What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2023-03-10 compared with 2022-03-11 · 296 added, 349 removed, 618 unchanged (51% of the section changed)

1 unchanged sentence

This section of this Annual Report on Form 10-K generally discusses 2022 and 2021 items and year-to-year comparisons between 2022 and 2021.

Discussions of 2019 items and year-to-year comparisons between 2020 and 2019 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020 (the "2020 10-K").

This discussion should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this report.

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.

2 unchanged sentences

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.

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, 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 Services Insurance;

(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.

3 unchanged sentences

The objective of our MD&A is to provide investors with a succinct analysis of the Company's financial performance from management's perspective.

We start by discussing the factors that we believe drive our operating results and then we discuss how industry developments and economic circumstances in general ( e.g.

, low interest rates, the COVID-19 pandemic) affected or could affect our financial performance.

After telling you about our industry, we discuss our 2021 financial highlights, the impacts of COVID-19 on our business during 2021, and then we break-down our results of operations in detail so an investor understands the various line items of our profit & loss statements from management’s perspective.

Since our investments are one of the two principal sources of our revenues, we describe them in detail.

Finally, we discuss our capital resources and liquidity so investors will have a better understanding how those resources are utilized and how we are able to meet our cash needs.

We start by discussing the factors that we believe drive our operating results and then we discuss how industry developments and economic circumstances in general (e.g., low interest rates, the COVID-19 pandemic) affected or could affect our financial performance.

After telling you about our industry, we discuss our 2022 financial highlights, the impacts of certain events on our business during 2022, and then we break-down our results of operations in detail so an investor understands the various line items of our profit and loss statements from management’s perspective.

Since our investments are one of two principal sources of revenues, we describe them in detail.

Finally, we discuss our capital resources and liquidity so investors better understand how those resources are utilized and how we are able to meet our cash needs.

Throughout the MD&A, we describe how we view the Company and which matters we believe are reasonably likely to affect future operations.

3 unchanged sentences

We see the following as the primary factors that drive our operating results:

• Sales (e.g., premium revenues)

• Our investments

1 unchanged sentence

• Operating expenses

As premium revenues and investment income are our two primary sources of income, both new sales and "resells" ( i.e .

retaining the policy) as well as our investments and the interest we receive on such investments, are key to our profitability.

Throughout the MD&A and in Item 1 - Busi ness , we describe the actions and initiatives that are taken to increase sales and improve retention, how we performed in 2021, and how we view trends with respect

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

December 31, 2022 | 10-K 28

CITIZENS, INC.

to sales and retention.

We also discuss our investment performance and what we are doing to improve performance in this extended low-interest rate environment.

Our first-year premiums in 2021 increased by 11.2% compared to 2020.

We believe this increase was driven by our focused marketing campaigns, including a campaign intended to recruit new agents, the introduction of new products, and higher sales in 2021 compared to 2020 due to COVID-19 impacts in 2020.

Renewal premiums in our Home Service Insurance increased in 2021 as compared to 2020 due to an increased focus on collection efforts.

Renewal premiums in our Life Insurance segment declined due to the decrease in our in-force business over the last several years.

The prior-year surrenders negatively impacted the current year renewal premiums even though total surrender benefits paid declined in 2021 compared to 2020 (see below).

As we describe in Item 1.

Business - Strategic Initiatives, we believe that our retention efforts began to stem the decline of renewal premiums in 2021.

While interest rates continue to remain low, our yield stayed flat, at 4.24% in both 2021 and 2020.

Our net investment income increased by $1.3 million from 2020 to 2021 due to a greater asset base.

As part of the ongoing process of managing our portfolio and optimizing performance we have been diversifying our investment portfolio in order to help mitigate the effects of the sustained low interest rate environment, and investment related gains on our investments contributed significantly to our profitability in 2021.

Premium revenues consist of both new sales (first year premiums) and renewal premiums.

Throughout the MD&A and in Item 1 - Business , we describe the actions and initiatives that are taken to increase sales and improve retention, how we performed in 2022, and how we view trends with respect to sales and retention.

Our Life Insurance segment first year premiums increased by 4% due to the introduction of a new whole life product in our international markets, as well as focused marketing campaigns.

Our Home Service Insurance segment first year premiums declined, which we believe is attributed to inflationary pressures and the cessation of COVID-19 government aid programs in 2022.

Renewal premiums in our Life Insurance segment declined primarily due to impact from a higher level of surrenders during the last few years and from matured endowment benefits, which we expected due to contractual expiration dates.

Our Home Service Insurance renewal premiums increased in 2022 due to the lack of hurricanes in Louisiana in 2022;

Hurricane Ida negatively impacted renewal premiums in this segment in 2021.

Our net investment income increased by $3.9 million from 2021 to 2022 due primarily to investment income from our limited partnership investments, a growing diversified invested asset base and reinvesting matured or called fixed income maturity securities into a higher interest rate environment.

December 31, 2022 | 10-K 29

CITIZENS, INC.

Payment of policyholder benefits for death claims and surrenders is our largest expense.

In 2021, our death claims increased due in large part to COVID-19-related deaths.

Our surrenders decreased by $3.2 million in 2021 from 2020, which we believe was in large part due to our retention efforts.

Operating Expenses are our second largest expense and thus drive our operating results.

Our general operating expenses decreased by $10.3 million in 2021 as compared to 2020.

General operating expenses in 2020 included $10.0 million of severance payments to our former CEO related to the change in control of the Company.

Payment of policyholder benefits for claims and surrenders is our largest expense and thus also key to our profitability.

In 2022, our death claim benefits decreased compared to 2021 due to a lower number of reported death claims as 2021 period was negatively impacted by COVID-19-related deaths.

Our surrenders decreased by $2.9 million in 2022, which we believe was in large part due to our retention initiatives.

Operating expenses are our second largest expense and thus also drive our operating results.

Our general operating expenses increased by $1.8 million in 2022 as compared to 2021 mainly due to our sales convention in 2022, which was cancelled in the prior year due to the COVID-19 pandemic, and by higher home office expenses.

ECONOMIC AND INSURANCE INDUSTRY DEVELOPMENTS

The following significant trends and developments are currently impacting our business and industry:

• Sustained Low Interest Rate Environment.

• Increase in Interest Rates;

Volatility in Equity and Credit Markets;

The material uptick in interest rates over the past year has benefited the life insurance sector with respect to increased yields, net investment income and spreads.

However, this benefit was offset by inflation and macroeconomic volatility in 2022.

The volatility was substantial and the industry moved into material unrealized loss positions on fixed-income portfolios.

Inflation has also impacted our industry over the past year.

As the price of energy and food rises, customers will have less discretionary income to spend on insurance products.

As the inflationary environment continues, the industry may see policy lapses rise, especially among lower and middle-income customers.

• Sustained Low Interest Rate Environment Prior to 2022.

Market interest rates are a key driver of our results.

Persistent low interest rates are identified as a major threat for life insurance companies, given their rate-sensitive products and investments.

The sustained low interest rate environment continues to limit increases in profit margins for life insurers by:

The multi-year sustained low interest rate environment significantly reduced the overall yield on investments, as regulations require that the vast majority of a life insurance company's portfolio consist of fixed income securities, which are primarily callable.

As interest rates declined, these fixed income securities were called and had to be re-invested in lower rate investments.

This has reduced and may continue to reduce profit margins for life insurers by:

◦ Reducing the spread between guaranteed interest rates credited to policyholders and interest earned on supporting assets.

◦ Causing us to reinvest proceeds in lower yielding assets as portions of our fixed maturity investment portfolio, which is primarily invested in callable securities, are called and must be reinvested;

◦ Potentially requiring us to increase our reserves or trigger loss recognition events related to policy liabilities, accelerate amortization of DAC and COIA, and potentially impair intangible assets;

◦ Making our products less attractive (due to lower credited interest rates), resulting in lower sales;

◦ Changing policyholder behavior, including increasing surrender or withdrawal activity.

We have attempted to mitigate the risk of the low interest rate environment by making new investments in securities of states, municipalities, essential services and corporate issuers as well as identifying investment opportunities in other asset classes, such as limited partnerships, to increase our yields while maintaining a prudent risk profile for our overall portfolio.

• Impact of COVID-19.

The COVID-19 pandemic has had and continues to have a significant impact on the life insurance industry.

Initially there were hopes for a gradual decline in COVID-19 mortality as the vaccination roll out increased significantly and the pandemic ebbed after more than a year during the summer months of 2021.

However, the emergence of the Delta variant resulted in a significant increase in the number of pandemic-related deaths in 2021, and the emergence of the

As older endowment and annuity products are maturing, the guaranteed interest rates may be higher than current yields;

◦ Products sold during the last several years with lower interest rate guarantees may be surrendered or lapsed, as customers look to invest in higher interest rate products;

◦ Because products may have been priced with assumptions of higher interest rates (and higher interest earned on supporting assets), life insurance companies may have to

December 31, 2022 | 10-K 30

CITIZENS, INC.

Omicron variant has resulted in additional economic distress in early 2022.

The global life insurance industry has experienced significantly higher reported claims due to the COVID-19 pandemic.

The long-term nature of life insurance products means premiums are not yet capturing the risk that deaths or long-term illness from COVID-19 will likely remain higher than previously estimated.

increase reserves, trigger loss recognition events related to policy liabilities, accelerate amortization of DAC or COIA, and potentially impair intangible assets.

• Impact of COVID-19.

COVID-19 and its related economic conditions have caused a lot of uncertainty in the world in the past three years.

Our industry and our Company are no exception to the negative, uncertain and unpredictable impacts the pandemic has brought.

While the direct impacts of COVID-19 (e.g., deaths) have begun to wane, 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 2023 or beyond.

The positive impact to our industry is that people have a higher awareness for the need for life insurance to protect their families and loved ones.

However, the long-term nature of life insurance products means premiums are not yet capturing the risk that deaths or long-term illness from COVID-19 will likely remain higher than previously estimated.

Additionally, life insurers will need to decide how to underwrite COVID-19 survivors, as the long-term effects of COVID-19 are still unclear.

• Aging population.

Many countries in the world are experiencing growth in the number and proportion of older persons in their population.

As an increasing percentage of the world population reaches retirement age, we believe there will be a greater need for age-related products and we will benefit from increased demand for living benefit products rather than death benefit products, as customers will require cash accumulation to pay expenses to meet their lifetime income needs.

Our ordinary life products are designed to accumulate cash values to provide for living expenses in a policy owner's later years, while continuously providing a death benefit.

However, as the population reaches retirement age, policyholders may decide to use their accumulated cash value for cash needed in retirement, thus increasing surrenders of long-term products.

• Availability of Reinsurance.

Reinsurance market dynamics including increased pricing, years of accumulating catastrophic losses, investment market losses and the significant losses expected from the fallout of the COVID-19 pandemic have led to a decline in the availability of reinsurance, tighter terms (such as, for example, pandemic exclusions) and/or increased reinsurance prices.

Reinsurance market dynamics including increased cybersecurity concerns, significant weather-related losses, pandemic losses, and similar to the life insurance industry, economic-related market losses, have led to a decline in the availability of reinsurance, tighter terms (such as, for example, pandemic exclusions) and/or increased reinsurance prices.

While we currently cede a limited amount of our primary insurance business to reinsurers, we may encounter difficulty in obtaining reinsurance in the future, forcing us to resort to a more expensive reinsurance market.

3 unchanged sentences

The onset of the COVID-19 pandemic in 2020 caused companies to adapt to a more digital operations platform, almost overnight.

The insurance industry is focused on digitizing distribution channels and empowering agents with advanced digital capabilities.

Access to real-time data has streamlined the way we underwrite our products.

The rapid development of artificial intelligence and the demand for fee-based, value-added services are challenging our industry.

Therefore, it is critical that we embrace these changes for the benefit of our policyholders, agents, employees and stockholders.

• Climate Change.

Rising climate related losses stemming from the frequency and severity of extreme weather-related events have shone a regulatory spotlight on insurance risk and climate change.

While the majority of our business is related to life insurance products, which may be less impacted by climate change than our property insurance products, we must understand and access accurate climate data in order to make informed decisions with regard to climate risk.

2021 HIGHLIGHTS

FINANCIAL EVENTS THAT MATERIALLY IMPACTED OUR BUSINESS IN 2022 AND 2021

EVENTS THAT IMPACTED 2022 RESULTS

Impact of Inflation and Rising Interest

As discussed above, the impact of inflation, which has led to market volatility and rising interest rates, had a material impact on both our results of operations and balance sheet in 2022.

The market volatility affected the fair value of our equity securities, leading to investment related losses of $10.3 million in 2022, compared to net gains $11.0 million in 2021.

Investment related losses in 2022 (and gains in 2021) derive principally from our investments in equity securities and includes unrealized losses (and gains) from market price changes during the period.

Investment related gains and losses can cause significant fluctuations from period to period and are not indicative of our operating results.

We believe that investment related gains and losses, whether realized from dispositions or unrealized from changes in market prices of equity securities, have no bearing in understanding our reported results or in evaluating the economic performance of our business.

These gains and losses have caused and will continue to cause significant volatility in our periodic earnings.

In addition, interest rates rose significantly in 2022 after being ultra-low for almost a decade.

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.

Long duration fixed maturity securities were particularly impacted by the rising rates in 2022.

Because we strive to match our asset duration to our liability duration, the vast majority of our total investments are invested in longer-term fixed maturity securities and we reported a pre-tax net unrealized loss of $201.7 million on our available-for-sale securities at December 31,

December 31, 2022 | 10-K 31

CITIZENS, INC.

The credit ratings and default risk of our fixed maturity securities were not significantly impacted by the rise in interest rates and volatility in 2022 and because we intend to hold the long-term investments to maturity, we do not believe that the current unrealized loss is indicative of our long-term financial strength.

These unrealized losses were the single largest negative impact that led to total stockholders' equity of $1.0 million at December 31, 2022.

We also believe that the inflationary environment has led to higher surrenders and lapses in 2022 as well as lower sales, as our policyholders conserve cash due to concerns over inflation and rising costs, particularly in our Home Service Insurance segment, where our customer base is primarily middle- and lower-income individuals.

EVENTS THAT IMPACTED 2021 RESULTS

We disclosed the following events in our Annual Report on Form 10-K for the year ended December 31, 2021 and are repeating below so investors can better understand material changes to our financial results between year end 2022 and 2021.

COVID-19 Pandemic

7 unchanged sentences

• volatility in our investment portfolio due to market disruptions caused by COVID-19 related concerns such as inflation.

December 31, 2021 | 10-K 35

CITIZENS, INC.

We believe that in both 2020 and 2021 we experienced higher than usual death claims due to the impact of COVID-19.

We continue to monitor the impact of the COVID-19 pandemic on our operations.

FINANCIAL HIGHLIGHTS

Federal Income Tax Benefit

6 unchanged sentences

Accordingly, as of December 31, 2021, we wrote-off the goodwill and recognized an expense of $12.6 million for 2021.

At December 31, 2021, we had $1.9 billion in total assets, an increase from $1.8 billion at December 31, 2020, and we had $27.3 million in cash.

We did not have any debt at December 31, 2021.

During 2021 , we reported net income of $36.8 million, compared to a net loss of $11.0 million in 2020.

In comparison to 2020, the $47.8 million increase in net income was primarily due to:

↑ $43.8 million tax benefit;

↑ $9.5 million increase in investment related gains;

↓ $10.3 million of general expenses.

The increase in net income was partially offset by:

↑ $4.2 million in death claim benefits;

↑ $6.5 million in future policy benefit reserves;

↑ $12.6 million goodwill impairment.

Revenue Highlights

As discussed above, insurance premiums and investment income are our primary sources of revenue.

• Insurance premiums declined 0.3% in 2021 compared to 2020, totaling $174.7 million and $175.3 million, respectively, as growth in first year premiums in both segments was more than offset by a decline in renewal premiums in our Life Insurance segment.

• Net investment income increased 2.2% in 2021 compared to 2020, totaling $61.5 million and $60.2 million, respectively, driven by a growing asset base.

The average yield on our consolidated investment portfolio was 4.24% for both 2021 and 2020 as diversification of our investment portfolio into limited partnership investments helped offset a challenging investment environment for fixed maturity securities in 2021.

• Investment related gains increased by $9.5 million.

December 31, 2022 | 10-K 32

CITIZENS, INC.

2022 HIGHLIGHTS

Due to the impact inflation has had on market volatility and rising interest rates during 2022, we had a net loss of $6.6 million, compared to net income of $36.8 million in 2021.

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 $10.3 million in 2022, compared to investment related gains of $11.0 million in 2021.

We did not sell these investments during 2022, but as discussed in Part IV, Item 15, Note 3.

Fair Value Measurements , 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.

As mentioned above, we consider investment related gains and losses, whether realized or unrealized, as non-core and incidental in understanding the quarterly or annual operating results of our insurance business.

In addition to the change in investment related gains and losses, 2021 net income was positively affected by the above-described one-time $43.8 million non-cash tax benefit.

Due to these investment related losses, our net loss per share of Class A common stock was $0.13 for the year ended December 31, 2022.

Key operating results (comparison of 2022 v.

↑ $3.9 million of net investment income

↓ $6.8 million of total insurance benefits paid or provided, partially offset by

↑ $1.8 million of general operating expenses

↓ $1.0 million of premium revenue

Revenue Highlights

As discussed above, insurance premiums and investment income are our primary sources of revenue and increased by $2.9 million in 2022 compared to 2021.

• Insurance premiums declined slightly in 2022 compared to 2021, totaling $173.7 million and $174.7 million, respectively due to:

◦ 4% growth in first year premiums in our Life Insurance segment was more than offset by lower renewal premiums in this segment due to increases in expiring matured endowments;

◦ our Home Service Insurance segment insurance premiums in 2022 decreased 2% compared to 2021;

◦ our property insurance premiums increased by $1.2 million due to rate increases and the lack of hurricanes in Louisiana in 2022 versus 2021 (Hurricane Ida).

• Net investment income increased 6% in 2022 compared to 2021, totaling $65.4 million and $61.5 million, respectively, from a higher average portfolio yield in 2022 as well as a growing invested asset base.

The average yield on our consolidated investment portfolio was 4.4% in 2022, a 16 basis point increase from 2021.

Benefits and Expenses Highlights

The primary use of our funds is payment of insurance benefits.

Total insurance benefits paid or provided in 2021 increased by 3.6%, from $156.7 million in 2020, to $162.4 million in 2021.

This expense consists primarily of the following:

• Claims and surrender benefits decreased 1.2% in 2021 compared to 2020.

This decrease was primarily due to a decrease in surrender benefits and endowments benefits in the Life Insurance segment, which more than offset the increase in death claims benefits.

The increase in death claim benefits was due primarily to a higher volume of reported claims, including COVID-19 related claims, in addition to an increase in the average death claim amount;

• Future policy benefit reserves, which increased 21.8% in 2021 compared to 2020 as a result of higher sales production and improved persistency.

The other primary use of our funds are the costs of selling our insurance products and other expenses:

• Commissions increased in 2021 compared to 2020, as they are directly related to premium production, and primarily first year premium production, which increased in 2021;

• General expenses decreased 19.2% in 2021 compared to 2020, driven by the change in control and executive severance expenses in 2020;

• Goodwill impairment of $12.6 million in 2021.

Our Operating Segments

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

Life Insurance

International .

For over 45 years, CICA Life Insurance Company of America ("CICA") and its predecessors have issued U.S.

dollar-denominated ordinary whole life insurance and endowment policies to non-U.S.

In 2018, we novated of all of the international policies issued by CICA to CICA Life Ltd.

("CICA International"), our Bermuda-based insurer.

We distribute our international insurance products through independent marketing organizations and their agents located in the countries in which our policyholders reside.

Endowment product sales are the primary driver of sales in this segment.

Our domestic operations in our Life Insurance segment primarily consist of the collection of renewal premiums on ordinary whole life and final expense policies issued to middle- and lower-income families and individuals in certain markets in the Mountain West, Midwest and Southern U.S.

We also sell credit life and credit accident and health insurance domestically.

As we discussed in Item 1.

Business - Strategic Initiatives, we introduced our domestic whole life products to the Florida market in 2021.

Our efforts to recruit agents to sell our products have been slower than we expected and we are re-evaluating our sales distribution approach, initiatives and domestic life insurance offerings in the Florida market in 2022.

The majority of our current domestic revenues are generated by the policies of domestic life insurance companies we have acquired since 1987.

Home Service Insurance

We operate in the Home Service Insurance market through our subsidiaries Security Plan Life Insurance Company ("SPLIC"), Magnolia Guaranty Life Insurance Company ("MGLIC") and Security Plan Fire Insurance Company ("SPFIC").

These companies provide final expense ordinary and industrial life insurance to middle- and lower-income individuals in Louisiana, Mississippi and Arkansas.

Our policies in this segment are sold and serviced through a home service marketing distribution system utilizing independent agents who work on a route system to collect premiums and service policyholders, and through networks of funeral homes that collect premiums and provide personal policyholder service.

In 2021, we added a new whole life product to this market that has higher allowable face values and a new critical illness coverage product which we sell through independent agents.

To a much lesser extent, our Home Service Insurance segment also sells property insurance policies covering dwellings and content.

The primary use of our funds is payment of insurance benefits for claims and surrenders as well as our general operating expenses.

• Total insurance benefits paid or provided decreased by 4% due primarily to lower future policy benefit reserves, which were a result of higher matured endowments in 2022, partially offset by increases to the future policy benefit reserves due to improved first year sales and better persistency in our Life Insurance segment.

• General expenses increased as described above.

December 31, 2022 | 10-K 33

CITIZENS, INC.

Financial Condition at December 31, 2022

• Total assets of $1.6 billion.

• Total investments of $1.3 billion;

fixed maturity securities comprised 88.0% of total investments.

• $4.8 billion of direct insurance in force.

CONSOLIDATED RESULTS OF OPERATIONS

Our Operating Segments

We manage our business in two operating segments:

Life Insurance and Home Service Insurance.

Item 1, Business for a discussion about the business operated in each segment.

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

The total dollar amount of insurance issued, number of policies issued, and average face amounts of policies issued in 2021 and 2020 are shown below.

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.

Years Ended December 31, 2022 2021

8 unchanged sentences

Total $ 674,719,105 31,179 $ 411,329,185 26,470

Total insurance issued increased $57.2 million, or 16.1%, in 2021 compared to 2020 as both the Life Insurance and Home Service Insurance segments experienced growth in amount of insurance issued.

The number of policies issued in the Life Insurance segment increased 13.2% in 2021 compared to 2020.

We believe the increase was primarily due to enhancements to our business operations and sales practices to adapt to the COVID-19 pandemic as well as continued sales promotions and campaigns, focused training on virtual selling, and strategically prioritizing selling lower face amount policies due to the COVID-19 pandemic in 2021.

In addressing the decreasing first year premiums we have seen in recent years in this segment, we have prioritized recruiting new independent contractors in 2021 and we believe we have seen the impact of these efforts in 2021.

We believe that our policies issued and amount of insurance issued in 2020 were negatively impacted by the COVID-19 pandemic.

The number of policies issued in the Home Service Insurance segment decreased 9.3% in 2021 compared to 2020;

however, the amount of insurance issued increased by 32.4% due to higher average policy face amounts.

The increase in higher average policy face amounts issued is attributable to sales campaigns that focused on increasing the face amount of insurance sold as well as the introduction of our new whole life product in this segment, which has a higher maximum face value.

In addition, our Home Service Insurance segment was negatively impacted by the COVID-19 pandemic in 2020 as we had temporary office closures in Louisiana during the second and third quarters of 2020 due to the COVID-19 pandemic and Hurricane Laura, and we also temporarily curtailed the sales of certain product offerings that require extensive person-to-person sales interaction due to the COVID-19 pandemic.

Revenues are primarily generated from insurance premiums and investment income on invested assets.

As we have previously discussed, our strategic initiatives include the introduction of new products tailored to our specific markets.

These new products helped drive the increase in total insurance issued of $263.4 million, or 64%, in 2022 compared to 2021.

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 62% of total insurance issued in this segment in 2022.

We continue focusing on sales promotions and campaigns and prioritizing recruiting new independent contractors and we believe we have seen the impact of these efforts in 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.

December 31, 2022 | 10-K 34

CITIZENS, INC.

Our revenues are primarily generated from insurance renewal premiums and investment income from invested assets.

Years ended December 31,

(In thousands)

2021 2020 2019

Life insurance $ 167,586 169,801

5 unchanged sentences

Total revenues $ 232,524 250,546

December 31, 2021 | 10-K 38

CITIZENS, INC.

Renewal premiums consisted of 89.8% and 90.9% of our total premium revenue in 2021 and 2020, respectively.

Total premiums decreased slightly due to lower Life insurance premiums, which declined slightly, somewhat offset by higher property insurance premiums.

The increase in property insurance premiums resulted from rate increases and lower catastrophic reinsurance premiums in 2022 due to no hurricanes impacting Louisiana.

Years ended December 31,

(In thousands)

2021 2020 2019

First year $ 17,529 17,766

1 unchanged sentence

Total premiums $ 173,714 174,728

As discussed above, despite higher first year premiums in both our segments and higher renewal premiums in our Home Service Insurance segment, total premiums declined due to lower renewal premiums in our Life Insurance segment.

A decrease in property insurance premiums resulting from higher catastrophic reinsurance reinstatement premiums in 2021 also contributed to the lower renewal premiums.

We believe that our consolidated first year premium revenue was negatively impacted by the COVID-19 pandemic in both 2020 and 2021.

Our renewal premiums comprised 90% of our total premium revenue in 2022 and 2021.

Renewal premiums declined slightly in 2022 compared to 2021;

we believe the decline in Life Insurance segment renewal premiums is due to the impact from a higher level of surrenders during the last few years and increasing matured endowment benefits.

Our first year premiums declined 1% in 2022 compared to 2021.

We believe this is attributed to inflationary pressures, primarily in our Home Service Insurance segment.

December 31, 2022 | 10-K 35

CITIZENS, INC.

Net Investment Income.

2 unchanged sentences

(In thousands, except for %)

2021 2020 2019

Gross investment income:

2 unchanged sentences

Policy loans 6,189 6,420

Long-term investments 809 238 13

Other 54 97 374

Other long-term investments 2,535 809

Total investment income 68,020 63,886

3 unchanged sentences

Yield on average invested assets 4.40 % 4.24 %

Net investment income increased 2.2% to $61.5 million in 2021 compared to $60.2 million in 2020 driven by a growing asset base.

Investment income from fixed maturity securities accounted for a majority of our investment income.

Long-term investment income continued to increase as our limited partnership asset base grew, in addition to some early distribution income.

The annualized yield remained level in 2021 compared to 2020.

The sustained low interest rate environment of the past several years has required us to reinvest a portion of our portfolio at lower interest rates;

however, diversification of our investment portfolio into limited partnership investments helped offset a challenging investment environment for fixed maturity securities.

As we continue to face a challenging investment environment for fixed maturity assets, which account for the majority of our investment portfolio we have been investing in new asset classes, including limited partnerships;

however, insurance regulations limit the amount we can invest in these alternative investments.

December 31, 2021 | 10-K 39

CITIZENS, INC.

Net investment income increased 6% to $65.4 million in 2022 compared to $61.5 million in 2021 driven by a growing diversified asset base as well as the rising interest rate environment.

The annualized yield increased by 16 basis points in 2022 compared to 2021 as a result of the rising interest rate environment.

Investment Related Gains (Losses).

I nvestment gains and losses are as follows:

I nvestment related gains and losses are as follows:

Years ended December 31,

(In thousands)

2021 2020 2019

Investment related gains (losses):

3 unchanged sentences

Change in credit loss allowance (237) 186

Other-than-temporary impairments ("OTTI") — — (3,105)

Investment related gains (losses), net $ (10,291) 10,991

Net investment related gains increased by $9.5 million in 2021 from 2020, helping drive our net income improvement in 2021.

A significant portion of these gains related to fair value changes in our limited partnership investments.

In addition, the Company realized a gain of $1.0 million on the sale of its former training facility near Austin, Texas during 2021 with a gross sale price of $3.8 million.

Net investment related losses in 2022 is a primary driver of our net loss in 2022.

A significant portion of these losses are related to the impact from the equity markets on the fair value in our limited partnership investments.

We did not sell these investments during 2022, but as discussed in Part IV, Item 15, Note 3.

Fair Value Measurements , 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.

In 2021, the Company realized a gain of $1.0 million on the sale of its former training facility near Austin, Texas with a gross sale price of $3.8 million.

The facility was owned by Citizens and was held in Other Non-Insurance Enterprises.

These increases were partially offset by a decrease in fair value on our equity securities.

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 due to a higher level of matured endowment benefits as well as our retention initiatives.

December 31, 2022 | 10-K 36

CITIZENS, INC.

BENEFITS AND EXPENSES

1 unchanged sentence

(In thousands)

2021 2020 2019

Benefits and expenses:

11 unchanged sentences

Total benefits and expenses $ 239,591 257,234

December 31, 2021 | 10-K 40

CITIZENS, INC.

Claims and Surrenders.

Payment of death claims and surrender benefits is our primary use of cash.

Claims and surrenders decreased 1.2% from $121.1 million in 2020 to $119.7 million in 2021.

Payments of death claims, surrender benefits and matured endowment benefits are our primary uses of cash.

Years ended December 31,

(In thousands)

2021 2020 2019

Claims and surrenders:

7 unchanged sentences

Total claims and surrenders $ 119,935 119,735

• Death claim benefits increased 15.4% in 2021 compared to 2020.

The increases were due to both a higher volume, including COVID-19 related deaths, and a higher average amount of reported claims.

Mortality experience and COVID-19 impacts will continue to be closely monitored by the Company.

December 31, 2022 | 10-K 37

CITIZENS, INC.

• Death claim benefits decreased 18% in 2022 compared to 2021.

We believe that 2021 was negatively impacted by COVID-19 related deaths, which reduced significantly in 2022.

Mortality experience and COVID-19 impacts continue to be closely monitored by the Company.

• Surrender benefits decreased 6% in 2022 compared to 2021.

The decrease in surrender benefits is primarily within our Life Insurance segment.

Surrender benefits have been high in recent years due to international policies that have been in force for an extended period and have little or no associated surrender charges, but 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.

Surrender benefits represented less than 1.1% of total direct life insurance in force of $4.6 billion as of December 31, 2021.

• Property claim expenses decreased 24.8% in 2021 compared to 2020 due to fewer hurricanes impacting Louisiana in 2021.

Surrender benefits, which had been increasing prior to 2021 due to international policies that had been in force for an extended period and had little or no associated surrender charges, have been decreasing the past two years.

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, particularly in our international business.

We believe the impact of inflation and curtailment of COVID-19 relief government aid in 2022 negatively impacted retention in our Home Service Insurance segment.

Surrender benefits represented approximately 1% of total direct life insurance in force of $4.8 billion as of December 31, 2022.

• Many of our endowment policies are reaching their contractual maturity dates and thus matured endowment benefits are increasing.

We anticipated the $11.2 million increase in 2022 based upon the contractual maturity dates and expect continued increases in matured endowment benefits over the next few years as these contracts expire.

• Property claim expenses decreased 63% in 2022 compared to 2021 due to no hurricanes impacting Louisiana in 2022.

Increase in Future Policy Benefit Reserves.

Future policy benefit reserves increased 21.8% in 2021 compared to 2020 due to better persistency and higher first year sales in both of our segments.

Policyholder Dividends.

Most of our Life Insurance segment's international policies contain guaranteed cash values and are participating (i.e.

, provide for cash dividends as apportioned by our Board of Directors).

Policyholders' dividends increased by 10.6% in 2021 as compared to 2020 due to increased sales in 2021 and improved policyholder retention.

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.

In 2022, despite issuing more insurance and increasing our in force block of business, policy benefit reserves decreased 19% compared to 2021 due to the impact of reserves released from higher matured endowment benefits.

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.

December 31, 2021 | 10-K 41

CITIZENS, INC.

commission rates are higher than renewal commission rates.

Commissions fluctuate directly in relation to sales and thus the increase in commissions in 2021 as compared to 2020 was due to higher sales in 2021.

First year commission rates are higher than renewal commission rates.

Commissions fluctuate directly in relation to sales and thus the increase in commissions in 2022 as compared to 2021 was due to higher sales in our Life Insurance segment in 2022.

Other General Expenses.

Total general expenses decreased $10.3 million, or 19.2%, in 2021 compared to 2020.

Other general expenses in 2020 included $10.0 million of non-recurring expenses related to change-in-control severance expenses.

We continue to work on improving our controllable operating expenses and in 2021, we had lower audit and long-term incentive compensation expenses compared to 2020.

Total general expenses increased $1.8 million, or 4%, in 2022 compared to 2021 due primarily to expenses related to our sales convention, which we did not hold in 2021 due to COVID-19, as well as severance costs related to moving our international business from Bermuda to Puerto Rico.

We continue to work on managing controllable operating expenses while investing in growth initiatives.

Capitalization of Deferred Policy Acquisition Costs ("DAC").

6 unchanged sentences

Amortization of DAC totaled $26.5 million and $25.0 million in 2022 and 2021, respectively.

The decrease in amortization is a result of better persistency and sales.

Amortization of DAC is impacted by new business, persistency and the level of surrenders.

Amortization of Cost of Insurance Acquired ("COIA").

Amortization of COIA decreased in 2021 compared to 2020 due primarily to an update in our Home Service Insurance segment's expected earned rate assumptions used within annuity models that resulted in additional amortization of approximately $0.2 million in 2020.

The increase in amortization is a result of less favorable persistency in the Home Service Insurance segment and sales.

Goodwill Impairment.

We recognized a goodwill impairment in our Life Insurance segment of $12.6 million in 2021.

In 2021, we recognized a goodwill impairment in our Life Insurance segment of $12.6 million.

The impairment was triggered by increases in our carrying value of the Life Insurance segment due to the release of a $43.8 million uncertain tax position in the fourth quarter of 2021 following the expiration of the statute of limitations for the tax year ended December 31, 2017.

December 31, 2022 | 10-K 38

CITIZENS, INC.

Federal Income Tax.

Federal income tax benefits of $0.4 million in 2022 and $43.5 million in 2021 resulted in effective tax rates of 6% and 650%, respectively.

The significant tax benefit in 2021 is comprised of the release of the uncertain tax position of $43.8 million related to the expiration of the statute of limitations for the year ended December 31, 2017.

The significant tax benefit in 2021 is the release of the uncertain tax position of $43.8 million related to the expiration of the statute of limitations for the year ended December 31, 2017.

Differences between our effective tax rate and the statutory tax rate result from income and expense items that are treated differently for financial reporting and tax purposes.

7 unchanged sentences

The Company evaluates profit and loss performance based on net income (loss) before federal income taxes for these segments.

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.

Years ended December 31,

(In thousands)

2021 2020 2019

Income (loss) before federal income taxes:

Loss before federal income taxes:

Life Insurance $ (682) 918

2 unchanged sentences

Other Non-Insurance Enterprises (4,609) (5,570)

Total income (loss) before federal income taxes $ (6,688) (12,317) 5,745

Total loss before federal income taxes $ (7,067) (6,688)

December 31, 2022 | 10-K 39

6 unchanged sentences

(In thousands)

2021 2020 2019

Life insurance $ 124,156 125,558

1 unchanged sentence

Net investment income 50,680 47,216

Investment related gains, net 9,176 1,340 6,795

Investment related gains (losses), net (8,826) 9,176

Other income 3,668 3,362

14 unchanged sentences

Income (loss) before federal income taxes $ (682) 918

Income before federal income tax expense decreased in 2021 as compared to 2020 due primarily to the goodwill impairment.

In our Life Insurance segment we reported a loss before federal income tax of $0.7 million in 2022 as compared to income of $0.9 million in 2021.

As in our consolidated operations, the current year reflected investment related losses which can cause significant fluctuations from period to period and are not indicative of our operating results.

The change in investment related gains (losses) between periods were somewhat offset by higher net investment income, lower death claim benefits and the goodwill impairment that impacted 2021.

Life Insurance Segment premium breakout is detailed below.

1 unchanged sentence

(In thousands)

2021 2020 2019

First year $ 11,892 11,420

2 unchanged sentences

Over 90% of our Life Insurance premium revenue in both 2022 and 2021 was generated by renewal premiums.

While first year premiums increased by 9.8% in 2021 as compared to 2020, overall premium revenue decreased by 2.4% in 2021 compared to 2020 as renewal premiums declined by 3.5%.

We believe that the increase in first year premiums is the result of actions we have taken over the past 18 months in executing on our strategic initiatives, including sales promotions and campaigns, focused training on virtual selling, and recruiting new independent contractors in 2021.

Renewal premiums have been declining over the last several years, due in part to our

While first year premiums increased by 4% in 2022 as compared to 2021, overall premium revenue decreased slightly in 2022 compared to 2021 as renewal premiums declined by 2%.

Renewal premiums have been declining

December 31, 2022 | 10-K 40

CITIZENS, INC.

withdrawal from Brazil and also due to one of our top distributors in Venezuela leaving our Company and as we discussed in Item 3 - Legal Proceedings , we believe is illegally competing with us and stealing our trade secrets and business.

over the last several years, due in part to the continued decline in production in Venezuela from one of our top distributors leaving our Company.

As we discuss in Item 3 - Legal Proceedings , we believe these distributors are illegally competing with us and stealing our trade secrets and business.

We began to stem the decline of renewal premiums in 2021, which we believe is due in part to our retention efforts that we also discuss in Part I.

Item 1, Business - Strategic Initiatives.

Endowment sales represent a significant portion of our new business sales internationally and totaled approximately $10.0 million and $8.6 million in 2021 and 2020, respectively, representing approximately 87.2% and 82.7% of total first year premiums in 2021 and 2020, respectively.

We believe that the increase in first year premiums is the result of actions we have taken over the past two years in executing on our strategic initiatives to issue new products and improve distribution through focused sales promotions and campaigns.

In 2022, we introduced a new whole life product tailored to our specific markets and for the first time, whole life sales became a significant percentage of our international new business sales, making up 47% of our total 2022 sales.

International Premiums.

2 unchanged sentences

(In thousands, except for %)

2021 2020 2019

Colombia $ 25,181 20.6 % $ 24,829 20.2 %

7 unchanged sentences

The five countries listed above represented the majority of the new and renewal premiums in both 2022 and 2021.

All experienced slight declines in 2021 as compared to 2020, which is due to the overall decline in our renewal business.

However, premiums from Venezuela continue to decrease more than the other countries and decreased by 10.9% from 2020 to 2021.

One of our largest distributors, who is based in Venezuela, has left our Company and based upon discovery conducted in such lawsuit, we believe is illegally competing with us and negatively affecting our business in Venezuela.

Colombia and Argentina experienced growth in 2022 as compared to 2021, which we believe was driven by previously mentioned sales campaigns and the introduction of our new whole life product as well as our retention initiatives.

Taiwan, Venezuela and Ecuador experienced declines in 2022 as compared to 2021, which is due to the overall decline in our renewal business as well as items discussed above.

Domestic Premiums.

Domestic premiums in our Life Insurance segment were $4.6 million in 2022, compared to $5.0 million in 2021.

The majority of the premium recorded in 2020 and 2021 is related to renewal business as we discontinued new sales of domestic ordinary whole life and endowment life insurance products within our Life Insurance segment in 2017.

In 2021, we introduced new domestic whole life products and distribution to expand our Life Insurance segment to the Hispanic market in Florida.

However, our efforts to recruit agents to sell our products have been slower than we expected and we are re-evaluating our sales distribution approach, initiatives and domestic life insurance offerings in the Florida market in 2022.

The majority of the premium recorded in 2021 and 2022 is related to 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, critical illness and final expense products domestically.

December 31, 2022 | 10-K 41

1 unchanged sentence

Net Investment Income.

Net investment income in our Life Insurance segment increased 2.9% in 2021 compared to 2020 due to continued growth in average invested assets.

We experienced a decrease in portfolio yield of two basis points in this segment in 2021 compared to 2020 as we continue to face a challenging investment environment for fixed maturity assets, which account for the majority of our investment portfolio.

Years ended December 31,

(In thousands, except for %)

2021 2020 2019

Net investment income $ 47,216 45,885 44,779

Average invested assets, at amortized cost 1,109,466 1,071,792 1,016,055

Annualized yield on average invested assets 4.26 % 4.28 % 4.41 %

Investment Related Gains, Net.

T he investment related gain for 2021 was primarily due to the appreciation in the value of our limited partnership investments.

The investment related gain for 2020 was primarily due to the appreciation in value of a preferred stock exchange traded fund purchased during the first quarter of 2020 as we were able to take advantage of the market dislocation to identify an attractive risk-adjusted investment opportunity.

Net investment income in our Life Insurance segment increased 7% in 2022 compared to 2021 due to a growing diversified invested asset base and reinvestment into a higher interest rate environment.

The majority of investment income is derived from fixed maturity securities;

however, long-term investment income continued to increase as our limited partnership asset base grew.

Investment Related Gains (Losses), Net.

T he investment related losses in 2022 were a result of the change in estimated fair market value for our limited partnerships, as previously discussed.

Claims and Surrenders.

A breakout of the primary claims and surrender benefits for the Life Insurance segment is detailed below.

The following table sets forth our primary claims and surrender benefits within our Life Insurance segment.

Years ended December 31,

(In thousands)

2021 2020 2019

Claims and surrenders:

6 unchanged sentences

Total claims and surrenders $ 95,576 91,390

75.7% of our claims and surrender benefits in 2021 and 78.0% in 2020 were related to payment of surrender benefits and matured endowment benefits.

Policy surrenders decreased 5.3% in 2021 as compared to 2020 and matured endowment benefits decreased by 6.0% in 2021 as compared to 2020.

Surrender benefits have been higher than usual the last several years.

However, policy surrenders decreased as we have instituted new programs seeking to curb surrenders.

Matured endowment benefits had been increasing over the last several years

December 31, 2021 | 10-K 45

CITIZENS, INC.

but leveled off this year, which is expected, due to endowment products reaching their stated maturities.

These charges are within expected levels.

The other key component of claims and surrender benefits is death claim benefits, which increased 36.2% in 2021 compared to 2020 due to both a higher volume, including COVID-19 related deaths, and a higher average amount of reported claims.

The majority of our claims and surrender benefits in our Life Insurance segment were related to payment of surrender benefits and matured endowment benefits.

Policy surrenders decreased 8% in 2022 as compared to 2021 and matured endowment benefits increased by 57% in 2022 as compared to 2021.

Policy surrenders decreased the past couple of years as we have instituted new programs seeking to curb surrenders.

Many of our endowment policies are reaching their contractual maturity dates and thus matured endowment benefits are increasing.

The other key component of claims and surrender benefits is death claim benefits, which decreased 25% in 2022 compared to 2021 due to a lower volume of reported claims, including COVID-19 related deaths.

Mortality experience is closely monitored by the Company as a key performance indicator and these amounts were within expected levels.

Increase in future policy benefit reserves.

The change in future policy benefit reserves increased 13.9% in 2021 compared to 2020 due to better persistency.

In addition, the change in future policy reserves for 2021 was lower due to an $0.8 million adjustment for the conversion of a small block of policies to our new actuarial valuation system for our Life Insurance segment during the second quarter of 2021.

The change in future policy benefit reserves decreased 19% in 2022 compared to 2021 as a result of reserves released from higher matured endowment benefits offsetting increases in insurance issued and better persistency.

In addition, the change in future policy reserves for 2021 was lower due to

December 31, 2022 | 10-K 42

CITIZENS, INC.

an $0.8 million adjustment for the conversion of a small block of policies to our new actuarial valuation system for our Life Insurance segment during the second quarter of 2021.

Other General Expenses.

General expenses increased in 2022 compared to 2021 due primarily to expenses associated with our home office and expenses related to our convention and severance costs related to the move of our international business from Bermuda to Puerto Rico.

We did not have a convention in 2021 due to the COVID-19 pandemic.

HOME SERVICE INSURANCE

5 unchanged sentences

(In thousands)

2021 2020 2019

Life insurance $ 43,430 44,243

2 unchanged sentences

Net investment income 13,632 13,224

Investment related gains, net 618 223 1,470

Investment related gains (losses), net (1,277) 618

Other income 1 7

12 unchanged sentences

Total benefits and expenses 63,193 64,555

Income (loss) before income tax expense $ (2,036) (3,470) 1,181

Our net loss before income tax expense decreased by $1.4 million in 2021 due primarily to higher first year and renewal life insurance premiums, which drove the total segment revenue increase of 5.2% in 2021 compared to 2020.

The increase was partially offset by higher reinstatement premiums for reinsurance coverage from the impact of Hurricane Ida in 2021.

First year life premiums increased due mainly to our 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

Income (loss) before federal income taxes $ (1,776) (2,036)

In our Home Service segment our net loss before income tax decreased by $0.3 million in 2022 due primarily to lower death claims benefits and fewer hurricane property claims partially offset by investment related losses due to the changes in the fair value of our equity securities, higher other general operating expenses and increased amortization of deferred policy acquisition costs.

Total Home Service Insurance segment premium revenue increased slightly in 2022 compared to 2021.

Our first year life insurance premiums declined in 2022 compared to 2021.

We believe our premium revenue is impacted by lower persistency due to inflationary pressures.

Our total number of issued policies within our Home Service segment is up approximately 20% in 2022 compared to 2021.

Property insurance premiums increased in 2022

December 31, 2022 | 10-K 43

CITIZENS, INC.

segment, which has a higher maximum face value.

Renewal premiums increased during 2021 due to improvements in our collection and payment processes, strong collection efforts by our independent agents and our insureds' increased disposable income due to government stimulus and assistance programs related to the COVID-19 pandemic.

Sales during the 2020 period were negatively impacted by the COVID-19 pandemic.

Our benefits and expenses in this segment increased by $1.7 million in 2021 as compared to 2020, primarily due to higher claims and surrenders, as well as an increase in future policy benefit reserves in 2021 due to better persistency and higher first year sales, partially offset by a decrease in other general expenses.

compared to 2021 due to the impact of higher catastrophic reinsurance reinstatement premiums in 2021 related to the impact of Hurricane Ida.

Claims and Surrenders.

A breakout of claims and surrender benefits for the Home Service Insurance segment is detailed below.

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

Years ended December 31,

(In thousands)

2021 2020 2019

Claims and surrenders:

8 unchanged sentences

The majority of claims and surrender benefits in our Home Service Insurance segment relate to death claim benefits.

Death claim benefits increased 9.5% in 2021 compared to 2020 due to both a higher volume, including COVID-19 related deaths, and a higher average amount of reported claims.

Death claim benefits decreased 15% in 2022 compared to 2021 due to a lower volume of reported claims, including COVID-19 related deaths.

Mortality experience is closely monitored by the Company and can fluctuate based on reported claims as a key performance indicator.

Surrender benefits increased in 2022 compared to 2021.

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

Property claims decreased in 2022 compared to 2021.

The Company was impacted by Hurricane Ida in 2021 and by Hurricanes Laura, Delta and Zeta in 2020.

The Company was impacted by Hurricane Ida in 2021.

We have a reinsurance agreement that covers catastrophic events such as hurricanes.

This 2021 agreement contains a maximum coverage of $11.0 million per event and a retention level of $0.5 million per event.

The decreased hurricane activity in 2021 helped reduce our property claims in 2021 compared to 2020.

With no hurricane activity in 2022, our property claims decreased in 2022 compared to 2021.

Increase in future policy benefit reserves.

The change in future policy benefit reserves increased 71.7% in 2021 compared to 2020 due to higher sales and improved retention in 2021.

The change in future policy benefit reserves decreased 19.0% in 2022 compared to 2021 due to lower persistency as discussed above.

Other general expenses.

Other general expenses decreased in 2021 compared to 2020 as a result of a released tax compliance best estimate liability of $1.8 million and lower expenses due to changes we made to our distribution structure in 2020.

Other general expenses increased in 2022 compared to 2021 due primarily from higher expenses related to our convention and 2021 included a released tax compliance best estimate liability of $1.8 million partially offset by lower employee health benefit costs.

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 in 2022, compared to 2021 from changes in persistency and higher surrenders as discussed above.

OTHER NON-INSURANCE ENTERPRISES

1 unchanged sentence

(In thousands)

2021 2020 2019

Income (loss) before federal income tax $ (4,609) (5,570)

December 31, 2021 | 10-K 47

CITIZENS, INC.

This operating unit represents the administrative support entities to the insurance operations whose revenues are primarily intercompany and have been eliminated in consolidation under U.S.

1 unchanged sentence

Revenue in this operating unit consists primarily of net investment income and investment related gains or losses, while expenses consist of other general expenses.

The loss reported for 2021 declined as other general expenses decreased in 2021 due to the $10.0 million in severance payments paid in 2020 related to our change in control.

The loss reported for 2022 declined as other general expenses decreased in 2022 by not incurring fees in the current year related to the change in control of the

December 31, 2022 | 10-K 44

CITIZENS, INC.

Company nor consulting fees paid to our former CEO as we did in 2021.

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

4 unchanged sentences

The assets are intended to mature in accordance with the average maturity of the insurance products and to provide the cash flow for our insurance company subsidiaries to meet their respective policyholder obligations and operating expenses.

The following table shows the carrying value of our investments by investment category and cash and the percentage of each to total invested assets.

In executing investing activities our management and third-party investment manager are incorporating environmental, social and governance factors into their respective investment processes as appropriate.

These factors include investing in opportunities to help mitigate climate change by pursuing relevant investments across asset classes.

The following table shows the carrying value of our investments by investment category and cash along with the percentage of each to total invested assets.

As of December 31,

13 unchanged sentences

Total fixed maturity securities 1,179,619 86.5 1,470,617 89.0

Short-term investments 1,241 0.1 — —

Cash and cash equivalents 22,973 1.7 27,294 1.7

2 unchanged sentences

Equity securities 11,590 0.8 14,844 0.9

Real estate and other long-term investments 57,399 3.5 29,865 1.8

Other long-term investments 69,558 5.1 57,399 3.5

Total cash and invested assets $ 1,363,754 100.0 % $ 1,650,461 100.0 %

2 unchanged sentences

Government agencies and government-sponsored enterprises at December 31, 2022 and 2021, respectively.

During 2021, we continued repositioning our portfolio into more diversified holdings as part of our investment management strategy.

As investments matured or were called, the Company increased investments in corporate securities, which now represent 54.0% of our cash and invested assets as of December 31, 2021 as compared to 52.8% at December 31, 2020.

The Company has also decreased its exposure to the municipal bond market, which represents 23.3% of the investment portfolio as of December 31, 2021 compared to 24.7% as of December 31, 2020.

The carrying value of the Company’s fixed maturity securities investment portfolio at December 31, 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 December 31, 2022 did not materially change from December 31, 2021 – the weighted average was “A” at both dates.

December 31, 2022 | 10-K 45

1 unchanged sentence

Cash and cash equivalents decreased as of December 31, 2022 compared to December 31, 2021 due to timing of cash inflows and investments of cash into marketable securities.

Real estate and other long-term investments increased to $57.4 million as of December 31, 2021, as compared to $29.9 million as of December 31, 2020, primarily due to investments of $37.9 million in limited partnerships, partially offset by the sale of our former training facility for $2.5 million and the payment of $8.8 million of severance previously held in a Rabbi trust for the benefit of our former chief executive officer.

In 2022, as fixed maturity securities matured or were called, we utilized the cash to invest into higher yielding bonds as interest rates were rising.

Other long-term investments increased to $69.6 million as of December 31, 2022, as compared to $57.4 million as of December 31, 2021, primarily due to investments of $13.3 million in limited partnerships.

At December 31, 2022, investments in fixed maturity and equity securities were 87% of our total cash and invested assets.

6 unchanged sentences

2021 4.26 % 4.37 % 4.24 %

2019 4.41 % 4.45 % 4.36 %

Yields on investment assets vary between segment operations due to different portfolio mixes and durations in the segments.

The consolidated yields include our other non-insurance enterprises.

The annualized yield increased across our segments in 2022 compared to 2021 resulting primarily from the rising interest rate environment.

The sustained low interest rate environment of the past several years for fixed maturity assets, which account for the majority of our investment portfolio, has required us to reinvest a portion of our portfolio at lower interest rates.

however, diversification of our investment portfolio into limited partnership investments helped offset a challenging investment environment for fixed maturity securities in 2021.

Diversification of our investment portfolio into limited partnership investments helped offset a challenging investment environment for fixed maturity securities.

However, insurance regulations limit the amount we can invest in these alternative investments.

Credit quality is an important feature of our investment guidelines for our fixed maturity securities.

33 unchanged sentences

Municipal fixed maturity securities shown excluding third-party guarantees

AAA $ 2,568 2,526 — — — — 2,568 2,526 0.7 %

AA $ 34,710 35,012 38,020 43,042 6,559 6,509 79,289 84,563 24.6

6 unchanged sentences

Value Amortized Cost % of Total Fair Value

Education $ 69,130 65,040 18.0 %

Utilities $ 49,818 54,414 16.2 %

Education 48,164 55,683 15.7 %

Transportation 35,759 44,670 11.6 %

20 unchanged sentences

Texas securities excluding third-party guarantees

AAA $ 2,568 2,526 — — — — 2,568 2,526

AA $ 26,395 26,312 3,004 2,993 — — 29,399 29,305

22 unchanged sentences

IMPAIRMENT CONSIDERATIONS RELATED TO INVESTMENTS IN FIXED MATURITY AND EQUITY SECURITIES

Beginning January 1, 2020, in connection with the adoption of a new accounting standard, the Company assesses available-for-sale ("AFS") fixed maturity securities in an unrealized loss position for expected credit losses.

Summary of Significant Accounting Policies for a discussion regarding our application of this accounting standard.

The Company recorded no credit losses on securities in 2021 or 2020.

The Company assesses available-for-sale ("AFS") fixed maturity securities in an unrealized loss position for expected credit losses.

The Company did not record any credit valuation allowances on fixed maturity securities in 2022 or 2021.

December 31, 2022 | 10-K 48

1 unchanged sentence

Gross unrealized losses on AFS fixed maturity securities amounted to $205.3 million as of December 31, 2022 and $3.0 million as of December 31, 2021.

This increase in gross unrealized losses during 2021 was a result of the increase in average interest rates compared to 2020.

This increase in gross unrealized losses during 2022 was a result of the increase in average market interest rates compared to 2021.

Information on both unrealized and realized gains and losses by category is set forth in Note 2.

7 unchanged sentences

(In thousands)

2021 2020 2019

Direct premiums $ 176,973 178,806

3 unchanged sentences

Our insurance subsidiaries monitor the solvency of their reinsurers in seeking to minimize the risk of loss in the event of default by a reinsurer.

The primary reinsurers of our insurance subsidiaries are large, well-capitalized entities.

The primary reinsurers of our insurance subsidiaries are large, well-capitalized entities who have ratings by A.M.

Best Company ranging from A- (Excellent) to A+ (Superior).

The effect of reinsurance on life insurance in force is as follows.

1 unchanged sentence

(In millions)

2021 2020 2019

Direct written life insurance in force $ 4,797 4,628

2 unchanged sentences

Net life insurance in force $ 4,257 4,166

Virtually all of the Company's non-credit accident and health insurance has been reinsured and is administered by Unified Life Insurance Company, an unaffiliated party.

The Company monitors the credit ratings of our life and property reinsurers.

The ratings by A.M.

Best Company range from B+ (Good) to A+ (Superior).

SPFIC generally carries first and second event catastrophe reinsurance coverage of $10.5 million per event and a retention level of $0.5 million per event.

Thus, the first $0.5 million of incurred claims and any claims in excess of $11.0 million per event are SPFIC's responsibility.

The reinsurance premium for catastrophe reinsurance was $2.3 million in 2021, $1.4 million in 2020 and $0.8 million in 2019.

Our property insurance company, SPFIC, currently carries first and second event catastrophe reinsurance coverage of $11.0 million per event and a retention level of $1.4 million per event.

Thus, SPFIC is responsible for the first $0.8 million of incurred claims and any claims in excess of $11.0 million per event.

In addition, SPFIC shares responsibility with our reinsurers for up to an additional $0.6 million of incurred claims should total incurred claims reach $11.0 million per event.

December 31, 2022 | 10-K 49

9 unchanged sentences

We currently anticipate meeting our short-term and long-term cash needs with cash generated by our insurance operations and from our invested assets.

From time-to-time we may raise capital by selling shares in our SIP (as defined below) and we may also access our Credit Facility if needed (both as described below).

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

3 unchanged sentences

cash generated from our operating subsidiaries and our invested assets.

Our ability to obtain cash from our insurance subsidiaries depends primarily upon the availability of statutorily permissible payments, including payments Citizens receives from service agreements with our life insurance subsidiaries and dividends from the subsidiaries.

The ability to make payments to the holding company is limited by applicable laws and regulations of Bermuda and U.S.

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 as of January 1, 2023, Puerto Rico), and U.S.

states of domicile which subject insurance operations to significant regulatory restrictions.

As discussed in Part I, Item 1, Business and Part I.

Risk Factors , these laws and regulations require, among other things, that our insurance subsidiaries maintain minimum capital 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.

Risk Factors , these laws and regulations require, among other things, that our insurance subsidiaries maintain minimum capital and surplus requirements, which limit the amount of dividends that can be paid to the 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.

11 unchanged sentences

Cash flow projections and cash flow tests under various market interest rate scenarios are performed annually to assist in evaluating liquidity needs and adequacy.

Cash from Operations.

Cash provided by (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

Cash from Operating Activities.

Cash provided by 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, invest

December 31, 2022 | 10-K 50

CITIZENS, INC.

make strategic acquisitions.

in our business or make strategic acquisitions.

Cash provided by operating activities was $56.9 million and $40.5 million for the years ended December 31, 2022 and 2021, respectively.

Cash provided by operations was lower in 2021 due to (i) the $8.8 million severance payment to our former CEO, (ii) decreased renewal premiums in our international business;

and (iii) increased first year premiums, which have higher costs associated with them than renewal premiums, such as commissions.

During the third quarter of 2020, the Company used funds from matured securities to pay $6.0 million to the IRS for the tax compliance matter described in Note 7.

Commitments and Contingencies in the notes to our consolidated financial statements.

As noted in Note 7.

Commitments and Contingencies , the IRS processed these withholding tax returns in 2021, and the Company considers this matter closed.

Cash from/used in Investments.

Cash provided by operations was higher in 2022 due to (i) the $8.8 million severance payment to our former CEO in 2021, and (ii) decreased death and surrender benefits in 2022.

Cash from/used in Investing Activities.

We have traditionally also had significant cash flows from both scheduled and unscheduled investment security maturities, redemptions, and prepayments.

2 unchanged sentences

The investing activities fluctuate from period to period due to timing of securities activities such as calls and maturities and reinvestment of those funds.

Our investments consist of 90.6% of marketable fixed maturity securities classified as available-for-sale and 0.9% of equity securities that could be readily converted to cash for liquidity needs.

Over the last several years, a large portion of our fixed maturity security investment portfolio has matured or called, which required us to reinvest in fixed maturity securities with lower interest rates.

We are seeking to diversify our portfolio with limited partnership investments in order to earn higher investment income to mitigate the effect of a decrease in our spread between our policy liability crediting rates and our investment earned rates (our gross margin), which could also negatively impact our liquidity.

Our investment portfolio (and, specifically, the valuations of investment assets we hold) has also been, and may continue to be, adversely affected as a result of market developments from the COVID-19 pandemic and uncertainty regarding its outcome.

Moreover, changes in interest rates, reduced liquidity or a continued slowdown in the U.S.

or in global economic conditions may also adversely affect the values and cash flows of these assets.

Cash from/used in Financing Activities.

Cash used in financing activities was $6.2 million for the year ended December 31, 2021 due primarily to the purchase of 100% of the outstanding Class B common stock from the Harold E.

Riley Foundation for $9.1 million in March 2021.

This amount was partially offset by $2.3 million we received from issuing shares under our SIP and $1.1 million net in annuity deposits received higher than annuity withdrawals.

During 2022, we used a higher amount of cash in investing activities, as we were able to invest at higher interest rates than the past several years, thus increasing our yields.

88% of our investments consist of marketable fixed maturity securities classified as available-for-sale that could be readily converted to cash for liquidity needs.

Trends, Demands and Restrictions on our Uses of Cash

1 unchanged sentence

In order to mitigate the risk of early policyholder surrenders, we include provisions in our insurance policies, such as surrender charges, that help limit and discourage early withdrawals.

As previously discussed, surrender benefits have been higher than usual the last several years as many of our policies have reached the age where surrender charges have expired and due to other reasons, like the loss of one of our biggest distributors in Venezuela (see Item 3.

Legal Proceedings ).

2 unchanged sentences

We continue to monitor surrenders and early withdrawals.

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.

Our 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 December 31, 2022, 38% of the Company's total insurance in force was in endowment products.

1 unchanged sentence

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.

Meeting these distributions could require the Company to sell its investments 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.

December 31, 2021 | 10-K 54

CITIZENS, INC.

Primarily due to the COVID-19 pandemic, we have experienced increased death claim benefits over the last two years.

Because the pandemic was an unforeseen event that was not priced into our product assumptions, to the extent we continue to experience increased claims and the associated death benefit payouts as a result of the COVID-19 pandemic, our liquidity could be negatively impacted.

We experienced increased death claim benefits in 2021, primarily due to the COVID-19 pandemic.

Some of our policies include pandemic exclusions, and we carry reinsurance to offset some of these risks.

However, death claim benefits decreased by 17.9% in 2022 compared to 2021.

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.

We experienced substantial increases in property claims in the 2021 and the last half of 2020 due in large part to four hurricanes that hit Louisiana.

As a result, SPLIC had to contribute capital to SPFIC in both 2021 and 2020 in order to maintain statutory capital requirements.

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

2 unchanged sentences

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%.

Additionally, we have a parental guarantee

December 31, 2022 | 10-K 51

CITIZENS, INC.

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

At December 31, 2022, our domestic insurance subsidiaries were above the required minimum RBC levels.

2 unchanged sentences

As of December 31, 2022, CICA International was above the TCL threshold.

As the Insurance Act permits, we requested a modification under Section 6C of the Insurance Act to remove the impact of unrealized gains or losses from the Minimum Margin of Solvency (“MMS”) requirement.

On January 19, 2023, the BMA granted CICA International a permitted practice, effective December 31, 2022, pursuant to Section 6C (1) of the Insurance Act to report its fixed income maturity securities at amortized cost in its unconsolidated statutory financial statements.

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

1 unchanged sentence

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.

Any capital injection that Citizens is required to make under the parental guarantee with CICA or under the Keep Well Agreement or change in our permitted practice with CICA International could negatively impact the Company's capital resources and liquidity.

CICA PR is a Puerto Rico domiciled company.

The Insurance Code does not specifically set forth minimum capital and surplus standards, but rather requires that an insurer submit a business plan for approval to the OIC that includes proposed minimum capital and surplus.

CICA PR is required to maintain a minimum of $750,000 in capital and maintain a premium to surplus ratio of 7 to 1.

CICA PR began issuing new business as of January 1, 2023 and since higher costs are associated with new business than renewal business (e.g., first year commissions), we expect that Citizens will have to contribute capital to CICA PR in the foreseeable future in order to maintain the required premium to surplus ratio.

Like with CICA International, any capital that Citizens is required to contribute could negatively impact the Company's capital resources and liquidity.

CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS

1 unchanged sentence

Expected timing of those payments are as follows:

As of December 31, 2021

Year ended December 31, 2022

(In thousands)

10 unchanged sentences

These amounts have been projected utilizing assumptions based upon our historical experience and anticipated future experience.

Because the exact timing and amount of the future policy benefit reserves are subject to significant uncertainty, we have reflected the majority of the obligation in the more than five-years category.

December 31, 2021 | 10-K 55

CITIZENS, INC.

We have reflected the majority of the obligation in the more than five-years category due to the age of the insured, years to policy maturity and our past experience with claims and surrenders.

Real Estate Lease.

The Company entered into a long-term lease agreement with an unrelated party for its home office in Austin, Texas and moved into its new home office in 2020.

The Company entered into a long-term lease agreement with an unrelated party for its home office in Austin, Texas.

Payments under this long-term lease agreement average approximately $112,000 per month.

December 31, 2022 | 10-K 52

CITIZENS, INC.

The Company does not have off-balance sheet arrangements at December 31, 2022.

17 unchanged sentences

Fixed maturity securities are classified as held-to-maturity and carried at amortized cost when management has the positive intent and the Company has the ability to hold the securities to maturity.

Securities not classified as held-to-maturity are classified as AFS and are carried at fair value, with the unrealized holding gains and losses, net of tax, reported in other comprehensive income and do not affect earnings until realized.

The Company currently does not hold any fixed maturity securities classified as held-to-maturity.

10 unchanged sentences

These assumptions require the use of significant management judgment and include the probability of issuer default and estimates regarding timing and amount of expected recoveries, which may include estimating the underlying collateral value.

In addition, projections of expected future fixed maturity security cash

In addition, projections of expected future fixed maturity security cash flows may change based upon new information regarding the performance of the issuer.

Any credit losses are presented as an allowance rather than as a write-down of AFS fixed maturity securities.

December 31, 2022 | 10-K 53

CITIZENS, INC.

flows may change based upon new information regarding the performance of the issuer.

Any credit losses are presented as an allowance rather than as a write-down of AFS fixed maturity securities.

DEFERRED POLICY ACQUISITION COSTS

23 unchanged sentences

If a future loss is anticipated under this basis, any additional shortfall indicated by loss recognition tests is recognized as a reduction in accumulated other comprehensive income (shadow loss recognition).

Similar to other loss recognition on long-duration insurance contracts, such shortfall is first reflected as a reduction in DAC and secondly as an increase in

Similar to other loss recognition on long-duration insurance contracts, such shortfall is first reflected as a reduction in DAC and secondly as an increase in liabilities for future policy benefits.

The change in these adjustments, net of tax, is included with the change in net unrealized appreciation of investments that is credited or charged directly to other comprehensive income (loss).

December 31, 2022 | 10-K 54

CITIZENS, INC.

liabilities for future policy benefits.

The change in these adjustments, net of tax, is included with the change in net unrealized appreciation of investments that is credited or charged directly to other comprehensive income.

COST OF INSURANCE ACQUIRED

7 unchanged sentences

This belief is based upon the analysis performed on estimated future results of the block and our annual recoverability testing.

Current accounting guidance requires that goodwill balances be reviewed for impairment at least annually or more frequently if events occur or circumstances change that would indicate a triggering event has occurred.

A reporting unit is defined as an operating segment or one level below an operating segment.

The Company's reporting units, for which goodwill has been allocated, are equivalent to the Company's operating segment, as there is no discrete financial information reviewed and analyzed by management for the separate components of the segment or all of the components of the segment have similar economic characteristics.

Goodwill is tested for impairment on an annual basis or more frequently if indicators of potential impairment exist.

The goodwill testing requires us to compare the estimated fair value of a reporting unit to its carrying value.

If the carrying value of the reporting unit is lower than its estimated fair value, no further evaluation is required.

If the carrying value of the reporting unit exceeds its estimated fair value, an impairment charge is recorded for that excess, limited to the total amount of goodwill allocated to that reporting unit.

We have the option of performing an assessment of certain qualitative factors to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying value or proceeding directly to a quantitative impairment test.

Management’s determination of the fair value of each reporting unit under the accounting guidance incorporates multiple inputs including discounted cash flow calculations based on assumptions that market participants would make in valuing the reporting unit.

Other assumptions can include levels of economic capital, future business growth, discount rates and earnings projections.

Spread compression and related effects to profitability caused by lower interest rates affect the valuation of in force business more significantly than the valuation of new business, as new business pricing assumptions reflect the current and anticipated future interest rate environment.

Estimates of fair value are inherently uncertain and represent management's reasonable expectations regarding future developments.

The Company completes its annual goodwill assessment for the individual reporting units within the Life Insurance segment as of December 31 each year.

We apply significant judgement when determining the estimated fair value of our reporting unit.

These judgments incorporate multiple inputs, including discounted cash flow calculations based on assumptions that market participants would make in valuing the reporting unit, levels of economic capital, production levels and profitability of new business, pricing changes, spread compression, value of in force, discount rate and earnings projections.

Estimates of fair value are inherently uncertain and represent management’s reasonable expectations regarding future developments.

We recorded an impairment of $12.6 million in 2021 in our Life Insurance segment caused by increases in our carrying value of the segment due to the release of a $43.8 million uncertain tax position in the fourth quarter of 2021 following the expiration of the statute of limitations on the tax year ended December 31, 2017.

This impairment is recorded on the Consolidated Statement of Operations.

There was no impairment of goodwill in the years ended December 31, 2020 or 2019.

December 31, 2021 | 10-K 58

CITIZENS, INC.

POLICY LIABILITIES

6 unchanged sentences

Annually, the Company completes experience studies with respect to mortality, lapse, interest and expenses.

The results of these studies are used for current year reserve adequacy testing, which includes loss recognition, goodwill, and establishing benefit liabilities and DAC for the following year's new issues.

CONTINGENCIES

An estimated loss from a contingency is accrued and charged to results of operations only if both of the following conditions are met:

Information available prior to the issuance of the financial statements indicates that it is probable (virtual certainty is not required) that an asset has been impaired or a liability incurred as of the date of the financial statements;

The amount of the loss can be reasonably estimated.

Reasonable estimation of a possible loss does not require estimating a single amount of the loss.

It requires that a loss be accrued if it can be estimated within a range.

If an amount within the range is a better estimate than any other amount within the range, that amount is accrued.

If no amount within the range is a better estimate than any other amount, the minimum amount in the range is accrued.

A gain contingency is an uncertain situation that will be resolved in the future, possibly resulting in a gain.

We do not allow the recognition of a gain contingency prior to settlement of the underlying event.

The results of these studies are used for current year reserve adequacy testing, which includes loss recognition and establishing benefit liabilities and DAC for the following year's new issues.

TAX ACCOUNTING

7 unchanged sentences

Due to the 0% enacted tax rate in Bermuda there are no deferred taxes recorded for CICA International's temporary differences.

As required by U.S.

GAAP, we evaluated the recoverability of deferred tax assets and the establishment of a valuation allowance, if necessary, to reduce the deferred tax asset to an amount that is more likely than not to be realized.

For the year ended December 31, 2022, changes in market conditions including rising interest rates, resulted in deferred tax assets related to the net unrealized capital losses in our investment portfolio.

When assessing the need for a valuation allowance on the unrealized capital loss deferred tax assets, we assert a tax planning strategy to hold a majority of the underlying securities to recovery or maturity.

Our ability to assert such a tax planning strategy is dependent upon factors such as our asset/liability matching process, overall investment strategy, projected future product sales and expected liquidity needs.

In the event these estimates differ from our prior estimates due to the receipt of new information, we may be required to significantly change the income tax expense recorded in the consolidated financial statements.

This includes a further significant decline in the value of

December 31, 2022 | 10-K 55

CITIZENS, INC.

assets incorporated into our tax planning strategies which could lead to an increase in our valuation allowance on deferred tax assets having an adverse effect on current and future results.

RECENT ACCOUNTING PRONOUNCEMENTS

1 unchanged sentence

Summary of Significant Accounting Policies in the notes to our consolidated financial statements.

December 31, 2021 | 10-K 59

CITIZENS, INC.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a smaller reporting company, we have elected to comply with certain scaled disclosure reporting obligations and therefore are not required to provide the information required by this Item.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis