CITIZENS, INC. 10-Q

Item 1. FINANCIAL STATEMENTS CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Balance Sheets (In thousands) September 30, 2022 December 31, 2021 Assets (Unaudited) Investments: Fixed maturity securities available-for-sale, at fair value (amortized cost: $ 1,374,777 and $ 1,343,755 in 2022 and 2021, respectively) $ 1,161,048 1,470,617 Equity securities, at fair value 11,789 14,844 Policy loans 78,085 80,307 Other long-term investments (portion measured at fair value $ 62,454 and $ 56,038 in 2022 and 2021, respectively) 62,717 57,399 Short-term investments 1,241 — Total investments 1,314,880 1,623,167 Cash and cash equivalents 21,007 27,294 Accrued investment income 16,615 16,197 Reinsurance recoverable 3,485 5,539 Deferred policy acquisition costs 140,727 140,380 Cost of insurance acquired 10,530 10,611 Current federal income tax receivable — 762 Deferred tax asset 3,273 — Property and equipment, net 13,310 14,074 Due premiums 10,551 10,748 Other assets (less allowance for losses of $ 344 and $ 111 in 2022 and 2021, respectively) 6,572 5,739 Total assets $ 1,540,950 1,854,511 See accompanying Notes to Consolidated Financial Statements. September 30, 2022 | 10-Q 2 Table of Contents CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Balance Sheets, Continued (In thousands, except share amounts) September 30, 2022 December 31, 2021 Liabilities and Stockholders' Equity (Deficit) (Unaudited) Liabilities: Policy liabilities: Future policy benefit reserves: Life insurance $ 1,299,924 1,278,987 Annuities 91,984 83,918 Accident and health 729 784 Dividend accumulations 40,483 37,760 Premiums paid in advance 38,437 40,690 Policy claims payable 7,979 14,590 Other policyholders' funds 37,935 30,690 Total policy liabilities 1,517,471 1,487,419 Commissions payable 1,772 2,285 Current federal income tax payable 469 — Deferred federal income tax payable — 15,456 Other liabilities 35,466 28,780 Total liabilities 1,555,178 1,533,940 Commitments and contingencies ( Note 7 ) Stockholders' Equity (Deficit): Common stock: Class A, no par value, 100,000,000 shares authorized, 53,756,692 and 53,170,413 shares issued and outstanding in 2022 and 2021, respectively, including shares in treasury of 3,751,396 in 2022 and 3,135,738 in 2021 267,988 265,561 Class B, no par value, 2,000,000 shares authorized, 1,001,714 shares issued and outstanding in 2022 and 2021, including shares in treasury of 1,001,714 in 2022 and 2021 3,184 3,184 Accumulated deficit ( 55,577 ) ( 45,565 ) Accumulated other comprehensive income (loss): Net unrealized gains (losses) on fixed maturity securities, net of tax ( 207,539 ) 117,492 Treasury stock, at cost ( 22,284 ) ( 20,101 ) Total stockholders' equity (deficit) ( 14,228 ) 320,571 Total liabilities and stockholders' equity (deficit) $ 1,540,950 1,854,511 See accompanying Notes to Consolidated Financial Statements. September 30, 2022 | 10-Q 3 Table of Contents CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited) Three Months Ended September 30, Nine Months Ended September 30, (In thousands, except per share amounts) 2022 2021 2022 2021 Revenues: Premiums: Life insurance $ 42,423 43,239 120,930 122,319 Accident and health insurance 299 311 865 945 Property insurance 1,153 ( 223 ) 3,668 1,921 Net investment income 16,604 15,454 47,983 46,018 Investment related gains (losses), net ( 4,991 ) 2,126 ( 10,589 ) 7,277 Other income 688 677 2,410 2,145 Total revenues 56,176 61,584 165,267 180,625 Benefits and Expenses: Insurance benefits paid or provided: Claims and surrenders 30,729 31,816 86,260 91,701 Increase in future policy benefit reserves 7,090 10,888 23,037 22,407 Policyholders' dividends 1,389 1,650 4,257 4,431 Total insurance benefits paid or provided 39,208 44,354 113,554 118,539 Commissions 9,210 9,115 25,807 26,073 Other general expenses 11,559 10,542 32,989 33,427 Capitalization of deferred policy acquisition costs ( 6,372 ) ( 6,026 ) ( 17,337 ) ( 16,798 ) Amortization of deferred policy acquisition costs 7,082 6,043 18,869 18,300 Amortization of cost of insurance acquired 276 283 775 959 Total benefits and expenses 60,963 64,311 174,657 180,500 Income (loss) before federal income tax ( 4,787 ) ( 2,727 ) ( 9,390 ) 125 Federal income tax expense (benefit) 344 72 622 1,475 Net income (loss) ( 5,131 ) ( 2,799 ) ( 10,012 ) ( 1,350 ) Per Share Amounts: Basic and diluted earnings (losses) per share of Class A common stock ( 0.10 ) ( 0.06 ) ( 0.20 ) ( 0.03 ) Basic and diluted earnings (losses) per share of Class B common stock — — — ( 0.01 ) Other Comprehensive Income (Loss): Unrealized gains (losses) on fixed maturity securities: Unrealized holding gains (losses) arising during period ( 89,713 ) ( 1,564 ) ( 343,989 ) ( 25,706 ) Reclassification adjustment for losses (gains) included in net income (loss) 43 ( 102 ) 78 ( 91 ) Unrealized gains (losses) on fixed maturity securities, net ( 89,670 ) ( 1,666 ) ( 343,911 ) ( 25,797 ) Income tax expense (benefit) on unrealized gains (losses) on fixed maturity securities ( 5,079 ) ( 271 ) ( 18,880 ) ( 32 ) Other comprehensive income (loss) ( 84,591 ) ( 1,395 ) ( 325,031 ) ( 25,765 ) Total comprehensive income (loss) $ ( 89,722 ) ( 4,194 ) ( 335,043 ) ( 27,115 ) See accompanying Notes to Consolidated Financial Statements. September 30, 2022 | 10-Q 4 Table of Contents CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Stockholders' Equity (Deficit) (Unaudited) Common Stock Accumulated deficit Accumulated other comprehensive income (loss) Treasury stock Total Stock- holders' equity (deficit) (In thousands) Class A Class B Balance at December 31, 2021 $ 265,561 3,184 ( 45,565 ) 117,492 ( 20,101 ) 320,571 Comprehensive income (loss): Net income (loss) — — ( 1,333 ) — — ( 1,333 ) Unrealized investment gains (losses), net — — — ( 124,217 ) — ( 124,217 ) Total comprehensive income (loss) — — ( 1,333 ) ( 124,217 ) — ( 125,550 ) Common stock issuance 1,788 — — — — 1,788 Stock-based compensation 93 — — — — 93 Balance at March 31, 2022 267,442 3,184 ( 46,898 ) ( 6,725 ) ( 20,101 ) 196,902 Comprehensive income (loss): Net income (loss) — — ( 3,548 ) — — ( 3,548 ) Unrealized investment gains (losses), net — — — ( 116,223 ) — ( 116,223 ) Total comprehensive income (loss) — — ( 3,548 ) ( 116,223 ) — ( 119,771 ) Common stock issuance 455 — — — — 455 Acquisition of treasury stock — — — — ( 1,300 ) ( 1,300 ) Stock-based compensation ( 47 ) — — — — ( 47 ) Balance at June 30, 2022 267,850 3,184 ( 50,446 ) ( 122,948 ) ( 21,401 ) 76,239 Comprehensive income (loss): Net income (loss) — — ( 5,131 ) — — ( 5,131 ) Unrealized investment gains (losses), net — — — ( 84,591 ) — ( 84,591 ) Total comprehensive income (loss) — — ( 5,131 ) ( 84,591 ) — ( 89,722 ) Acquisition of treasury stock — — — — ( 883 ) ( 883 ) Stock-based compensation 138 — — — — 138 Balance at September 30, 2022 $ 267,988 3,184 ( 55,577 ) ( 207,539 ) ( 22,284 ) ( 14,228 ) See accompanying Notes to Consolidated Financial Statements. September 30, 2022 | 10-Q 5 Table of Contents CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Stockholders' Equity (Deficit), cont. (Unaudited) Common Stock Accumulated deficit Accumulated other comprehensive income (loss) Treasury stock Total Stock- holders' equity (deficit) (In thousands) Class A Class B Balance at December 31, 2020 $ 262,869 3,184 ( 82,352 ) 128,255 ( 11,011 ) 300,945 Comprehensive income (loss): Net income (loss) — — ( 3,573 ) — — ( 3,573 ) Unrealized investment gains (losses), net — — — ( 56,518 ) — ( 56,518 ) Total comprehensive income (loss) — — ( 3,573 ) ( 56,518 ) — ( 60,091 ) Stock-based compensation ( 14 ) — — — — ( 14 ) Balance at March 31, 2021 262,855 3,184 ( 85,925 ) 71,737 ( 11,011 ) 240,840 Comprehensive income (loss): Net income (loss) — — 5,022 — — 5,022 Unrealized investment gains (losses), net — — — 32,148 — 32,148 Total comprehensive income (loss) — — 5,022 32,148 — 37,170 Acquisition of treasury stock — — — — ( 9,090 ) ( 9,090 ) Stock-based compensation 205 — — — — 205 Balance at June 30, 2021 263,060 3,184 ( 80,903 ) 103,885 ( 20,101 ) 269,125 Comprehensive income (loss): Net income (loss) — — ( 2,799 ) — — ( 2,799 ) Unrealized investment gains (losses), net — — — ( 1,395 ) — ( 1,395 ) Total comprehensive income (loss) — — ( 2,799 ) ( 1,395 ) — ( 4,194 ) Stock-based compensation 100 — — — — 100 Balance at September 30, 2021 $ 263,160 3,184 ( 83,702 ) 102,490 ( 20,101 ) 265,031 See accompanying Notes to Consolidated Financial Statements. September 30, 2022 | 10-Q 6 Table of Contents CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended September 30, (In thousands) 2022 2021 Cash flows from operating activities: Net income (loss) $ ( 10,012 ) ( 1,350 ) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Investment related (gains) losses on sale of investments and other assets 10,589 ( 7,277 ) Net deferred policy acquisition costs 1,532 1,502 Amortization of cost of insurance acquired 775 959 Depreciation 413 954 Amortization of premiums and discounts on investments 3,456 4,065 Stock-based compensation 300 406 Deferred federal income tax expense (benefit) 150 ( 370 ) Change in: Accrued investment income ( 418 ) 512 Reinsurance recoverable 2,054 ( 7,971 ) Due premiums 197 1,940 Future policy benefit reserves 22,920 22,292 Other policyholders' liabilities 1,104 20,668 Federal income tax payable 1,231 1,855 Commissions payable and other liabilities 6,367 ( 14,342 ) Other, net ( 895 ) ( 73 ) Net cash provided by (used in) operating activities 39,763 23,770 Cash flows from investing activities: Purchases of fixed maturity securities, available-for-sale ( 102,348 ) ( 62,809 ) Sales of fixed maturity securities, available-for-sale 30,348 8,238 Maturities and calls of fixed maturity securities, available-for-sale 37,890 40,395 Principal payments on mortgage loans 1,097 7 Funding of mortgage loans — ( 1,000 ) (Increase) decrease in policy loans, net 2,222 3,216 Sales of other long-term investments 4,130 20,893 Purchases of other long-term investments ( 18,150 ) ( 27,514 ) Sales of property and equipment — 14 Purchases of property and equipment ( 76 ) ( 847 ) Purchases of short-term investments ( 1,250 ) — Net cash provided by (used in) investing activities ( 46,137 ) ( 19,407 ) See accompanying Notes to Consolidated Financial Statements. September 30, 2022 | 10-Q 7 Table of Contents CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Cash Flows, Continued (Unaudited) Nine Months Ended September 30, (In thousands) 2022 2021 Cash flows from financing activities: Annuity deposits $ 6,777 6,901 Annuity withdrawals ( 6,634 ) ( 5,855 ) Acquisition of treasury stock ( 2,183 ) ( 9,090 ) Issuance of common stock 2,244 — Other ( 117 ) ( 363 ) Net cash provided by (used in) financing activities 87 ( 8,407 ) Net increase (decrease) in cash and cash equivalents ( 6,287 ) ( 4,044 ) Cash and cash equivalents at beginning of year 27,294 34,131 Cash and cash equivalents at end of period $ 21,007 30,087 SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES: During the nine months ended September 30, 2022 and 2021, various fixed maturity issuers exchanged securities with book values of $ 6.1 million and $ 10.9 million, respectively, for securities of equal value. The Company had no net unsettled security trades during the nine months ended September 30, 2022 and $ 9.4 million during the nine months ended September 30, 2021. The Company recognized right-of-use assets of $ 0.4 million in exchange for new operating lease liabilities during the nine months ended September 30, 2022 and none during the nine months ended September 30, 2021. See accompanying Notes to Consolidated Financial Statements. September 30, 2022 | 10-Q 8 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) (1) FINANCIAL STATEMENTS BASIS OF PRESENTATION AND CONSOLIDATION The consolidated financial statements include the accounts and operations of Citizens, Inc. ("Citizens" or the "Company"), a Colorado corporation, and its wholly-owned subsidiaries, CICA Life Insurance Company of America ("CICA"), CICA Life Ltd. ("CICA International"), CICA Life A.I., Citizens National Life Insurance Company ("CNLIC"), Security Plan Life Insurance Company ("SPLIC"), Security Plan Fire Insurance Company ("SPFIC"), Magnolia Guaranty Life Insurance Company ("MGLIC") and Computing Technology, Inc. ("CTI"). All significant inter-company accounts and transactions have been eliminated. Citizens and its wholly-owned subsidiaries are collectively referred to as the "Company", "it", "we", "us" or "our". The consolidated balance sheet as of September 30, 2022, the consolidated statements of operations and comprehensive income (loss) and stockholders' equity (deficit) for the three and nine months ended September 30, 2022 and September 30, 2021 and the consolidated statements of cash flows for the nine months ended September 30, 2022 and September 30, 2021 have been prepared by the Company without audit and are not subject to audit. In the opinion of management, all normal and recurring adjustments to present fairly the financial position, results of operations, and changes in cash flows at September 30, 2022 and for comparative periods have been made. The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q adopted by the Securities and Exchange Commission ("SEC"). Accordingly, the consolidated financial statements do not include all the information and footnotes required for complete financial statements and should be read in conjunction with the Company’s consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2021 ("Form 10-K"). Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period. Our Life Insurance segment operates through CICA International, CICA and CNLIC. Our international life insurance business, which operates through CICA International, issues U.S. dollar-denominated endowment contracts internationally, which are principally accumulation contracts that incorporate an element of life insurance protection and ordinary whole life insurance in U.S. dollar-denominated amounts sold to non-U.S. residents. These contracts are designed to provide a fixed amount of insurance coverage over the life of the insured and may utilize rider benefits to provide additional increasing or decreasing coverage and annuity benefits to enhance accumulations. Our domestic life insurance business operates through CICA and CNLIC. CICA issues credit life and disability policies and CNLIC issues ordinary whole life and critical illness policies mainly in Texas and Florida. Both companies service whole life and accident and health policies primarily in the Southern U.S., Midwest and Mountain West. Our Home Service Insurance segment operates through our subsidiaries SPLIC, MGLIC and SPFIC, and focuses on the life insurance needs of the middle- and lower-income markets, primarily in Louisiana, Mississippi and Arkansas. Our products in this segment consist primarily of small face amount ordinary whole life, industrial life and pre-need policies, which are designed to fund final expenses for the insured, primarily consisting of funeral and burial costs as well as critical illness and property insurance policies, which cover dwelling and contents. CTI provides data processing systems and services to the Company. We converted the small block of ordinary whole life policies of CNLIC from a legacy platform to our new actuarial valuation software solution which provides enhanced modeling capabilities as of April 1, 2021. The impact of this system conversion reflected in the accompanying consolidated financial statements as of and for the nine months ended September 30, 2021 was an increase to pretax income of $ 0.7 million consisting of a reduced increase in future policy benefit reserves of $ 0.8 million and increased amortization of deferred policy acquisition costs of $ 0.1 million. September 30, 2022 | 10-Q 9 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) USE OF ESTIMATES The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include those used in the evaluation of credit allowances on fixed maturity securities, actuarially determined assets and liabilities and assumptions and valuation allowance on deferred tax assets. Certain of these estimates are particularly sensitive to market conditions, and deterioration and/or volatility in the worldwide debt or equity markets could have a material impact on the consolidated financial statements. SIGNIFICANT ACCOUNTING POLICIES For a description of our significant accounting policies, see Part IV, Item 15, Note 1. Summary of Significant Accounting Policies in the notes to our consolidated financial statements included in our Form 10-K , which should be read in conjunction with these accompanying consolidated financial statements. (2) ACCOUNTING PRONOUNCEMENTS ACCOUNTING STANDARDS NOT YET ADOPTED In August 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2018-12, Financial Services-Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts. This ASU amends four key areas of the accounting and impacts disclosures for long-duration insurance and investment contracts: • Requires updated assumptions for liability measurement. Assumptions used to measure the liability for traditional insurance contracts, which are typically determined at contract inception, will now be reviewed at least annually, and, if there is a change, updated, with the effect recorded in net income; • Standardizes the liability discount rate. The liability discount rate will be a market-observable discount rate (upper-medium grade fixed-income instrument yield), with the effect of rate changes recorded in other comprehensive income; • Provides greater consistency in measurement of market risk benefits. The two previous measurement models have been reduced to one measurement model (fair value), resulting in greater uniformity across similar market-based benefits and better alignment with the fair value measurement of derivatives used to hedge capital market risk; • Simplifies amortization of deferred acquisition costs ("DAC"). Previous earnings-based amortization methods have been replaced with a more level amortization basis; and • Requires enhanced disclosures. The new disclosures include rollforwards and information about significant assumptions and the effects of changes in those assumptions. For calendar-year public companies, the changes will be effective on January 1, 2023, however, early adoption is permitted. We will adopt this ASU effective January 1, 2023 with a transition date of January 1, 2021 using a modified retrospective approach. We continue to make progress in our implementation process that includes, but is not limited to, making significant accounting policy decisions, employing appropriate internal controls, building and updating actuarial models and systems, revising reporting processes and developing informative qualitative and quantitative disclosures. In 2022, we began the process of calculating our transition adjustments and preparing for the restatement of applicable periods. We are currently refining our calculation of the impact of adopting this ASU on our consolidated financial condition and results of operations and will be able to finalize our calculation of the effects once we complete our implementation efforts. September 30, 2022 | 10-Q 10 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) As of the January 1, 2021 transition date, we estimate the adoption of the new guidance will increase previously reported accumulated deficit by approximately $ 1.5 million to $ 2.5 million, net of tax, primarily from capping net premium ratios for certain policyholder benefit cohorts at 100% as of the transition date, and decrease accumulated other comprehensive income (loss) (“AOCI”) by approximately $ 0.3 billion to $ 0.4 billion, net of tax, primarily from remeasuring in-force contract liabilities using upper-medium grade fixed income instrument yields as of the transition date. As of June 30, 2022, these estimates have declined, ranging from a decrease in AOCI of approximately $ 50.0 million to an increase in AOCI of $ 50.0 million primarily due to the increase in interest rates since the transition date. All amounts assume a tax rate of 21%. In addition to the impacts to the balance sheets, we also expect an impact to the pattern of earnings emergence following the transition date. While we have substantially completed the necessary updates to its valuation models and other systems to implement the standard, our implementation of the new guidance is ongoing. The actual impact of adoption, including the actual tax rate, will be updated as the model validation, system testing and parallel runs continue through the remainder of 2022; therefore, our estimates are subject to change. On June 30, 2022, the FASB issued ASU No. 2022-03, Fair Value Measurement (Topic 820: Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions. This standard clarifies that contractual restrictions on equity security sales are not considered part of the security unit of account and, therefore, are not considered in measuring fair value. In addition, the amendments clarify that an entity cannot, as a separate unit of account, recognize and measure a contractual sale restriction. Disclosures on such restrictions are also required. The amendments are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years, and are required to be applied prospectively, with any adjustments from the adoption recognized in earnings and disclosed. Early adoption is available. Adoption of this standard will have no impact on our consolidated financial statements. No other new accounting pronouncements issued or effective during the year had, or is expected to have, a material impact on our consolidated financial statements. (3) SEGMENT INFORMATION The Company has two reportable segments: Life Insurance and Home Service Insurance. Our Life Insurance segment primarily issues endowment contracts, which are principally accumulation contracts that incorporate an element of life insurance protection and ordinary whole life insurance, to non-U.S. residents through CICA International. These contracts are designed to provide a fixed amount of insurance coverage over the life of the insured and may utilize rider benefits to provide additional coverage and annuity benefits to enhance accumulations. CICA issues credit life, credit disability and accident and health related policies throughout the Midwest and southern U.S. CNLIC issues ordinary whole life and critical illness products in Florida and Texas. Our Home Service Insurance segment operates through our subsidiaries SPLIC, MGLIC and SPFIC, and focuses on the life insurance needs of the middle- and lower-income markets, primarily in Louisiana, Mississippi and Arkansas. Our policies are sold and serviced through funeral homes and independent agents who sell policies, collect premiums and service policyholders. Our Home Service Insurance segment also sells property insurance policies in Louisiana and Arkansas. The Life Insurance and Home Service Insurance portions of the Company constitute separate businesses. The Company also operates other non-insurance portions of the Company ("Other Non-Insurance Enterprises"), which primarily include the Company’s IT and corporate-support functions that are included in the tables presented below to properly reconcile the segment information with the consolidated financial statements of the Company. The Company's Other Non-Insurance Enterprises is the only reportable difference between segments and consolidated operations. September 30, 2022 | 10-Q 11 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) The accounting policies of the reportable segments and Other Non-Insurance Enterprises are presented in accordance with U.S. GAAP and are the same as those used in the preparation of the consolidated financial statements. The Company evaluates profit and loss performance based on U.S. GAAP income or loss before federal income taxes for its two reportable segments. Life Insurance Home Service Insurance Other Non-Insurance Enterprises Consolidated Three Months Ended September 30, 2022 (In thousands) Revenues: Premiums $ 31,696 12,179 — 43,875 Net investment income 12,806 3,527 271 16,604 Investment related gains (losses), net ( 4,367 ) ( 462 ) ( 162 ) ( 4,991 ) Other income 682 — 6 688 Total revenues 40,817 15,244 115 56,176 Benefits and expenses: Insurance benefits paid or provided: Claims and surrenders 24,742 5,987 — 30,729 Increase in future policy benefit reserves 6,040 1,050 — 7,090 Policyholders' dividends 1,382 7 — 1,389 Total insurance benefits paid or provided 32,164 7,044 — 39,208 Commissions 5,103 4,107 — 9,210 Other general expenses 6,016 4,228 1,315 11,559 Capitalization of deferred policy acquisition costs ( 4,592 ) ( 1,780 ) — ( 6,372 ) Amortization of deferred policy acquisition costs 4,991 2,091 — 7,082 Amortization of cost of insurance acquired 66 210 — 276 Total benefits and expenses 43,748 15,900 1,315 60,963 Income (loss) before federal income tax expense $ ( 2,931 ) ( 656 ) ( 1,200 ) ( 4,787 ) September 30, 2022 | 10-Q 12 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) Life Insurance Home Service Insurance Other Non-Insurance Enterprises Consolidated Nine Months Ended September 30, 2022 (In thousands) Revenues: Premiums $ 88,461 37,002 — 125,463 Net investment income 37,124 10,054 805 47,983 Investment related gains (losses), net ( 8,644 ) ( 1,629 ) ( 316 ) ( 10,589 ) Other income 2,403 1 6 2,410 Total revenues 119,344 45,428 495 165,267 Benefits and expenses: Insurance benefits paid or provided: Claims and surrenders 67,768 18,492 — 86,260 Increase in future policy benefit reserves 18,746 4,291 — 23,037 Policyholders' dividends 4,241 16 — 4,257 Total insurance benefits paid or provided 90,755 22,799 — 113,554 Commissions 13,701 12,106 — 25,807 Other general expenses 17,065 12,093 3,831 32,989 Capitalization of deferred policy acquisition costs ( 12,205 ) ( 5,132 ) — ( 17,337 ) Amortization of deferred policy acquisition costs 14,086 4,783 — 18,869 Amortization of cost of insurance acquired 206 569 — 775 Total benefits and expenses 123,608 47,218 3,831 174,657 Income (loss) before federal income tax expense $ ( 4,264 ) ( 1,790 ) ( 3,336 ) ( 9,390 ) September 30, 2022 | 10-Q 13 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) Life Insurance Home Service Insurance Other Non-Insurance Enterprises Consolidated Three Months Ended September 30, 2021 (In thousands) Revenues: Premiums $ 32,198 11,129 — 43,327 Net investment income 11,991 3,238 225 15,454 Investment related gains (losses), net 1,205 ( 36 ) 957 2,126 Other income 676 1 — 677 Total revenues 46,070 14,332 1,182 61,584 Benefits and expenses: Insurance benefits paid or provided: Claims and surrenders 22,565 9,251 — 31,816 Increase in future policy benefit reserves 9,369 1,519 — 10,888 Policyholders' dividends 1,638 12 — 1,650 Total insurance benefits paid or provided 33,572 10,782 — 44,354 Commissions 4,854 4,261 — 9,115 Other general expenses 4,900 4,146 1,496 10,542 Capitalization of deferred policy acquisition costs ( 4,201 ) ( 1,825 ) — ( 6,026 ) Amortization of deferred policy acquisition costs 5,191 852 — 6,043 Amortization of cost of insurance acquired 68 215 — 283 Total benefits and expenses 44,384 18,431 1,496 64,311 Income (loss) before federal income tax expense $ 1,686 ( 4,099 ) ( 314 ) ( 2,727 ) September 30, 2022 | 10-Q 14 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) Life Insurance Home Service Insurance Other Non-Insurance Enterprises Consolidated Nine Months Ended September 30, 2021 (In thousands) Revenues: Premiums $ 89,399 35,786 — 125,185 Net investment income 35,468 9,826 724 46,018 Investment related gains (losses), net 5,741 393 1,143 7,277 Other income 2,142 3 — 2,145 Total revenues 132,750 46,008 1,867 180,625 Benefits and expenses: Insurance benefits paid or provided: Claims and surrenders 69,366 22,335 — 91,701 Increase in future policy benefit reserves 17,081 5,326 — 22,407 Policyholders' dividends 4,400 31 — 4,431 Total insurance benefits paid or provided 90,847 27,692 — 118,539 Commissions 13,483 12,590 — 26,073 Other general expenses 15,273 12,024 6,130 33,427 Capitalization of deferred policy acquisition costs ( 11,578 ) ( 5,220 ) — ( 16,798 ) Amortization of deferred policy acquisition costs 15,739 2,561 — 18,300 Amortization of cost of insurance acquired 279 680 — 959 Total benefits and expenses 124,043 50,327 6,130 180,500 Income (loss) before federal income tax expense $ 8,707 ( 4,319 ) ( 4,263 ) 125 September 30, 2022 | 10-Q 15 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) (4) STOCKHOLDERS' EQUITY (DEFICIT) AND RESTRICTIONS STOCK Our Restated and Amended Articles of Incorporation authorize the issuance of 127,000,000 shares, of which 100,000,000 shares shall be Class A common stock, 2,000,000 shares shall be Class B common stock, and 25,000,000 shall be preferred stock. The two authorized classes of common stock are equal in all respects, except (a) each share of Class A common stock is entitled to receive twice the cash dividends paid on a per share basis to the Class B common stock, if any; and (b) the holders of the Class B common stock have the exclusive right to elect a simple majority of the board of Directors of Citizens. In April 2021, we repurchased all of the outstanding Class B common stock, which is now classified as treasury stock. As a result, all of the directors are elected by the holders of the Class A common stock. Citizens has never issued any preferred stock. A summary of the change in gross number of shares of Class A and Class B common stock issued and treasury stock is as follows: Nine Months Ended September 30, 2022 2021 (In thousands) Common Stock Treasury Common Stock Treasury Class A Class B Stock Class A Class B Stock Balance at beginning of year 53,170 1,002 4,138 52,654 1,002 3,136 Stock issued under stock investment plan 475 — — 112 — — Stock issued for compensation 90 — — — — — Acquisition of Class A shares — — 615 — — — Acquisition of Class B shares — — — — — 1,002 Other share issuance 22 — — — — — Balance at end of period 53,757 1,002 4,753 52,766 1,002 4,138 September 30, 2022 | 10-Q 16 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) EARNINGS PER SHARE The following tables set forth the computation of basic and diluted earnings (loss) per share. Three Months Ended September 30, 2022 2021 (In thousands, except per share amounts) Basic and diluted earnings (loss) per share: Numerator: Net income (loss) $ ( 5,131 ) ( 2,799 ) Net income (loss) allocated to Class A common stock $ ( 5,131 ) ( 2,799 ) Net income (loss) allocated to Class B common stock — — Net income (loss) $ ( 5,131 ) ( 2,799 ) Denominator: Weighted average shares of Class A outstanding - basic 50,075 49,630 Weighted average shares of Class A outstanding - diluted 50,799 50,263 Weighted average shares of Class B outstanding - basic and diluted — — Basic and diluted earnings (loss) per share of Class A common stock $ ( 0.10 ) ( 0.06 ) Basic and diluted earnings (loss) per share of Class B common stock — — Nine Months Ended September 30, 2022 2021 (In thousands, except per share amounts) Basic and diluted earnings (loss) per share: Numerator: Net income (loss) $ ( 10,012 ) ( 1,350 ) Net income (loss) allocated to Class A common stock $ ( 10,012 ) ( 1,345 ) Net income (loss) allocated to Class B common stock — ( 5 ) Net income (loss) $ ( 10,012 ) ( 1,350 ) Denominator: Weighted average shares of Class A outstanding - basic 50,203 49,594 Weighted average shares of Class A outstanding - diluted 50,927 50,226 Weighted average shares of Class B outstanding - basic and diluted — 401 Basic and diluted earnings (loss) per share of Class A common stock $ ( 0.20 ) ( 0.03 ) Basic and diluted earnings (loss) per share of Class B common stock — ( 0.01 ) CAPITAL AND SURPLUS Each of our regulated insurance subsidiaries is required to meet stipulated regulatory capital requirements. These include capital requirements imposed by the U.S. National Association of Insurance Commissioners ("NAIC") and the Bermuda Monetary Authority ("BMA"). All domestic insurance subsidiaries exceeded the minimum capital requirements at September 30, 2022. Due to the rapidly rising interest rates that caused the increase in 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 to allow CICA International to use total statutory economic capital September 30, 2022 | 10-Q 17 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) and surplus for purposes of calculating the minimum solvency margin in place of unconsolidated capital and surplus. The BMA is currently evaluating our request and has not taken any action with respect to this matter. In order to minimize the risk of a shortfall in capital arising from an unexpected adverse deviation or excess risk, the BMA has established a threshold capital level (termed the Target Capital Level ("TCL")), which is set at 120 % of a company’s enhanced capital requirement. The TCL serves as an early warning tool for the BMA. As of September 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 % (equal to the TCL). Since CICA International’s capital level currently exceeds 120% , Citizens is not currently required to make a capital contribution. (5) INVESTMENTS The Company invests primarily in fixed maturity securities, which totaled 86.9 % of total cash and invested assets at September 30, 2022, as shown below. Carrying Value (In thousands, except for %) September 30, 2022 December 31, 2021 Amount % Amount % Cash and invested assets: Fixed maturity securities $ 1,161,048 86.9 % 1,470,617 89.0 % Equity securities 11,789 0.9 % 14,844 0.9 % Policy loans 78,085 5.8 % 80,307 4.9 % Other long-term investments 62,717 4.7 % 57,399 3.5 % Short-term investments 1,241 0.1 % — — % Cash and cash equivalents 21,007 1.6 % 27,294 1.7 % Total cash and invested assets $ 1,335,887 100.0 % 1,650,461 100.0 % September 30, 2022 | 10-Q 18 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) The following tables represent the amortized cost, gross unrealized gains and losses and fair value of fixed maturity securities as of the dates indicated. Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value September 30, 2022 (In thousands) Fixed maturity securities: Available-for-sale: U.S. Treasury securities $ 9,448 190 10 9,628 U.S. Government-sponsored enterprises 3,441 272 — 3,713 States and political subdivisions 349,835 1,686 36,222 315,299 Corporate: Financial 237,294 189 46,131 191,352 Consumer 249,551 562 50,401 199,712 Utilities 114,259 5 25,643 88,621 Energy 76,175 — 13,377 62,798 All other 184,197 669 32,737 152,129 Commercial mortgage-backed 50 — — 50 Residential mortgage-backed 110,610 8 9,807 100,811 Asset-backed 39,817 — 2,984 36,833 Foreign governments 100 2 — 102 Total fixed maturity securities $ 1,374,777 3,583 217,312 1,161,048 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value December 31, 2021 (In thousands) Fixed maturity securities: Available-for-sale: U.S. Treasury securities $ 9,515 1,097 1 10,611 U.S. Government-sponsored enterprises 3,463 996 — 4,459 States and political subdivisions 356,594 28,056 692 383,958 Corporate: Financial 213,652 22,477 172 235,957 Consumer 219,223 23,658 900 241,981 Utilities 105,738 7,358 801 112,295 Energy 76,989 7,334 68 84,255 All other 196,403 22,497 380 218,520 Residential mortgage-backed 117,755 16,046 6 133,795 Asset-backed 44,322 368 14 44,676 Foreign governments 101 9 — 110 Total fixed maturity securities $ 1,343,755 129,896 3,034 1,470,617 September 30, 2022 | 10-Q 19 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) Most of the Company's equity securities are diversified stock and bond mutual funds. Fair Value (In thousands) September 30, 2022 December 31, 2021 Equity securities: Stock mutual funds $ 2,865 3,571 Bond mutual funds 4,136 5,060 Common stock 769 990 Non-redeemable preferred stock 10 161 Non-redeemable preferred stock fund 4,009 5,062 Total equity securities $ 11,789 14,844 VALUATION OF INVESTMENTS Available-for-sale ("AFS") fixed maturity securities are reported in the consolidated financial statements at fair value. Equity securities are measured at fair value with the change in fair value recorded through net income (loss). The Company recognized net investment related losses of $ 0.9 million and $ 2.9 million on equity securities held for the three and nine months ended September 30, 2022 and losses of $ 0.4 million and gains of $ 0.2 million for the same periods ended September 30, 2021, respectively. The Company considers several factors in its review and evaluation of individual investments, using the process described in Part IV, Item 15, Note 2. Investments in the notes to the consolidated financial statements of our Form 10-K to determine whether a credit valuation loss exists. For the three and nine months ended September 30, 2022 and 2021, the Company recorded no credit valuation losses on fixed maturity securities. September 30, 2022 | 10-Q 20 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) The following tables present the fair values and gross unrealized losses of fixed maturity securities that are not deemed to have credit losses, aggregated by investment category and length of time that individual securities have been in a continuous loss position at September 30, 2022 and December 31, 2021. September 30, 2022 Less than 12 months Greater than 12 months Total (In thousands, except for # of securities) Fair Value Unrealized Losses # of Securities Fair Value Unrealized Losses # of Securities Fair Value Unrealized Losses # of Securities Fixed maturity securities: Available-for-sale securities: U.S. Treasury securities $ — — — 64 10 2 64 10 2 U.S. Government-sponsored enterprises 224 — 1 — — — 224 — 1 States and political subdivisions 202,975 35,836 255 627 386 2 203,602 36,222 257 Corporate: Financial 185,874 45,602 253 778 529 1 186,652 46,131 254 Consumer 178,490 46,447 240 6,355 3,954 10 184,845 50,401 250 Utilities 84,016 22,774 162 4,557 2,869 6 88,573 25,643 168 Energy 62,798 13,377 83 — — — 62,798 13,377 83 All Other 142,448 31,285 183 2,799 1,452 2 145,247 32,737 185 Commercial mortgage-backed 49 — 1 — — — 49 — 1 Residential mortgage-backed 100,546 9,807 100 — — — 100,546 9,807 100 Asset-backed 34,177 2,732 41 2,655 252 6 36,832 2,984 47 Total fixed maturity securities $ 991,597 207,860 1,319 17,835 9,452 29 1,009,432 217,312 1,348 December 31, 2021 Less than 12 months Greater than 12 months Total (In thousands, except for # of securities) Fair Value Unrealized Losses # of Securities Fair Value Unrealized Losses # of Securities Fair Value Unrealized Losses # of Securities Fixed maturity securities: Available-for-sale securities: U.S. Treasury securities $ 72 1 2 — — — 72 1 2 States and political subdivisions 21,715 692 15 — — — 21,715 692 15 Corporate: Financial 8,059 86 15 1,227 86 1 9,286 172 16 Consumer 29,494 777 28 2,419 123 1 31,913 900 29 Utilities 19,072 401 14 4,523 400 4 23,595 801 18 Energy 7,381 68 8 — — — 7,381 68 8 All Other 14,312 380 16 — — — 14,312 380 16 Residential mortgage-backed 1,084 6 6 — — — 1,084 6 6 Asset-backed 9,078 12 11 663 2 1 9,741 14 12 Total fixed maturity securities $ 110,267 2,423 115 8,832 611 7 119,099 3,034 122 September 30, 2022 | 10-Q 21 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) In each category of our fixed maturity securities described above, we do not intend to sell our investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases. These unrealized losses on fixed maturity securities are due to noncredit-related factors, including widening credit spreads and rising interest rates since purchase, which have little bearing on the recoverability of our investments, hence they are not recognized as credit losses. The fair value is expected to recover as the securities approach maturity or if market yields for such investments decline. As of September 30, 2022 and December 31, 2021, 98.6 % and 98.0 %, respectively, of the fair value of our fixed maturity securities portfolio was rated investment grade. While the losses are currently unrealized, we continue to monitor all fixed maturity securities on an ongoing basis as future information may become available which could result in an allowance being recorded. The amortized cost and fair value of fixed maturity securities at September 30, 2022 by contractual maturity are shown in the table below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date have been reflected based upon final stated maturity. September 30, 2022 Amortized Cost Fair Value (In thousands) Fixed maturity securities: Due in one year or less $ 22,156 22,244 Due after one year through five years 118,051 115,766 Due after five years through ten years 228,829 214,219 Due after ten years 1,005,741 808,819 Total fixed maturity securities $ 1,374,777 1,161,048 The Company uses the specific identification method of the individual security to determine the cost basis used in the calculation of realized gains and losses related to security sales. Three Months Ended Nine Months Ended September 30, September 30, (In thousands) 2022 2021 2022 2021 Fixed maturity securities, available-for-sale: Proceeds $ 1,520 984 30,348 8,238 Gross realized gains $ 19 89 120 189 Gross realized losses $ 1 — 103 1 The Company sold 2 and 19 AFS fixed maturity securities during the three and nine months ended September 30, 2022 and 10 and 28 during the three and nine months ended September 30, 2021, respectively. (6) FAIR VALUE MEASUREMENTS Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We hold AFS fixed maturity securities, which are carried at fair value with changes in fair value reported through comprehensive income (loss). We also report our equity securities and other long-term investments at fair value with changes in fair value reported through the consolidated statements of operations. Fair value measurements are generally based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our view of market assumptions September 30, 2022 | 10-Q 22 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) in the absence of observable market information. We utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. All assets and liabilities carried at fair value are required to be classified and disclosed in one of the following three categories: • Level 1 - Quoted prices for identical instruments in active markets. • Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs or whose significant value drivers are observable. • Level 3 - Instruments whose significant value drivers are unobservable. Level 1 primarily consists of financial instruments whose value is based on quoted market prices such as U.S. Treasury securities and actively traded mutual fund and stock investments. Level 2 includes those financial instruments that are valued by independent pricing services or broker quotes. These pricing models are primarily industry-standard models that consider various inputs, such as interest rates, credit spreads and foreign exchange rates for the underlying financial instruments. All significant inputs are observable or derived from observable information in the marketplace or are supported by observable levels at which transactions are executed in the marketplace. Financial instruments in this category primarily include corporate securities, U.S. Government-sponsored enterprise securities, securities issued by states and political subdivisions and certain mortgage and asset-backed securities. Level 3 is comprised of financial instruments whose fair value is estimated based on non-binding broker prices utilizing significant inputs not based on or corroborated by readily available market information. We have no investments in this category. September 30, 2022 | 10-Q 23 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) The following tables set forth our assets that are measured at fair value on a recurring basis as of the dates indicated. September 30, 2022 Level 1 Level 2 Level 3 Total Fair Value (In thousands) Financial Assets Fixed maturity securities available-for-sale: U.S. Treasury and U.S. Government-sponsored enterprises $ 9,628 3,713 — 13,341 States and political subdivisions — 315,299 — 315,299 Corporate 47 694,565 — 694,612 Commercial mortgage-backed — 50 — 50 Residential mortgage-backed — 100,811 — 100,811 Asset-backed — 36,833 — 36,833 Foreign governments — 102 — 102 Total fixed maturity securities available-for-sale 9,675 1,151,373 — 1,161,048 Equity securities: Stock mutual funds 2,865 — — 2,865 Bond mutual funds 4,136 — — 4,136 Common stock 769 — — 769 Non-redeemable preferred stock 10 — — 10 Non-redeemable preferred stock fund 4,009 — — 4,009 Total equity securities 11,789 — — 11,789 Other long-term investments (1) — — — 62,454 Total financial assets $ 21,464 1,151,373 — 1,235,291 (1) In accordance with Subtopic 820-10, certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient are not classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the consolidated balance sheets. September 30, 2022 | 10-Q 24 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) December 31, 2021 Level 1 Level 2 Level 3 Total Fair Value (In thousands) Financial Assets Fixed maturity securities available-for-sale: U.S. Treasury and U.S. Government-sponsored enterprises $ 10,611 4,459 — 15,070 States and political subdivisions — 383,958 — 383,958 Corporate 51 892,957 — 893,008 Residential mortgage-backed — 133,795 — 133,795 Asset-backed — 44,676 — 44,676 Foreign governments — 110 — 110 Total fixed maturity securities available-for-sale 10,662 1,459,955 — 1,470,617 Equity securities: Stock mutual funds 3,571 — — 3,571 Bond mutual funds 5,060 — — 5,060 Common stock 990 — — 990 Non-redeemable preferred stock 161 — — 161 Non-redeemable preferred stock fund 5,062 — — 5,062 Total equity securities 14,844 — — 14,844 Other long-term investments (1) — — — 56,038 Total financial assets $ 25,506 1,459,955 — 1,541,499 (1) In accordance with Subtopic 820-10, certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient are not classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the consolidated balance sheets. FINANCIAL INSTRUMENTS VALUATION FINANCIAL INSTRUMENTS CARRIED AT FAIR VALUE Fixed maturity securities, available-for-sale. At September 30, 2022, fixed maturity securities, valued using a third-party pricing source, totaled $ 1.2 billion for Level 2 assets and comprised 93.2 % of total reported fair value of our financial assets. The Level 1 and Level 2 valuations are reviewed and updated quarterly through testing by comparisons to separate pricing models, other third-party pricing services, and back tested to recent trades. In addition, we obtain information annually relative to the third-party pricing models and review model parameters for reasonableness. There were no Level 3 assets at September 30, 2022. As of September 30, 2022, there were no material changes to the valuation methods or assumptions used to determine fair values, and no broker or third-party prices were changed from the values received. Equity securities. Our equity securities are classified as Level 1 assets as their fair values are based upon quoted market prices. Limited partnerships. The Company considers the net asset value ("NAV") to represent the value of the investment fund and is measured by the total value of assets minus the total value of liabilities. The following tables include information related to our investments in limited partnerships that calculate NAV per share. For these investments, which are measured at fair value on a recurring basis, we use the NAV per share to measure fair value. Changes in the NAV of our limited partnerships are recorded through net income (loss). The Company recognized net investment related losses of $ 4.2 million and $ 9.4 million on limited partnerships held for the three and nine months ended September 30, 2022 and net realized gains of $ 1.3 million and $ 5.8 million for the three and nine months September 30, 2022 | 10-Q 25 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) ended September 30, 2021, respectively. These investments are included in other long-term investments on the consolidated balance sheets. September 30, 2022 December 31, 2021 Fair Value Using NAV Per Share Unfunded Commit- ments Range (in years) Fair Value Using NAV Per Share Unfunded Commit- ments Range (in years) (In thousands, except years) Limited partnerships Middle market Investments in privately-originated, performing senior secured debt primarily in North America-based companies $ 31,427 8,233 5 $ 21,947 18,712 10 Global equity fund Investments in common stocks of U.S., international developed and emerging markets with a focus on long-term capital growth 8,095 — 0 10,607 — 0 Late-stage growth Investments in private late-stage, established companies seeking capital to accelerate growth prior to an IPO or sale 17,639 20,000 5 to 7 20,468 4,459 6 Infrastructure Investments in climate infrastructure assets, focusing on renewable power generation in wind and solar energy 5,293 14,462 11 3,016 16,653 12 Total limited partnerships $ 62,454 42,695 $ 56,038 39,824 The majority of our limited partnership investments are not redeemable because distributions from the funds will be received when the underlying investments of the partnerships are liquidated. The life spans indicated above may be shortened or extended at the fund manager's discretion, typically in one or two-year increments. The global equity fund is redeemable monthly. We initially estimate the fair value of investments in limited partnerships by reference to the transaction price. Subsequently, we obtain the fair value of these investments from net asset value information provided by the general partner or manager of the investments, the financial statements of which are audited annually. We carried no limited partnership investments at cost at September 30, 2022 and December 31, 2021. We review the fair value hierarchy classifications each reporting period. Changes in the observability of the valuation attributes may result in a reclassification of certain financial assets. Such reclassifications are reported as transfers in and out of Level 3 at the beginning fair value for the reporting period in which the changes occur. There were no transfers in or out of Level 3 during the nine months ended September 30, 2022 or 2021. FINANCIAL INSTRUMENTS NOT CARRIED AT FAIR VALUE Estimates of fair values are made at a specific point in time, based on relevant market prices and information about the financial instruments. The fair values of financial instruments presented below are not necessarily indicative of the amounts the Company might realize in actual market transactions. September 30, 2022 | 10-Q 26 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) The carrying amount and fair value for the financial assets and liabilities on the consolidated balance sheets not otherwise disclosed for the periods indicated are as follows: September 30, 2022 December 31, 2021 (In thousands) Carrying Value Fair Value Carrying Value Fair Value Financial Assets: Policy loans $ 78,085 78,085 80,307 80,307 Commercial mortgage loan — — 1,000 1,000 Residential mortgage loans 50 52 148 169 Cash and cash equivalents 21,007 21,007 27,294 27,294 Financial Liabilities: Annuity - investment contracts 66,592 57,548 64,384 72,352 Policy loans. Policy loans had a weighted average annual interest rate of 7.7 % at September 30, 2022 and December 31, 2021 and no specified maturity dates. Policy loans are an integral part of the life insurance policies we have in force, cannot be valued separately and are not marketable. Therefore, the fair value of policy loans approximates the carrying value and policy loans are considered Level 3 assets in the fair value hierarchy. Commercial mortgage loan. We financed $ 1.0 million of the sale of our training facility at a 6.0 % interest rate during the third quarter of 2021. The loan was paid in full during the third quarter of 2022. Due to the short-term nature of the loan, the carrying value approximated fair value and was considered a Level 3 asset in the fair value hierarchy. Residential mortgage loans. Mortgage loans are secured principally by residential properties. Weighted average interest rates for these loans were approximately 7.0 % at September 30, 2022 and 6.4 % at December 31, 2021. At September 30, 2022, the remaining loan matures in six years . Management estimated the fair value using an annual interest rate of 6.25 % at September 30, 2022. Our mortgage loans are considered Level 3 assets in the fair value hierarchy and are included in other long-term investments on the consolidated balance sheet. Cash and cash equivalents. The fair value of cash and cash equivalents approximate carrying value and are characterized as Level 1 assets in the fair value hierarchy. Annuity liabilities. The fair value of the Company's liabilities under annuity contract policies, which are considered Level 3 liabilities, was estimated at September 30, 2022 and December 31, 2021 using discounted cash flows based upon spot rates adjusted for various risk adjustments ranging from 3.91 % to 4.53 % and 0.50 % to 2.63 %, respectively. The fair value of liabilities under all insurance contracts are taken into consideration in the overall management of interest rate risk, which seeks to minimize exposure to changing interest rates through the matching of investment maturities with amounts due under insurance contracts. September 30, 2022 | 10-Q 27 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) Other long-term investments. Financial instruments included in other long-term investments are classified in various levels of the fair value hierarchy. The following table summarizes the carrying amounts of these investments. Carrying Value (In thousands ) September 30, 2022 December 31, 2021 Other long-term investments: Limited partnerships $ 62,454 56,038 FHLB common stock 192 192 Mortgage loans 50 1,148 All other investments 21 21 Total other long-term investments $ 62,717 57,399 We are a member of the Federal Home Loan Bank ("FHLB") of Dallas and such membership requires members to own stock in FHLB. Our FHLB stock is carried at amortized cost, which approximates fair value. (7) COMMITMENTS AND CONTINGENCIES LITIGATION AND REGULATORY ACTIONS From time to time, we are subject to legal and regulatory actions relating to our business. We may incur defense costs, including attorneys' fees, and other direct litigation costs associated with defending claims. If we suffer an adverse judgment as a result of litigation claims, it could have a material adverse effect on our business, results of operations and financial condition. CONTRACTUAL OBLIGATIONS As of September 30, 2022, CICA International is committed to fund investments up to $ 42.7 million related to limited partnerships previously described and other investments. CREDIT FACILITY On May 5, 2021 , the Company entered into a $ 20 million senior secured revolving credit facility (the “Credit Facility”) with Regions Bank ("Regions"). The Credit Facility has a three-year term, maturing on May 5, 2024 , and allows the Company to borrow up to $ 20 million for working capital purposes, capital expenditures and other corporate purposes. Revolving loans may be requested by the Company in aggregate minimum principal amounts of $ 0.5 million per loan. At the Company's election, the revolving loans may either bear a base rate, which is 1.75 % plus a base rate (a fluctuating rate per annum) equal to the greatest of (a) Regions' prime rate, (b) the federal funds rate plus 0.50 %, (c) the one-month LIBOR rate plus 1 %, and (d) 0.75 %; or an adjusted LIBOR rate, which is 2.75 % plus an adjusted LIBOR rate but cannot be less than 0.75 %. The Company is required to pay Regions an annual commitment fee of 0.375 % of the unused portion of the Credit Facility in quarterly installments, which the Company expenses as it is incurred. Obligations under the Credit Facility are secured by substantially all of the assets of the Company other than the equity interests in all of the regulated insurance subsidiaries, real estate owned by the Company, and other limited exceptions. The Credit Facility contains customary events of default and financial, affirmative and negative covenants, including but not limited to restrictions on indebtedness, liens, investments, asset dispositions and restricted payments. As of September 30, 2022, the Company had no t borrowed any funds against the Credit Facility and was not in violation of any covenants. September 30, 2022 | 10-Q 28 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) (8) INCOME TAXES The effective tax rate is the ratio of tax expense (benefit) over pre-tax income (loss). The effective tax rate was ( 7.2 )% and ( 6.6 )% for the three and nine months ended September 30, 2022, compared to ( 2.6 )% and 1180.0 % for the same periods in 2021, respectively. CICA International is considered a controlled foreign corporation for federal tax purposes. As a result, the insurance activity of CICA International is subject to Subpart F of the Internal Revenue Code and is included in Citizens’ taxable income. Due to the 0 % enacted tax rate in Bermuda, there are no deferred taxes recorded for CICA International's temporary differences. The effective tax rate varies from the prevailing corporate federal income tax rate of 21.0% mainly due to the impact of Subpart F and uncertain tax positions. At September 30, 2022, we determined it was more likely than not that a portion of our capital deferred tax assets would not be realized in their entirety. The Company recorded a valuation allowance of $ 4.4 million through Other Comprehensive Income (Loss). (9) OTHER COMPREHENSIVE INCOME (LOSS) The changes in the components of other comprehensive income (loss) are reported net of the effects of income taxes of 21% as of the three and nine months ended September 30, 2022 and 2021, as indicated below. Three Months Ended September 30, 2022 2021 (In thousands) Amount Tax Effect Total Amount Tax Effect Total Unrealized gains (losses): Unrealized holding gains (losses) arising during the period $ ( 88,382 ) 4,808 ( 83,574 ) ( 9,561 ) 781 ( 8,780 ) Reclassification adjustment for (gains) losses included in net income 43 ( 8 ) 35 ( 102 ) 22 ( 80 ) Effects on deferred policy acquisition costs 725 ( 153 ) 572 7,975 ( 528 ) 7,447 Effects on cost of insurance acquired 251 ( 53 ) 198 7 ( 1 ) 6 Effects on unearned revenue reserves ( 2,307 ) 485 ( 1,822 ) 15 ( 3 ) 12 Other comprehensive income (loss) $ ( 89,670 ) 5,079 ( 84,591 ) ( 1,666 ) 271 ( 1,395 ) Nine Months Ended September 30, 2022 2021 (In thousands) Amount Tax Effect Total Amount Tax Effect Total Unrealized gains (losses): Unrealized holding gains (losses) arising during the period $ ( 340,678 ) 18,200 ( 322,478 ) ( 35,749 ) 2,736 ( 33,013 ) Reclassification adjustment for (gains) losses included in net income 78 ( 15 ) 63 ( 91 ) 19 ( 72 ) Effects on deferred policy acquisition costs 1,879 ( 395 ) 1,484 11,681 ( 3,068 ) 8,613 Effects on cost of insurance acquired 694 ( 146 ) 548 284 ( 59 ) 225 Effects on unearned revenue reserves ( 5,884 ) 1,236 ( 4,648 ) ( 1,922 ) 404 ( 1,518 ) Other comprehensive income (loss) $ ( 343,911 ) 18,880 ( 325,031 ) ( 25,797 ) 32 ( 25,765 ) September 30, 2022 | 10-Q 29 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) (10) RELATED PARTY TRANSACTIONS The Company has various routine related party transactions in conjunction with our holding company structure, such as a management service agreement related to costs incurred, a tax sharing agreement between entities, and inter-company dividends and capital contributions. There were no changes related to these relationships during the nine months ended September 30, 2022. See our Form 10-K for a comprehensive discussion of related party transactions. (11) SUBSEQUENT EVENTS The Company has evaluated the impact of subsequent events as defined by the accounting guidance through the date this report was issued and determined that no significant subsequent events need to be recognized or disclosed. September 30, 2022 | 10-Q 30 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS