What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-11-04 compared with 2022-08-04 · 217 added, 216 removed, 430 unchanged (50% of the section changed)

24 unchanged sentences

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

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 September 30, 2022 and the material changes in our results of operations for the three and nine months ended September 30, 2022 as compared to the same periods in 2021.

September 30, 2022 | 10-Q 31

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.

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

5 unchanged sentences

• 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

Premium revenues and investment income are our two primary sources of income and thus key to our profitability.

Premium revenues consist of both new sales (first year premiums) and "resells" ( i.e ., retaining the policy), which lead to renewal premiums.

We experienced slight increases, 1.3% and 0.2%, respectively, in premium revenue in the three and nine months ended September 30, 2022 compared to the prior year periods.

Premium revenues increased in both periods primarily due to higher property insurance premiums.

Higher property insurance premiums were the result of the lack of hurricanes in Louisiana in the 2022 periods, as property insurance premiums in 2021 were negatively impacted due to reinstatement premiums we paid for catastrophic reinsurance as a result of Hurricane Ida.

Our net investment income increased during both the three and nine months ended September 30, 2022 compared to the same prior year periods due primarily to a growing diversified invested asset base and reinvestment into a higher interest rate environment.

September 30, 2022 | 10-Q 32

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

Payment of policyholder benefits for death claims and surrenders and operating expenses are our largest expenses and thus also key to our profitability.

In both the three and nine months ending in September 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 COVID-19 related deaths, which have decreased in the 2022 periods.

While surrenders decreased in the first nine months of 2022, they slightly increased during the three month period due to higher surrenders in our Home Service Insurance segment.

We believe the decrease in surrenders in the nine month period was in large part due to our retention initiatives;

however, we believe the impact of inflation and curtailment of COVID-19 relief government aid in 2022 is negatively impacting retention in our Home Service Insurance segment.

Our general operating expenses for the three months ended September 30, 2022 increased compared to the prior year period due primarily to our international sales convention in 2022, which was cancelled in the prior year period due to COVID, as well as severance costs.

General operating expenses in the nine months ended September 30, 2022 decreased compared to the prior year period, as we did not incur fees in the current year related to the change in control of the Company nor consulting fees paid to our former CEO as we did in 2021.

These savings were partially offset by higher home office and convention expenses in the current year.

September 30, 2022 | 10-Q 33

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

$5.0 million and $1.4 million, respectively, in the prior year periods.

FINANCIAL HIGHLIGHTS

Due to the impact inflation has had on market volatility and rising interest rates during the first nine months of 2022, we had net losses of $5.1 million and $10.0 million, respectively, in the three and nine months ended September 30, 2022, compared to net losses of $2.8 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.

Changes in the fair value of our limited partnership investments drove investment related losses of $5.0 million and $10.6 million, respectively, in the current year periods, compared to investment related gains of $2.1 million and $7.3 million in the prior year periods, respectively.

We did not sell these investments during 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.

Due to these investment related losses driving our net loss, loss per share of Class A common stock was $0.20 for the nine months ended September 30, 2022.

All other revenues (premiums, net investment income and other income) collectively increased by $1.7 million and $2.5 million, respectively, in the three and nine months ended September 30, 2022 as compared to the same prior year periods.

Our total benefits and expenses decreased by $3.3 million and $5.8 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.

Insurance premiums and investment income are our primary sources of revenue and increased 2.9% in the three months ended September 30, 2022 compared to the same period in 2021.

• Insurance premiums increased by $0.5 million due primarily to higher first year premiums in our Life Insurance segment and higher property insurance premiums due to the negative impact of Hurricane Ida in 2021 described above, partially offset by a decrease in renewal premiums in both of our segments.

• Net investment income increased by $1.2 million, or 7.4%, from a higher average portfolio yield in the current year period as well as a growing invested asset base.

Insurance premiums and investment income collectively increased 1.3% in the nine months ended September 30, 2022 as compared to the same period in 2021.

• Insurance premiums increased by $0.3 million, or 0.2% as due to the increased property insurance premiums, partially offset by a decrease in first year premiums in both of our segments.

• Net investment income increased by $2.0 million, or 4.3% for the same reasons discussed above.

September 30, 2022 | 10-Q 34

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

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:

In the three months ended September 30, 2022 compared to the same period in 2021, total benefits and expenses decreased by $3.3 million due primarily to:

• a $5.2 million decrease in insurance benefits paid or provided due to:

◦ $3.8 million lower future policy benefit reserves, which were a result of higher matured endowments in the quarter, partially offset by increases to the future policy benefit reserves due to improved first year sales and better persistency;

◦ $1.1 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;

• $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;

• $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

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

Financial Condition at June 30, 2022

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, partially offset by an increase in matured endowment benefits;

• both of the above partially offset by a $1.0 million increase in other general expenses.

In the nine months ended September 30, 2022 compared to the same period in 2021, total benefits and expenses decreased by $5.8 million due primarily to:

• a $5.4 million decrease in claims and surrender benefits due primarily to a decrease in COVID-19 related death benefits paid in 2022 and a decrease in surrender benefits as we have focused efforts on retaining policyholders;

• a $0.4 million decrease in other general expenses.

Financial Condition at September 30, 2022

• Total assets of $1.5 billion.

1 unchanged sentence

fixed maturity securities comprised 88.3% of total investments.

• Total stockholders' equity of $0.1 billion.

• $4.7 billion of direct insurance in force.

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.

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 nine months ended September 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.

Because the vast majority of our total investments are invested in fixed maturity securities, we reported a pre-tax net unrealized loss of $213.7 million on our available-for-sale securities at September 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.

These unrealized losses led to stockholders' deficit of $(14.2) million at September 30, 2022.

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.

2 unchanged sentences

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:

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

September 30, 2022 | 10-Q 35

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

2022 or beyond.

While we don't believe that the COVID-19 pandemic materially impacted our results of operations for the three and nine months ended September 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;

5 unchanged sentences

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

June 30, 2022 | 10-Q 33

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

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

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

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

Nine Months Ended September 30, 2022 2021

Issued Number of

3 unchanged sentences

Issued Average Policy

Ordinary Life Policies:

Life Insurance $ 253,040,853 3,022 $ 83,733 $ 172,645,808 2,873 $ 60,093

2 unchanged sentences

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.

These new products helped drive the 45.3% increase in total insurance issued in the nine months ended September 30, 2022, from $315.3 million in the first nine months of 2021 to $458.3 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.

The growth in our Life Insurance segment is attributable to strong sales from our new international whole life product, which accounted for 31% of total insurance issued in this segment for the nine months ended September 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.

September 30, 2022 | 10-Q 36

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

CONSOLIDATED RESULTS OF OPERATIONS

1 unchanged sentence

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,

Three Months Ended Nine Months Ended

September 30, September 30,

(In thousands) 2022 2021 2022 2021

6 unchanged sentences

Total revenues $ 56,176 61,584 165,267 180,625

June 30, 2022 | 10-Q 34

Premium Income.

Total premium income increased $0.5 million and $0.3 million, or 1.3% and 0.2%, for the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021.

• Three months ended September 30, 2022 :

Total premiums increased due to higher property insurance premiums, which were the result of the lack of hurricanes in Louisiana in 2022, as property insurance premiums in 2021 were negatively impacted due to reinstatement premiums we paid for catastrophic reinsurance as a result of Hurricane Ida.

Life insurance premiums decreased 1.9%, as higher first year premiums in our Life Insurance segment were offset by lower renewal premiums in both segments.

• Nine months ended September 30, 2022:

Total premiums increased slightly due to the higher property insurance premiums as described above.

Life insurance premiums declined 1.1%.

We believe the decline in our first year premiums is attributed to lower average premiums associated with a change in the mix of business as we continue the introduction of new products.

We believe the decline in Life Insurance segment renewal premium is due to the impact of increasing matured endowment benefits.

September 30, 2022 | 10-Q 37

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,

Three Months Ended Nine Months Ended

September 30, September 30,

(In thousands, except for %) 2022 2021 2022 2021

12 unchanged sentences

Income from our fixed maturity securities constitutes the vast majority of our net investment income, as they comprise 88.3% 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.

Our total investment income increased by 7.9% and 4.5% for the three and nine months ended September 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.

Long-term investment income increased as our private equity investment asset base grew.

Our yield increased 6 basis points to 4.30% in the first nine months of 2022 compared to the prior year period due to the rising interest rate environment.

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

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.

We recorded investment related losses of $5.0 million and $10.6 million during the three and nine months ended September 30, 2022, respectively, as compared to investment related gains of $2.1 million and $7.3 million during the same prior year periods.

The gains and losses are primarily related to the fair value change of our limited partnership and equity securities investments, mostly in our Life Insurance segment, due to the inflationary environment and volatility in equity markets.

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

Other Income.

1 unchanged sentence

We believe this income has been increasing over the past few quarters due to our retention initiatives.

September 30, 2022 | 10-Q 38

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

BENEFITS AND EXPENSES

Three Months Ended Six Months Ended

June 30, June 30,

Three Months Ended Nine Months Ended

September 30, September 30,

(In thousands) 2022 2021 2022 2021

11 unchanged sentences

Total benefits and expenses $ 60,963 64,311 174,657 180,500

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 benefits and other general expenses are our primary expenses.

Total benefits and expenses decreased in the three and nine months ended September 30, 2022 as compared to same periods in 2021.

Claims and Surrenders.

Three Months Ended Six Months Ended

June 30, June 30,

Three Months Ended Nine Months Ended

September 30, September 30,

(In thousands) 2022 2021 2022 2021

7 unchanged sentences

Total claims and surrenders $ 30,729 31,816 86,260 91,701

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

Death claim benefits decreased 37.4% and 24.7% for the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021.

These decreases in both segments were due primarily to a lower volume of reported death claims, including COVID-19 related deaths.

Surrender benefits decreased 6.0% for the nine months ended September 30, 2022, compared to the same period in 2021.

Surrender benefits represented less than 0.8% of total direct ordinary whole life insurance in force of $4.7 billion as of September 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;

however, we believe the impact of inflation and curtailment of COVID-19 relief government aid in 2022 is negatively impacting retention in our Home Service Insurance segment.

September 30, 2022 | 10-Q 39

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.

Matured endowment benefits increased 98.1% and 37.7% for the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021.

We anticipated this increase based upon the contractual maturity dates.

Explanation of other benefits and expenses

Other General Expenses.

General expenses increased 9.6% and decreased 1.3% in the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021.

General expenses for three months ended September 30, 2022 increased primarily due to expenses related to our sales convention, which we did not hold in 2021 due to COVID, as well as severance costs.

General operating expenses in the nine months ended September 30, 2022 decreased as compared to the prior year period, as in 2021 we paid consulting fees to our former CEO and incurred professional fees in connection with the change in control of the Company.

These savings in 2022 were partially offset by higher home office and travel and convention expenses in the current year.

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.

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 generally increase when we have a larger 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.

Compared to the 2021 periods, the change in future policy benefit reserves decreased 34.9% in the three months ended September 30, 2022 due to the expected impact of matured endowments despite the increase in insurance issued, and increased 2.8% for the nine months ended September 30, 2022, due to significantly higher sales.

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.

9 unchanged sentences

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

September 30, 2022 | 10-Q 40

CITIZENS, INC.

1 unchanged sentence

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,

Three Months Ended Nine Months Ended

September 30, September 30,

(In thousands) 2022 2021 2022 2021

6 unchanged sentences

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.

We had a net loss of $2.9 million and $4.3 million, respectively in the three and nine months ended September 30, 2022 as compared to net income of $1.7 million and $8.7 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.

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

We recorded investment related losses of $4.4 million and $8.6 million during the three and nine months ended September 30, 2022, respectively, as compared to investment related gains of $1.2 million and $5.7 million during the same prior year periods.

All other revenues (premiums, net investment income and other income) collectively increased in the three and nine months ended September 30, 2022 as compared to the same prior year periods due primarily to higher net investment income.

Total benefits and expenses in this segment slightly decreased in each of the three and nine months ended September 30, 2022.

September 30, 2022 | 10-Q 41

CITIZENS, INC.

1 unchanged sentence

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,

Three Months Ended Nine Months Ended

September 30, September 30,

(In thousands) 2022 2021 2022 2021

18 unchanged sentences

Life Insurance segment premium breakout is detailed below.

Three Months Ended Six Months Ended

June 30, June 30,

Three Months Ended Nine Months Ended

September 30, September 30,

(In thousands) 2022 2021 2022 2021

2 unchanged sentences

Total premiums $ 31,696 32,198 88,461 89,399

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

Total premiums for three and nine months ended September 30, 2022 decreased 1.6% and 1.0%, 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 2.2% and 0.8% in the three and nine months ended September 30, 2022, respectively, as compared to the same periods in 2021.

First year premiums increased slightly for three months ended September 30, 2022 compared to the same period in 2021, which we believe is due to sales campaigns and our new international whole life product, which launched in March 2022.

First year premiums decreased for the nine months ended September 30, 2022 as compared to the same period in 2021.

We believe that the decline is primarily related to a decline in production in Taiwan due in part to COVID-19 lock downs and

September 30, 2022 | 10-Q 42

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.

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,

The following table sets forth, for our top five producing countries, our direct premiums from our international life insurance business for the three and nine months ended September 30, 2022 and 2021.

Three Months Ended Nine Months Ended

September 30, September 30,

(In thousands) 2022 2021 2022 2021

8 unchanged sentences

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.

Domestic premiums in our Life Insurance segment were $1.2 million and $3.4 million in the three and nine months ended September 30, 2022, respectively, compared to $1.2 million and $3.7 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 as we 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.

Our net investment income increased by 6.8% and 4.7% for the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021 from higher average portfolio yield in the current year period.

Long-term investment income increased as our limited partnership investments asset base grew.

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

The investment related losses for the three and nine months ended September 30, 2022 were a result of the change in estimated fair market value for our limited partnerships, as previously discussed.

September 30, 2022 | 10-Q 43

CITIZENS, INC.

1 unchanged sentence

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,

The following table shows the primary claims and surrender benefits paid within the Life Insurance segment for the three and nine months ended September 30, 2022 compared to the same periods in 2021.

Three Months Ended Nine Months Ended

September 30, September 30,

(In thousands) 2022 2021 2022 2021

6 unchanged sentences

Total claims and surrenders $ 24,742 22,565 67,768 69,366

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.

During the three and nine months ended September 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 0.4% and 7.7% in the three and nine months ended September 30, 2022, respectively, as compared to the same 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.

Matured endowment benefits have generally been increasing but can fluctuate, which we expected due to the contractual timing of maturities.

Death claims benefits decreased for the three and nine months ended September 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.

The change in future policy benefit reserves decreased 35.5% as a result of reserves released from higher matured endowment benefits offsetting increases in insurance issued and better persistency for the three months ended September 30, 2022, compared to the same period in 2021.

The change in future policy benefit reserves increased 9.7% for the nine months ended September 30, 2022 compared to the same period in 2021 due to increases in insurance issued and improved persistency more than offset the release of reserves associated with higher matured endowment benefits.

In addition, the change in future policy reserves for the nine months ended September 30, 2021 was lower due to an $0.8 million adjustment for the conversion of a small block of policies to our new actuarial valuation system 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.

General expenses increased in the three and nine months ended September 30, 2022 compared to the same periods in 2021 due primarily to expenses associated with our home office and expenses related to our convention and severance costs.

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

We had a net loss before federal income tax expense in our Home Service Insurance segment which decreased by $3.4 million and $2.5 million in the three and nine months ended September 30, 2022, respectively, as compared to the prior year periods, driven by decreases in death claim benefits and fewer hurricane property claims, partially offset by investment related losses due to the changes in the fair value of our equity securities.

September 30, 2022 | 10-Q 44

CITIZENS, INC.

1 unchanged sentence

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,

Three Months Ended Nine Months Ended

September 30, September 30,

(In thousands) 2022 2021 2022 2021

16 unchanged sentences

Total benefits and expenses 15,900 18,431 47,218 50,327

Income (loss) before federal income tax expense $ 106 538 (1,134) (220)

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

Loss before federal income tax expense $ (656) (4,099) (1,790) (4,319)

Total premium revenue increased by 9.4% in the three months ended September 30, 2022 compared to the same period in 2021 due to the negative impact Hurricane Ida had on property premiums in 2021.

We believe that our premium revenue is impacted by changes 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 3.4% in the nine months ended September 30, 2022 compared to the same period in 2021.

This increase is due to higher renewal premiums during the nine months ended September 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 and the change to property premiums due to the prior year impact of Hurricane Ida.

September 30, 2022 | 10-Q 45

CITIZENS, INC.

2 unchanged sentences

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

Three Months Ended Six Months Ended

June 30, June 30,

Three Months Ended Nine Months Ended

September 30, September 30,

(In thousands) 2022 2021 2022 2021

8 unchanged sentences

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.

Death claim benefits decreased 29.8% and 14.5% in the three and nine months ended September 30, 2022, respectively, compared to the same 2021 periods.

The decrease in death claim benefits was due primarily to a 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.

Surrender benefits increased for the three and nine months ended September 30, 2022, compared to the same 2021 periods.

We believe the impact of inflation and curtailment of COVID-19 relief government aid in 2022 is negatively impacting persistency.

Property claims decreased due to no hurricanes impacting Louisiana in the 2022 periods.

Amortization of Deferred Policy Acquisition Costs.

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

Amortization has increased for the three and nine months ended September 30, 2022, compared to the same 2021 periods from changes in persistency and higher surrenders as discussed above.

OTHER NON-INSURANCE ENTERPRISES

Three Months Ended Six Months Ended

June 30, June 30,

Three Months Ended Nine Months Ended

September 30, September 30,

(In thousands)

5 unchanged sentences

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.

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.

Our cash and invested assets at September 30, 2022 were $1.3 billion, of which 86.9% 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

September 30, 2022 | 10-Q 46

CITIZENS, INC.

1 unchanged sentence

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

Carrying Value September 30, 2022 December 31, 2021

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

11 unchanged sentences

Total fixed maturity securities 1,161,048 86.9 % 1,470,617 89.0 %

Short-term investments 1,241 0.1 % — — %

Cash and cash equivalents 21,007 1.6 % 27,294 1.7 %

4 unchanged sentences

Total cash, cash equivalents and invested assets $ 1,335,887 100.0 % $ 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.

(1) Includes $133.4 million and $158.6 million of securities guaranteed by third parties at September 30, 2022 and December 31, 2021, respectively.

(2) Includes $100.6 million and $133.7 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.

Government-sponsored enterprises at September 30, 2022 and December 31, 2021, respectively.

The carrying value of the Company’s fixed maturity securities investment portfolio at September 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.

The distribution of the credit ratings of our portfolio of fixed maturity securities by carrying value as of September 30, 2022 did not materially change from December 31, 2021 – the weighted average was “A” at both dates.

Cash and cash equivalents decreased as of September 30, 2022 from December 31, 2021 due primarily to the reinvestment of funds in higher interest rate securities.

Other long-term investments increased by $5.3 million as of September 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

The Company’s fixed maturity securities investment portfolio at September 30, 2022 and December 31, 2021 included $315.3 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).

September 30, 2022 | 10-Q 47

CITIZENS, INC.

1 unchanged sentence

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.

Detailed below is a presentation by the Nationally Recognized Statistical Rating Organization ("NRSRO") rating of these holdings by funding type as of September 30, 2022.

General Obligation Special Revenue Other Total % Based on Amortized

17 unchanged sentences

Total $ 77,355 78,602 221,670 254,278 16,274 16,955 315,299 349,835 100.0 %

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

4 unchanged sentences

Transportation 39,511 48,061 12.5 %

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

The Company holds 21.1% and 12.8% of its municipal bond portfolio in Texas and California issuers, respectively, as of September 30, 2022.

There were no other states or individual issuer holdings that represented or exceeded 10% of the total municipal bond portfolio as of September 30, 2022.

September 30, 2022 | 10-Q 48

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

The table below represents the Company's detailed exposure to municipal bond portfolio in Texas at June 30, 2022.

June 30, 2022 General Obligation Special Revenue Other Total

The table below represents the Company's detailed exposure to municipal bonds in Texas at September 30, 2022.

General Obligation Special Revenue Other Total

(In thousands) Fair

16 unchanged sentences

Total $ 32,476 32,320 34,175 41,884 — — 66,651 74,204

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

The table below represents the Company's detailed exposure to municipal bonds in California at September 30, 2022.

General Obligation Special Revenue Other Total

(In thousands) Fair

7 unchanged sentences

BBB — — 866 865 — — 866 865

BB and other — — 3,787 3,777 — — 3,787 3,777

Total $ 2,669 3,230 35,273 43,835 2,346 2,730 40,288 49,795

5 unchanged sentences

Total $ 2,669 3,230 35,273 43,835 2,346 2,730 40,288 49,795

June 30, 2022 | 10-Q 46

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 nine months ended September 30, 2022 or 2021.

September 30, 2022 | 10-Q 49

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.

1 unchanged sentence

LIQUIDITY AND CAPITAL RESOURCES

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

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

(In thousands)

June 30, 2022 December 31, 2021

September 30, 2022 December 31, 2021

Fixed maturity securities $ 1,161,048 1,470,617

1 unchanged sentence

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

At September 30, 2022, we had $21.0 million in cash and cash equivalents and $1.3 billion in invested assets.

As described above, cash and cash equivalents decreased as of September 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.

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.

We have recorded a $0.1 million unrealized gain on securities due in one 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).

14 unchanged sentences

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

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

As of September 30, 2022, we have not borrowed any money under the Credit Facility and have no immediate plans to do so.

September 30, 2022 | 10-Q 50

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

2 unchanged sentences

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 have not had to liquidate a material amount of investments to pay our expenses and we did not do so in the nine months ended September 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.

2 unchanged sentences

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.

In the nine months ended September 30, 2022, our operations provided $39.8 million in net cash.

Cash from Investing Activities.

1 unchanged sentence

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.

Net cash used in investing activities totaled $46.1 million for the nine months ended September 30, 2022.

Due to the higher interest rate environment, we purchased $102.3 million in fixed maturity securities and we also used $18.2 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

2 unchanged sentences

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.

However, we have been aggressively managing policyholder retention efforts and in the nine months ended September 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.

As of September 30, 2022, 39% of the Company's total insurance in force was in endowment products.

Approximately 12% of the endowments in force will mature in the next five years.

3 unchanged sentences

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

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.

Death claims, which were high in 2021 due in part to COVID, have decreased to pre-pandemic levels during the first nine 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.

September 30, 2022 | 10-Q 51

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

Our domestic companies are subject to minimum capital requirements set by the NAIC in the form of risk-based capital ("RBC").

3 unchanged sentences

Additionally, we have a parental guarantee between Citizens and CICA, Citizens' wholly-owned subsidiary domiciled in Colorado, to maintain a RBC level above 350%.

At June 30, 2022, our domestic insurance subsidiaries were above the required minimum RBC levels.

At September 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.

Due to the rapidly rising interest rates that caused the increase in our unrealized losses reported in Other Comprehensive Income (Loss), CICA International fell below the required long-term business minimum solvency margin at September 30, 2022.

As the Bermuda Insurance Act of 1978 permits, we have requested a modification under Section 6C Act to remove the impact of the unrealized gains or losses from the minimum solvency margin requirement.

The BMA is currently evaluating our request and has not taken any action with respect to this matter.

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

3 unchanged sentences

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.

As of September 30, 2022, we have no additional contractual obligations or off-balance sheet arrangements other than those described in Part I.

Item 1, Note 7.

4 unchanged sentences

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

June 30, 2022 | 10-Q 49

September 30, 2022 | 10-Q 52

CITIZENS, INC.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis