CITIZENS, INC. 10-Q

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS This section and other parts of this Quarterly Report on Form 10-Q ("Form 10-Q") contain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Forward-looking statements can also be identified by words such as “future,” “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “will,” “would,” “could,” “can,” “may,” and similar terms. Forward-looking statements are not guarantees of future performance and the Company’s actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, statements concerning any potential future impact of the coronavirus disease (“COVID-19”) pandemic on our business and the inflationary environment that has led to market volatility and rising interest rates, as well as factors discussed in the "Risk Factors" contained in our Annual Report on Form 10-K for the year ended December 31, 2021, which are incorporated herein by reference. The Company assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law. The following discussion should be read in conjunction with the consolidated financial statements and accompanying notes included in Part I, Item 1 of this Form 10-Q. The Company assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law. The U.S. Securities and Exchange Commission ("SEC") maintains a website that contains reports, proxy and information statements, and other information regarding issuers, including the Company, that file electronically with the SEC. The public can obtain any documents that the Company files with the SEC at http://www.sec.gov. We also make available, free of charge, through our Internet website (http://www.citizensinc.com), our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Section 16 Reports filed by officers and directors, news releases, and, if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable after we electronically file such reports with, or furnish such reports to, the SEC. We are not including any of the information contained on our website as part of, or incorporating it by reference into, this Form 10-Q. OVERVIEW For over 45 years, we have been fulfilling the needs of our policyholders and their families by providing insurance products that offer both living and death benefits. Citizens conducts insurance related operations through its insurance subsidiaries, which provide benefits to residents in 31 U.S. states and more than 70 different countries. We specialize in offering primarily ordinary whole life insurance, endowment products and final expense insurance in niche markets where we believe we can optimize our competitive position. As an insurance provider, we collect premiums on an ongoing basis from our policyholders and invest the majority of the premiums to pay future benefits, including claims and surrenders and policyholder dividends. Accordingly, the Company derives its revenues principally from: (1) life insurance premiums earned for insurance coverages provided to insureds in our two operating segments – Life Insurance and Home Service Insurance; and (2) net investment income. In addition to paying and reserving for insurance benefits that we pay to our policyholders, our expenses consist primarily of the costs of selling our insurance products (e.g., commissions, underwriting, marketing expenses), operating expenses and income taxes. Objective of our Management's Discussion and Analysis We refer to our Management’s Discussion and Analysis of Financial Condition and Results of Operations as our “MD&A”. The objective of our MD&A is to provide investors with information in order to assess the material changes in our financial condition from December 31, 2021 to 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. We September 30, 2022 | 10-Q 31 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS also discuss in the MD&A any trends that we believe may materially affect our future operations or financial condition. The Factors that Drive our Operating Results We see the following as the primary factors that drive our operating results: • Sales ( i.e. , premium revenues) • Investments • Death claims and surrenders • Operating expenses 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 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS 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 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS 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 $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 $0.20 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 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 Table of Contents 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 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; and ◦ $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, 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; and • a $0.4 million decrease in other general expenses. Financial Condition at September 30, 2022 • Total assets of $1.5 billion. • Total investments of $1.3 billion; fixed maturity securities comprised 88.3% of total investments. • $4.7 billion of direct insurance in force. • No debt. IMPACT OF INFLATION AND RISING INTEREST RATES 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 $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. COVID-19 PANDEMIC The overall impact of the COVID-19 pandemic and its related economic conditions on the Company's financial results continue to be highly uncertain and unpredictable. While the Company has implemented new strategies and processes to mitigate this impact, the scope, duration and magnitude of the direct and indirect effects of COVID-19 are difficult or impossible to anticipate. As a result, it is not possible to predict its impact on the Company's results in September 30, 2022 | 10-Q 35 Table of Contents 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; • decreased premium revenue due to disruption to our workforce or distribution channels resulting from required isolation, travel limitations and business restrictions; • higher surrenders and lapses due to cash needs our policyholders may have due to concerns over COVID-19 economic impacts; and • volatility in our investment portfolio due to market disruptions caused by COVID-19 related concerns such as inflation. We continue to monitor the impact of the COVID-19 pandemic on our operations. OUR OPERATING SEGMENTS We manage our business in two operating segments, Life Insurance and Home Service Insurance. 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 for ordinary life policies issued during the periods indicated are shown below. Nine Months Ended September 30, 2022 2021 Amount of Insurance Issued Number of Policies Issued Average Policy Face Amount Issued Amount of Insurance Issued Number of Policies Issued Average Policy Face Amount Issued Ordinary Life Policies: Life Insurance $ 253,040,853 3,022 $ 83,733 $ 172,645,808 2,873 $ 60,093 Home Service Insurance 205,218,816 21,045 9,751 142,678,954 18,533 7,699 Total $ 458,259,669 24,067 $ 315,324,762 21,406 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 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 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 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS CONSOLIDATED RESULTS OF OPERATIONS A discussion of consolidated results is presented below, followed by a discussion of segment operations and financial results by segment. REVENUES Our revenues are generated primarily by insurance renewal premiums and investment income from invested assets. Three Months Ended Nine Months Ended September 30, September 30, (In thousands) 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 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 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS Net Investment Income. A summary of our net investment income and annualized net investment income performance are summarized as follows: Three Months Ended Nine Months Ended September 30, September 30, (In thousands, except for %) 2022 2021 2022 2021 Gross investment income: Fixed maturity securities $ 14,994 13,786 43,136 41,682 Equity securities 158 213 453 636 Policy loans 1,535 1,604 4,641 4,811 Long-term investments 505 389 1,604 642 Other investment income 87 15 139 35 Total investment income 17,279 16,007 49,973 47,806 Investment expenses (675) (553) (1,990) (1,788) Net investment income $ 16,604 15,454 47,983 46,018 Net investment income, annualized 63,977 61,357 Average invested assets, at amortized cost 1,482,651 1,448,615 Annualized yield on average invested assets 4.30 % 4.24 % 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 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 $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. Other income consists primarily of supplemental contracts issued to policyholders in our Life Insurance segment upon the surrender or maturity of their original policies. We believe this income has been increasing over the past few quarters due to our retention initiatives. September 30, 2022 | 10-Q 38 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS BENEFITS AND EXPENSES Three Months Ended Nine Months Ended September 30, September 30, (In thousands) 2022 2021 2022 2021 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 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 Nine Months Ended September 30, September 30, (In thousands) 2022 2021 2022 2021 Claims and Surrenders: Death claim benefits $ 6,089 9,723 18,979 25,207 Surrender benefits 12,597 12,435 36,463 38,771 Endowment benefits 2,131 2,360 6,417 7,012 Matured endowment benefits 8,470 4,276 20,737 15,060 Property claims 326 1,765 631 2,401 A&H and other policy benefits 1,116 1,257 3,033 3,250 Total claims and surrenders $ 30,729 31,816 86,260 91,701 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 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS 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 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. Commissions. Commission expenses are a cost of acquiring business, as commissions are the primary compensation paid to our independent consultants and independent agents for selling our products. First year commission rates are higher than renewal commission rates and thus commissions fluctuate directly in relation to first year sales. Capitalization and Amortization of Deferred Policy Acquisition Costs. Costs capitalized include certain commissions, policy issuance costs, and underwriting and agency expenses that relate to successful sales efforts for insurance contracts and thus fluctuate primarily with first year sales. Amortization is impacted by persistency, surrenders, and new sales production and thus it may fluctuate from period to period depending on these factors. SEGMENT OPERATIONS Our business is comprised of two operating business segments, as detailed below. • Life Insurance • Home Service Insurance These segments are reported in accordance with U.S. GAAP. The Company's Other Non-Insurance enterprises include non-insurance operations such as IT and corporate-support functions, which are included in the table presented below to properly reconcile the segment information with the consolidated financial statements of the Company. September 30, 2022 | 10-Q 40 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS The following table shows income (loss) before federal income taxes by segment during the periods indicated. Three Months Ended Nine Months Ended September 30, September 30, (In thousands) 2022 2021 2022 2021 Income (loss) before federal income tax expense: Segments: Life Insurance $ (2,931) 1,686 (4,264) 8,707 Home Service Insurance (656) (4,099) (1,790) (4,319) Total segments (3,587) (2,413) (6,054) 4,388 Other Non-Insurance enterprises (1,200) (314) (3,336) (4,263) Total income (loss) before federal income tax expense $ (4,787) (2,727) (9,390) 125 LIFE INSURANCE 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 $4.4 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 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS Detailed results of operations for the Life Insurance segment for the periods indicated are as follows: Three Months Ended Nine Months Ended September 30, September 30, (In thousands) 2022 2021 2022 2021 Revenues: Premiums $ 31,696 32,198 88,461 89,399 Net investment income 12,806 11,991 37,124 35,468 Investment related gains (losses), net (4,367) 1,205 (8,644) 5,741 Other income 682 676 2,403 2,142 Total revenues 40,817 46,070 119,344 132,750 Benefits and expenses: Insurance benefits paid or provided: Claims and surrenders 24,742 22,565 67,768 69,366 Increase in future policy benefit reserves 6,040 9,369 18,746 17,081 Policyholders' dividends 1,382 1,638 4,241 4,400 Total insurance benefits paid or provided 32,164 33,572 90,755 90,847 Commissions 5,103 4,854 13,701 13,483 Other general expenses 6,016 4,900 17,065 15,273 Capitalization of deferred policy acquisition costs (4,592) (4,201) (12,205) (11,578) Amortization of deferred policy acquisition costs 4,991 5,191 14,086 15,739 Amortization of cost of insurance acquired 66 68 206 279 Total benefits and expenses 43,748 44,384 123,608 124,043 Income (loss) before federal income tax expense $ (2,931) 1,686 (4,264) 8,707 Life Insurance segment premium breakout is detailed below. Three Months Ended Nine Months Ended September 30, September 30, (In thousands) 2022 2021 2022 2021 Premiums: First year $ 3,135 2,998 7,888 8,201 Renewal 28,561 29,200 80,573 81,198 Total premiums $ 31,696 32,198 88,461 89,399 Premiums. 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 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS 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 nine months ended September 30, 2022 and 2021. Three Months Ended Nine Months Ended September 30, September 30, (In thousands) 2022 2021 2022 2021 Country: Colombia $ 5,869 6,368 $ 17,765 17,635 Taiwan 3,862 3,905 12,540 13,132 Venezuela 4,388 4,729 12,343 13,593 Ecuador 3,286 3,420 9,380 9,687 Argentina 2,250 2,785 6,688 7,021 Other Non-U.S. 10,141 10,259 28,711 28,447 Total $ 29,796 31,466 87,427 89,515 Domestic Life Insurance Premiums. 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 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 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 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS Claims and Surrenders. The following table shows the primary claims and surrender benefits paid within the Life Insurance segment for the three and 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 Claims and Surrenders: Death claim benefits $ 1,370 3,005 3,879 7,538 Surrender benefits 11,817 11,870 34,230 37,099 Endowment benefits 2,128 2,359 6,406 7,006 Matured endowment benefits 8,335 4,138 20,323 14,607 A&H and other policy benefits 1,092 1,193 2,930 3,116 Total claims and surrenders $ 24,742 22,565 67,768 69,366 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 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 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 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 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 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS Detailed results of operations for the Home Service Insurance segment for the periods indicated are as follows: Three Months Ended Nine Months Ended September 30, September 30, (In thousands) 2022 2021 2022 2021 Revenues: Premiums $ 12,179 11,129 37,002 35,786 Net investment income 3,527 3,238 10,054 9,826 Investment related gains (losses), net (462) (36) (1,629) 393 Other income — 1 1 3 Total revenues 15,244 14,332 45,428 46,008 Benefits and expenses: Insurance benefits paid or provided: Claims and surrenders 5,987 9,251 18,492 22,335 Increase in future policy benefit reserves 1,050 1,519 4,291 5,326 Policyholders' dividends 7 12 16 31 Total insurance benefits paid or provided 7,044 10,782 22,799 27,692 Commissions 4,107 4,261 12,106 12,590 Other general expenses 4,228 4,146 12,093 12,024 Capitalization of deferred policy acquisition costs (1,780) (1,825) (5,132) (5,220) Amortization of deferred policy acquisition costs 2,091 852 4,783 2,561 Amortization of cost of insurance acquired 210 215 569 680 Total benefits and expenses 15,900 18,431 47,218 50,327 Loss before federal income tax expense $ (656) (4,099) (1,790) (4,319) Premiums. 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 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS Claims and Surrenders. Claims and surrender benefits, which are the largest portion of our expenses in the Home Service Insurance segment, are summarized as follows: Three Months Ended Nine Months Ended September 30, September 30, (In thousands) 2022 2021 2022 2021 Claims and Surrenders: Death claim benefits $ 4,719 6,718 15,100 17,669 Surrender benefits 780 565 2,233 1,672 Endowment benefits 3 1 11 6 Matured endowment benefits 135 138 414 453 Property claims 326 1,765 631 2,401 A&H and other policy benefits 24 64 103 134 Total claims and surrenders $ 5,987 9,251 18,492 22,335 The majority of claims and surrender benefits in our Home Service Insurance segment relate to death claim benefits. 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. 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 Nine Months Ended September 30, September 30, (In thousands) 2022 2021 2022 2021 Income (loss) before income tax expense $ (1,200) (314) (3,336) (4,263) This operating unit represents the administrative support entities to the insurance operations. Its revenues are primarily intercompany and have been eliminated in consolidation under U.S. GAAP, which typically results in a segment loss. Revenue in this operating unit consists primarily of net investment income and investment related gains or losses, while expenses consist of other general expenses related to corporate functions. INVESTMENTS Our investments are an integral part of our business success. 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. September 30, 2022 | 10-Q 46 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS The following table shows the carrying value of our investments by investment category and cash, cash equivalents and the percentage of each to total cash and invested assets. Carrying Value September 30, 2022 December 31, 2021 (In thousands, except for %) Amount % Amount % Cash, Cash Equivalents and Invested Assets Fixed maturity securities: U.S. Treasury and U.S. Government-sponsored enterprises $ 13,341 1.0 % $ 15,070 0.9 % Corporate 694,612 52.0 % 893,008 54.0 % States and political subdivisions (1) 315,299 23.6 % 383,958 23.3 % Mortgage-backed (2) 100,861 7.6 % 133,795 8.1 % Asset-backed 36,833 2.7 % 44,676 2.7 % Foreign governments 102 — % 110 — % 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 % Other investments: Policy loans 78,085 5.8 % 80,307 4.9 % Equity securities 11,789 0.9 % 14,844 0.9 % Other long-term investments 62,717 4.7 % 57,399 3.5 % Total cash, cash equivalents and invested assets $ 1,335,887 100.0 % $ 1,650,461 100.0 % (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 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 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 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 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS The Company's municipal bond portfolio includes third-party guarantees. Detailed below is a presentation by the Nationally Recognized Statistical Rating Organization ("NRSRO") rating of these holdings by funding type as of September 30, 2022. General Obligation Special Revenue Other Total % Based on Amortized Cost (In thousands, except for %) Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost State and political subdivision fixed maturity securities including third-party guarantees AAA $ 14,631 14,567 6,712 7,119 — — 21,343 21,686 6.2 % AA 43,996 44,028 117,429 135,154 10,492 11,098 171,917 190,280 54.4 % A 12,255 13,064 87,680 100,730 4,447 4,407 104,382 118,201 33.8 % BBB 2,435 2,548 8,561 9,990 1,335 1,450 12,331 13,988 4.0 % BB and other 4,038 4,395 1,288 1,285 — — 5,326 5,680 1.6 % Total $ 77,355 78,602 221,670 254,278 16,274 16,955 315,299 349,835 100.0 % State and political subdivision fixed maturity securities excluding third-party guarantees AA $ 28,696 28,565 44,341 49,045 6,594 6,514 79,631 84,124 24.0 % A 22,508 23,472 119,383 139,248 6,793 7,136 148,684 169,856 48.6 % BBB 4,375 4,455 26,853 30,656 1,552 1,855 32,780 36,966 10.6 % BB and other 21,776 22,110 31,093 35,329 1,335 1,450 54,204 58,889 16.8 % 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 September 30, 2022. (In thousands) Fair Value Amortized Cost % of Total Fair Value Education $ 47,189 54,244 15.0 % Utilities 50,025 54,512 15.9 % 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 September 30, 2022. 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 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS 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 Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Texas state and political subdivision fixed maturity securities including third-party guarantees AAA $ 14,128 14,061 2,967 3,064 — — 17,095 17,125 AA 18,348 18,259 13,968 16,111 — — 32,316 34,370 A — — 14,925 20,384 — — 14,925 20,384 BBB — — 1,813 1,822 — — 1,813 1,822 BB and other — — 502 503 — — 502 503 Total $ 32,476 32,320 34,175 41,884 — — 66,651 74,204 Texas state and political subdivision fixed maturity securities excluding third-party guarantees AA $ 26,463 26,322 2,994 3,003 — — 29,457 29,325 A 4,867 4,854 23,711 30,848 — — 28,578 35,702 BBB 1,146 1,144 5,006 5,246 — — 6,152 6,390 BB and other — — 2,464 2,787 — — 2,464 2,787 Total $ 32,476 32,320 34,175 41,884 — — 66,651 74,204 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 Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost California state and political subdivision fixed maturity securities including third-party guarantees AA $ 1,415 1,580 26,663 33,242 2,346 2,730 30,424 37,552 A 1,254 1,650 7,744 9,728 — — 8,998 11,378 BBB — — 866 865 — — 866 865 Total $ 2,669 3,230 35,273 43,835 2,346 2,730 40,288 49,795 California state and political subdivision fixed maturity securities excluding third-party guarantees AA $ — — 2,198 3,062 — — 2,198 3,062 A 2,669 3,230 16,230 20,616 2,346 2,730 21,245 26,576 BBB — — 3,702 3,946 — — 3,702 3,946 BB and other — — 13,143 16,211 — — 13,143 16,211 Total $ 2,669 3,230 35,273 43,835 2,346 2,730 40,288 49,795 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 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS Information on both unrealized and realized gains and losses by category is set forth in Part I, Item 1, Note 5. Investments of the notes to our consolidated financial statements herein. LIQUIDITY AND CAPITAL RESOURCES Below are our primary capital resources (based on carrying value of each) as of the periods indicated. (In thousands) September 30, 2022 December 31, 2021 Fixed maturity securities $ 1,161,048 1,470,617 Cash and cash equivalents 21,007 27,294 Liquidity refers to a company's ability to generate sufficient cash flows to meet the needs of its operations. We manage our insurance operations as described herein in order to ensure that we have stable and reliable sources of cash 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 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. Note 5. Investments in the notes to our consolidated financial statements herein, we expect the fair value to recover as the securities approach maturity. We have 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). PARENT COMPANY LIQUIDITY AND CAPITAL RESOURCES Citizens is a holding company and has minimal operations of its own. Our assets consist of the capital stock of our subsidiaries, cash and investments. Our liquidity requirements are met primarily from two sources: cash generated from our operating subsidiaries and our invested assets. Our ability to obtain cash from our insurance subsidiaries depends primarily upon the availability of statutorily permissible payments, including payments Citizens receives from service agreements with our insurance subsidiaries and dividends from the subsidiaries. The ability to make payments to the holding company is limited by applicable laws and regulations of Bermuda and U.S. states of domicile which subject insurance operations to significant regulatory restrictions. These laws and regulations require, among other things, that our insurance subsidiaries maintain minimum solvency requirements, which limit the amount of dividends that can be paid to the holding company. The regulations also require approval of our service agreements with the applicable regulatory authority in order to prevent insurance subsidiaries from moving large amounts of cash to the unregulated holding company. In addition to the above-mentioned sources of cash, we offer a Stock Investment Plan ("SIP"), whereby investors, policyholders, independent contractors and agents, employees and directors can directly purchase our stock. At our option, purchases of stock under the SIP can be made from newly issued or treasury stock, rather than in the open market, in which case, we can raise capital by selling our shares. In 2021, we entered into a Credit Facility with Regions Bank. See Part I, Item 1, Note 7. Commitments and Contingencies in the notes to our consolidated financial statements, herein, for a description of the Credit Facility. 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 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS INSURANCE COMPANY SUBSIDIARY LIQUIDITY AND CAPITAL RESOURCES The liquidity requirements of our insurance operations are primarily met by premium revenues, investment income and investment maturities or sales. Primary cash needs relate to payments of policyholder benefits, investment purchases and operating expenses. Historically, cash flow from our operations has been sufficient to meet our cash needs. We have not had to liquidate a material amount of investments to pay our expenses and we did not do so in the 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. See Contractual Obligations and Off-balance Sheet Arrangements in our Form 10-K and below for a discussion of known and estimated cash needs. Cash from Operating Activities. Cash provided by or used in operating activities is an important liquidity metric because it reflects, during a given period, the amount of cash generated that is available to pay our operating expenses or make strategic acquisitions. In the nine months ended September 30, 2022, our operations provided $39.8 million in net cash. Cash from Investing Activities. We have traditionally also had significant cash flows from investing activities due to both scheduled and unscheduled investment security maturities, redemptions, and prepayments. These cash flows, for the most part, are reinvested in new investments. Net cash used in investing activities totaled $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. Trends, Demands and Restrictions on our Uses of Cash Because claims and surrender benefits are our largest expense, a primary liquidity concern is the risk of either (i) an extraordinary level of early policyholder surrenders, or (ii) higher than expected mortality. In order to mitigate the risk of early policyholder surrenders, we include provisions in our insurance policies, such as surrender charges, that help limit and discourage early withdrawals. As previously discussed, surrender benefits had been higher than usual the last several years as many of our policies have reached the age where surrender charges have expired and due to other reasons, like the loss of one of our biggest distributors in Venezuela. However, we have been aggressively managing policyholder retention efforts and in the 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 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. Policyholder election behavior is unknown, but if too many policyholders elect lump sum distributions, the Company could be exposed to liquidity risk in years of high maturities. Meeting these distributions could require the Company to sell securities at inopportune times to pay policyholder withdrawals. Alternatively, if the policyholders were to leave the money on deposit with the Company at interest, our profitability could be impacted if the product guaranteed rate is higher than the market rate we are earning on our investments. We currently anticipate that our available operating cash flow and capital resources will be adequate to meet our needs for funds, but we will monitor closely our policyholder behavior patterns. Death claims, which were high in 2021 due in part to COVID, have decreased to 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 Table of Contents 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"). RBC considers the type of business written by an insurance company, the quality of its assets, and various other aspects of an insurance company's business to develop a minimum level of capital called "Authorized Control Level Risk-Based Capital". This level of capital is then compared to an adjusted statutory capital that includes capital and surplus as reported under statutory accounting principles, plus certain investment reserves. Should the ratio of adjusted statutory capital to control level RBC fall below 200% for our domestic companies, a series of remedial actions by the affected company would be required. Additionally, we have a parental guarantee between Citizens and CICA, Citizens' wholly-owned subsidiary domiciled in Colorado, to maintain a RBC level above 350%. At 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"). 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. The Keep Well Agreement requires Citizens to contribute up to $10 million in capital to CICA International as necessary to ensure that CICA International has a minimum capital level of 120%. Since CICA International’s capital level currently exceeds 120%, Citizens is not currently required to make a capital contribution. Any capital injection that Citizens is required to make under the parental guarantee with CICA or under the Keep Well Agreement with CICA International could negatively impact the Company’s capital resources and liquidity. CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS As of September 30, 2022, we have no additional contractual obligations or off-balance sheet arrangements other than those described in Part I. Item 1, Note 7. Commitments and Contingencies in the notes to our consolidated financial statements herein and in Part II, Item 7, Contractual Obligations and Off-Balance Sheet Arrangements in our Form 10-K . We do not utilize special purpose entities as investment vehicles, nor are there any such entities in which we have an investment that engage in speculative activities of any nature, and we do not use such investments to hedge our investment positions. CRITICAL ACCOUNTING POLICIES We believe that the accounting policies set forth in Part I, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations - "Critical Accounting Policies" and Part IV, Item 15, Note 1. Summary of Significant Accounting Policies of our consolidated financial statements in our Form 10-K continue to describe the significant judgments and estimates used in the preparation of our consolidated financial statements. September 30, 2022 | 10-Q 52 Table of Contents CITIZENS, INC.