31,662 31,099 57,631 58,049 Domestic Life Insurance Premiums. Domestic premiums in our Life Insurance segment were $1.2 million and $2.2 million in the three and six months ended June 30, 2022, respectively, compared to $1.3 million and $2.5 million in the same prior year periods. Our domestic in force business results primarily from blocks of business of insurance companies we have acquired over the years and ceased selling ordinary life in 2017. We currently offer credit life, credit disability and critical illness products domestically. Net Investment Income . Our net investment income increased by 3.9% and 3.6% for the three and six months ended June 30, 2022, respectively, compared to the same periods in 2021 from higher average portfolio yield in the current year period. Fixed maturity securities income for the six months ended June 30, 2021 included a non-recurring "make-whole" call redemption. Long-term investment income increased as our limited partnership investments asset base grew and we received some early distribution income. Investment Related Gains (Losses), Net. The investment related losses for the three and six months ended June 30, 2022 were a result of the change in estimated fair market value for our limited partnerships, as previously discussed. June 30, 2022 | 10-Q 40 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS Claims and Surrenders. The following table shows the primary claims and surrender benefits paid within the Life Insurance segment for the three and six months ended June 30, 2022 compared to the same periods in 2021. Three Months Ended Six Months Ended June 30, June 30, (In thousands) 2022 2021 2022 2021 Claims and Surrenders: Death claim benefits $ 1,519 1,849 2,509 4,533 Surrender benefits 10,776 12,978 22,413 25,229 Endowment benefits 2,149 2,248 4,278 4,647 Matured endowment benefits 5,981 5,489 11,988 10,469 A&H and other policy benefits 1,143 967 1,838 1,923 Total claims and surrenders $ 21,568 23,531 43,026 46,801 During the three and six months ended June 30, 2022 and 2021, the majority of our claims and surrender benefits in our Life Insurance segment were related to payment of surrender benefits and matured endowment benefits. Surrenders decreased 17.0% and 11.2% in the three and six months ended June 30, 2022, as compared to the prior year periods. We believe this improvement is due to the success of our retention programs aimed at curbing surrenders. Matured endowment benefits have generally been increasing but can fluctuate, which we expected due to the timing of maturities. Death claims benefits decreased for the three and six months ended June 30, 2022, as compared to the prior year periods. We believe that the COVID-19 pandemic contributed to high death claims in the 2021 period. Increase in Future Policy Benefit Reserves. The change in future policy benefit reserves increased 86.9% and 64.8% for the three and six months ended June 30, 2022, respectively, compared to the same periods in 2021 due to better sales and persistency. In addition, the change in future policy reserves for the three and six months ended June 30, 2021 was lower due to an $0.8 million adjustment for the conversion of a small block of policies to our new actuarial valuation system during the second quarter of 2021. Other General Expenses. General expenses increased in the three and six months ended June 30, 2022 compared to the same periods in 2021 due primarily to expenses associated with our home office and travel related expenses including our convention. We did not have a convention in 2021 due to the COVID-19 pandemic. HOME SERVICE INSURANCE Income before federal income tax expense in our Home Service Insurance segment decreased by $0.4 million and $0.9 million in the three and six months ended June 30, 2022, respectively, as compared to the prior year periods, driven by investment related losses due to the changes in the fair value of our equity securities. The effect of the investment related losses on pre-tax net income was partially offset by lower death benefits, fewer hurricane property claims and lower operating expenses in the current year periods. June 30, 2022 | 10-Q 41 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS Detailed results of operations for the Home Service Insurance segment for the periods indicated are as follows: Three Months Ended Six Months Ended June 30, June 30, (In thousands) 2022 2021 2022 2021 Revenues: Premiums $ 12,390 12,688 24,823 24,657 Net investment income 3,283 3,243 6,527 6,588 Investment related gains (losses), net (925) 206 (1,167) 429 Other income 1 — 1 2 Total revenues 14,749 16,137 30,184 31,676 Benefits and expenses: Insurance benefits paid or provided: Claims and surrenders 5,529 5,765 12,505 13,084 Increase in future policy benefit reserves 1,802 2,233 3,241 3,807 Policyholders' dividends 6 9 9 19 Total insurance benefits paid or provided 7,337 8,007 15,755 16,910 Commissions 4,132 4,403 7,999 8,329 Other general expenses 3,515 4,084 7,865 7,878 Capitalization of deferred policy acquisition costs (1,877) (1,971) (3,352) (3,395) Amortization of deferred policy acquisition costs 1,357 874 2,692 1,709 Amortization of cost of insurance acquired 179 202 359 465 Total benefits and expenses 14,643 15,599 31,318 31,896 Income (loss) before federal income tax expense $ 106 538 (1,134) (220) Premiums. Total premium revenue declined by 2.3% in the three months ended June 30, 2022 compared to the same period in 2021 which we believe is associated with the change in our business mix as we continue the strategic transformation of this business and introduce new products, which are lower cost to policyholders than some of our legacy products. Premium revenue increased by 0.7% in the six months ended June 30, 2022 compared to the same period in 2021. This increase is due to higher renewal premiums during the six months ended June 30, 2022 as a result of collection efforts by our independent agents as well as the impact from a pricing increase on our property casualty business products. June 30, 2022 | 10-Q 42 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 Six Months Ended June 30, June 30, (In thousands) 2022 2021 2022 2021 Claims and Surrenders: Death claim benefits $ 4,354 4,695 10,381 10,951 Surrender benefits 831 551 1,453 1,107 Endowment benefits 3 3 8 5 Matured endowment benefits 152 173 279 315 Property claims 163 315 305 636 A&H and other policy benefits 26 28 79 70 Total claims and surrenders $ 5,529 5,765 12,505 13,084 The majority of claims and surrender benefits in our Home Service Insurance segment relate to death claim benefits. Death claim benefits decreased 7.3% and 5.2% in the three and six months ended June 30, 2022, respectively, compared to the same 2021 periods. The decrease in death claim benefits was due primarily to a slightly lower volume of reported claims, including less 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 a lower volume of reported claims and fewer hurricane property claims. Other General Expenses. General expenses decreased in the three months ended June 30, 2022 compared to the same period in 2021, primarily due to lower employee health benefit costs. OTHER NON-INSURANCE ENTERPRISES Three Months Ended Six Months Ended June 30, June 30, (In thousands) 2022 2021 2022 2021 Income (loss) before income tax expense $ (1,372) (2,065) (2,136) (3,949) This operating unit represents the administrative support entities to the insurance operations. Its 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 and six months ended June 30, 2022, the Other Non-Insurance Enterprises had a loss of $1.4 million and $2.1 million, respectively, compared to a loss of $2.1 million and $3.9 million for the same periods in 2021, as other general expenses decreased in the current year period due to payment of consulting fees to our former CEO and professional fees in connection with the change in control of the Company in 2021. INVESTMENTS Our investments are an integral part of our business success. Our cash and invested assets at June 30, 2022 were $1.4 billion, of which 87.4% 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. June 30, 2022 | 10-Q 43 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 June 30, 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 $ 13,856 1.0 % $ 15,070 0.9 % Corporate 734,762 51.9 % 893,008 54.0 % States and political subdivisions (1) 343,389 24.2 % 383,958 23.3 % Mortgage-backed (2) 110,014 7.8 % 133,795 8.1 % Asset-backed 34,879 2.5 % 44,676 2.7 % Foreign governments 104 — % 110 — % Total fixed maturity securities 1,237,004 87.4 % 1,470,617 89.0 % Cash and cash equivalents 22,407 1.5 % 27,294 1.7 % Other investments: Policy loans 78,586 5.5 % 80,307 4.9 % Equity securities 12,711 0.9 % 14,844 0.9 % Other long-term investments 66,002 4.7 % 57,399 3.5 % Total cash, cash equivalents and invested assets $ 1,416,710 100.0 % $ 1,650,461 100.0 % (1) Includes $146.8 million and $160.6 million of securities guaranteed by third parties at June 30, 2022 and December 31, 2021, respectively. (2) Includes $109.8 million and $136.5 million of U.S. Government-sponsored enterprises at June 30, 2022 and December 31, 2021, respectively. The carrying value of the Company’s fixed maturity securities investment portfolio at June 30, 2022 was $1.2 billion compared to $1.5 billion at December 31, 2021. As discussed above, this decline reflects the impact of interest rate sensitivity on the fair value of our fixed maturity securities. The distribution of the credit ratings of our portfolio of fixed maturity securities by carrying value as of June 30, 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 six months. Cash and cash equivalents decreased as of June 30, 2022 from December 31, 2021 due primarily to the reinvestment of funds in higher interest rate securities. Other long-term investments increased by $8.6 million as of June 30, 2022 from December 31, 2021 due to additional funding of our limited partnership investments. Obligations of States and Political Subdivisions The Company’s fixed maturity securities investment portfolio at June 30, 2022 and December 31, 2021 included $343.4 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). June 30, 2022 | 10-Q 44 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 June 30, 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 $ 15,036 14,574 3,862 3,794 — — 18,898 18,368 5.1 % AA 48,577 47,211 117,530 127,360 11,067 11,102 177,174 185,673 51.7 % A 15,847 16,082 94,993 101,882 4,599 4,408 115,439 122,372 34.1 % BBB 2,560 2,547 8,326 9,131 1,399 1,450 12,285 13,128 3.7 % BB and other 4,298 4,401 15,295 15,257 — — 19,593 19,658 5.4 % Total $ 86,318 84,815 240,006 257,424 17,065 16,960 343,389 359,199 100.0 % State and political subdivision fixed maturity securities excluding third-party guarantees AA $ 30,307 29,432 44,434 46,949 6,845 6,518 81,586 82,899 23.1 % A 28,543 28,496 124,179 134,577 7,159 7,138 159,881 170,211 47.4 % BBB 4,555 4,455 27,869 29,917 1,663 1,855 34,087 36,227 10.1 % BB and other 22,913 22,432 43,524 45,981 1,398 1,449 67,835 69,862 19.4 % Total $ 86,318 84,815 240,006 257,424 17,065 16,960 343,389 359,199 100.0 % 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 total municipal bond portfolio at June 30, 2022. (In thousands) Fair Value Amortized Cost % of Total Fair Value Education $ 58,278 62,222 17.0 % Utilities 53,540 55,118 15.6 % Transportation 38,807 44,071 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 June 30, 2022. The Company holds 20.5% and 12.6% of its municipal bond portfolio in Texas and California issuers, respectively, as of June 30, 2022. There were no other states or individual issuer holdings that represented or exceeded 10% of the total municipal bond portfolio as of June 30, 2022. June 30, 2022 | 10-Q 45 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 June 30, 2022. June 30, 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 $ 14,510 14,067 3,145 3,069 — — 17,655 17,136 AA 19,624 19,117 11,988 12,810 — — 31,612 31,927 A — — 18,745 23,096 — — 18,745 23,096 BBB — — 1,908 1,823 — — 1,908 1,823 BB and other — — 510 503 — — 510 503 Total $ 34,134 33,184 36,296 41,301 — — 70,430 74,485 Texas state and political subdivision fixed maturity securities excluding third-party guarantees AA $ 27,953 27,183 3,058 3,013 — — 31,011 30,196 A 5,017 4,856 25,369 30,251 — — 30,386 35,107 BBB 1,164 1,145 5,307 5,249 — — 6,471 6,394 BB and other — — 2,562 2,788 — — 2,562 2,788 Total $ 34,134 33,184 36,296 41,301 — — 70,430 74,485 The table below represents the Company's detailed exposure to municipal bond portfolio in California at June 30, 2022. June 30, 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 $ 1,543 1,574 26,605 30,812 2,559 2,730 30,707 35,116 A 1,353 1,650 6,651 8,102 — — 8,004 9,752 BBB — — 866 865 — — 866 865 BB and other — — 3,787 3,777 — — 3,787 3,777 Total $ 2,896 3,224 37,909 43,556 2,559 2,730 43,364 49,510 California state and political subdivision fixed maturity securities excluding third-party guarantees AA $ — — 2,434 3,062 — — 2,434 3,062 A 2,896 3,224 13,658 16,459 2,559 2,730 19,113 22,413 BBB — — 3,923 4,043 — — 3,923 4,043 BB and other — — 17,894 19,992 — — 17,894 19,992 Total $ 2,896 3,224 37,909 43,556 2,559 2,730 43,364 49,510 June 30, 2022 | 10-Q 46 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS IMPAIRMENT CONSIDERATIONS RELATED TO INVESTMENTS IN FIXED MATURITY AND EQUITY SECURITIES The Company did not record any credit valuation allowances on fixed maturity securities in either of the three and six months ended June 30, 2022 or 2021. 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) June 30, 2022 December 31, 2021 Fixed maturity securities $ 1,237,004 1,470,617 Cash and cash equivalents 22,407 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 June 30, 2022, we had $22.4 million in cash and cash equivalents and $1.4 billion in invested assets. As described above, cash and cash equivalents decreased as of June 30, 2022 from December 31, 2021 due primarily to the reinvestment of funds in higher interest rate securities and the decline in the fair value of our fixed maturity securities is due to rising interest rates. As discussed in Part I, Item 1 . Note 5 . Investments in the notes to our consolidated financial statements herein, we expect the fair value to recover as the securities approach maturity. We have only recorded a $0.3 million unrealized loss on securities due in 1 year or less. 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 (also 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 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. June 30, 2022 | 10-Q 47 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS The Credit Facility provides additional liquidity to the Company for short-term and longer-term needs. As of June 30, 2022, we have not borrowed any money under the Credit Facility and have no immediate plans to do so. INSURANCE COMPANY SUBSIDIARY LIQUIDITY AND CAPITAL RESOURCES The liquidity requirements of our insurance operations are primarily met by premium revenues, investment income and investment maturities 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 six months ended June 30, 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 Operating Activities. 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 six months ended June 30, 2022, our operations provided $22.3 million in net cash. Cash from Investing Activities. 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 $27.9 million for the six months ended June 30, 2022. Due to the higher interest rate environment, we purchased $64.7 million in fixed maturity securities and we also used $14.7 million to purchase other long-term investments. Our 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 $0.7 million in the six months ended June 30, 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 had 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. However, we have been aggressively managing policyholder retention efforts and in the six months ended June 30, 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 June 30, 2022, 39% of the Company's total insurance in force was in endowment products. Approximately 14% 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. June 30, 2022 | 10-Q 48 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS Death claims, which were high in 2021 due in part to COVID, have decreased to pre-pandemic levels during the first six months of 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. 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 June 30, 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 June 30, 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 June 30, 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. June 30, 2022 | 10-Q 49 Table of Contents CITIZENS, INC.