What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-08 compared with 2022-11-04 · 242 added, 269 removed, 378 unchanged (57% of the section changed)

5 unchanged sentences

Forward-looking statements are not guarantees of future performance and the Company’s actual results may differ significantly from the results discussed in the forward-looking statements.

Factors that might cause such differences include, but are not limited to, statements concerning any potential future impact of the coronavirus disease (“COVID-19”) pandemic on our business and the inflationary environment that has led to market volatility and rising interest rates, as well as factors discussed in the "Risk Factors" contained in our Annual Report on Form 10-K for the year ended December 31, 2021, which are incorporated herein by reference.

The Company assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law.

These forward-looking statements are subject to a number of risks, uncertainties and assumptions including those factors discussed in the "Risk Factors" contained in our Annual Report on Form 10-K for the year ended December 31, 2022, which are incorporated herein by reference.

The following discussion should be read in conjunction with the consolidated financial statements and accompanying notes included in Part I, Item 1 of this Form 10-Q.

2 unchanged sentences

The public can obtain any documents that the Company files with the SEC at http://www.sec.gov.

We also make available, free of charge, through our Internet website (http://www.citizensinc.com), our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Section 16 Reports filed by officers and directors, news releases, and, if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable after we electronically file such reports with, or furnish such reports to, the SEC.

We also make available, free of charge, through our website (http://www.citizensinc.com), our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Section 16 Reports filed by officers and directors, news releases, and, if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable after we electronically file such reports with, or furnish such reports to, the SEC.

We are not including any of the information contained on our website as part of, or incorporating it by reference into, this Form 10-Q.

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.

For almost 50 years, we have been fulfilling the needs of our policyholders and their families by providing insurance products that offer both living and death benefits.

Citizens conducts insurance related operations through its insurance subsidiaries, which provide benefits to residents in 32 U.S.

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We refer to our Management’s Discussion and Analysis of Financial Condition and Results of Operations as our “MD&A”.

The objective of our MD&A is to provide investors with information in order to assess the material changes in our financial condition from December 31, 2021 to September 30, 2022 and the material changes in our results of operations for the three and nine months ended September 30, 2022 as compared to the same periods in 2021.

September 30, 2022 | 10-Q 31

The objective of our MD&A is to provide investors with information in order to assess the material changes in our financial condition from December 31, 2022 to March 31, 2023 and the material changes in our results of operations for the three months ended March 31, 2023 as compared to the same period in 2022.

We also discuss in the MD&A any trends that we believe may materially affect our future operations or financial condition.

Prior year amounts have been revised to reflect the implementation ASU 2018-12 as noted in Part I, Item 1, Note 1.

Financial Statements - " Significant Accounting Policies " and Note 2.

Accounting Pronouncements in the notes to our consolidated financial statements.

March 31, 2023 | 10-Q 41

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

also discuss in the MD&A any trends that we believe may materially affect our future operations or financial condition.

The Factors that Drive our Operating Results

3 unchanged sentences

• Investments

• Death claims and surrenders

• Claims and surrenders

• Operating expenses

1 unchanged sentence

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

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

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

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

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

September 30, 2022 | 10-Q 32

Our total first year premiums increased by 24% due primarily to a new whole life product that was introduced last year in our international markets, as well as focused marketing campaigns across both of our insurance segments.

Our total renewal premium revenues decreased in the three months ended March 31, 2023 compared to the prior year period 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 net investment income increased for the three months ended March 31, 2023 compared to the same prior year period due to the higher interest rate environment and investment income from our limited partnerships.

March 31, 2023 | 10-Q 42

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

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

In both the three and nine months ending in September 2022, our death claims decreased compared to the same prior year periods.

Death claims in the 2021 periods in both of our segments were negatively impacted by COVID-19 related deaths, which have decreased in the 2022 periods.

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

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

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

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

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

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

September 30, 2022 | 10-Q 33

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

In the three months ended March 31, 2023, our death claim benefits decreased compared to the prior year period due to a lower number of reported death claims.

Our surrenders were flat in the three months ended March 31, 2023, compared to the prior year period.

As expected, matured endowments increased as many of our endowment policies are reaching their contractual maturity dates.

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

Our general operating expenses for the three months ended March 31, 2023 increased slightly compared to the prior year period.

FINANCIAL HIGHLIGHTS

Our net income was $4.9 million for the three months ended March 31, 2023 compared to net income of $6.4 million in the prior year period.

The decline in net income is primarily driven by lower renewal year premiums, higher federal income tax expense and higher insurance benefits paid or provided, which is partially offset by higher net investment income and lower investment related losses.

Our net income per share of Class A common stock was $0.10 for the three months ended March 31, 2023 compared to $0.13 in prior year period.

March 31, 2023 | 10-Q 43

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

FINANCIAL HIGHLIGHTS

Due to the impact inflation has had on market volatility and rising interest rates during the first nine months of 2022, we had net losses of $5.1 million and $10.0 million, respectively, in the three and nine months ended September 30, 2022, compared to net losses of $2.8 million and $1.4 million, respectively, in the prior year periods.

As an insurance company, we hold significant invested assets in order to pay future policy liabilities.

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

We did not sell these investments during 2022, but as discussed in Part I, Item 1, Note 5.

Investments , changes in fair values of our equity securities are reflected as investment related gains or losses, in addition to executed transactions that result in a gain or loss.

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

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

Our total benefits and expenses decreased by $3.3 million and $5.8 million, respectively, in the current year periods as compared to the same prior year periods.

Consolidated Revenue Highlights

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

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

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

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

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

Insurance premiums and investment income are our primary sources of revenue.

Collectively, insurance premiums and investment income were flat in the three months ended March 31, 2023 as compared to the same period in 2022.

• Insurance premiums decreased by $1.1 million, or 2.8%.

While first year premiums increased this was more than offset by a decline in renewal year premiums.

• Net investment income increased by $1.6 million, or 10.2% for the same reasons discussed above.

September 30, 2022 | 10-Q 34

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

Consolidated Benefits and Expenses Highlights

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

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

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

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

◦ $1.1 million decrease in claims and surrenders benefits.

This decrease was primarily related to lower death claims in both of our segments as 2021 included a higher number of reported death claims, including COVID-19 related deaths, partially offset by an increase in matured endowment benefits;

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

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

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

• a $0.4 million decrease in other general expenses.

Financial Condition at September 30, 2022

In the three months ended March 31, 2023 compared to the same period in 2022, total benefits and expenses increased by $1.0 million.

• Claims and surrender benefits increased $1.9 million due primarily to increased matured endowment benefits partially offset by lower death claim benefits.

• Increase in future policy benefits reserves decreased $1.1 million due to the impact of reserves released from higher matured endowment benefits partially offset by increases in our in force block of business.

Financial Condition at March 31, 2023

• Total assets of $1.6 billion

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• $4.8 billion of direct insurance in force

• Fully diluted income per share of Class A common stock of $0.10

IMPACT OF INFLATION AND RISING INTEREST RATES

The impact of inflation, which has led to market volatility and rising interest rates, has had a material impact on our results of operations and financial condition in the three and nine months ended September 30, 2022.

In addition to the market volatility that affected the fair value of our equity securities, leading to the investment related losses, higher interest rates typically reduce the market values of fixed income assets, as the interest payments from existing fixed income assets become less competitive relative to newer higher rate fixed income instruments.

Because the vast majority of our total investments are invested in fixed maturity securities, we reported a pre-tax net unrealized loss of $213.7 million on our available-for-sale securities at September 30, 2022.

This compares to net unrealized gains of $126.9 million at December 31, 2021, with the year-over-year decrease primarily driven by higher interest rates.

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

The impact of inflation, which has led to market volatility and rising interest rates, has affected the fair value of our equity securities, leading to investment related losses.

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.

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.

We reported pre-tax net unrealized losses of $158.2 million on our available-for-sale securities at March 31, 2023.

This compares to pre-tax net unrealized losses of $201.7 million at December 31, 2022, with the year-over-year change primarily driven by market interest rates.

In addition, we could experience higher surrenders and lapses and fewer sales in the coming months as our policyholders conserve cash due to concerns over inflation and rising costs, particularly in our Home Service Insurance segment, whose customer base is primarily middle- and lower-income individuals.

COVID-19 PANDEMIC

The overall impact of the COVID-19 pandemic and its related economic conditions on the Company's financial results continue to be highly uncertain and unpredictable.

While the Company has implemented new strategies and processes to mitigate this impact, the scope, duration and magnitude of the direct and indirect effects of COVID-19 are difficult or impossible to anticipate.

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

September 30, 2022 | 10-Q 35

March 31, 2023 | 10-Q 44

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

2022 or beyond.

While we don't believe that the COVID-19 pandemic materially impacted our results of operations for the three and nine months ended September 30, 2022 , some of the most significant factors related to COVID-19 that could cause our future results to differ significantly from our prior results or expectations include:

• a higher level of claims due to COVID-19 deaths;

• decreased premium revenue due to disruption to our workforce or distribution channels resulting from required isolation, travel limitations and business restrictions;

• higher surrenders and lapses due to cash needs our policyholders may have due to concerns over COVID-19 economic impacts;

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

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

OUR OPERATING SEGMENTS

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

We manage our business in two operating segments:

Life Insurance and Home Service Insurance.

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

1 unchanged sentence

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

Nine Months Ended September 30, 2022 2021

Three Months Ended March 31, 2023 2022

Issued Number of

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Total $ 170,329,261 7,426 $ 97,347,823 6,064

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

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

The growth in insurance issued was a result of both a greater number of policies issued and higher average policy face amounts issued in both segments.

The growth in our Life Insurance segment is attributable to strong sales from our new international whole life product, which accounted for 31% of total insurance issued in this segment for the nine months ended September 30, 2022.

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

September 30, 2022 | 10-Q 36

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

These new products helped drive the 75% increase in total insurance issued in the three months ended March 31, 2023, from $97.3 million in the first three months of 2022 to $170.3 million in 2023.

The increase in total insurance issued was driven by an increase in total number of policies issued and higher average policy face amounts 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 72% of total insurance issued in this segment for the three months ended March 31, 2023.

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.

March 31, 2023 | 10-Q 45

CITIZENS, INC.

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

Three Months Ended Nine Months Ended

September 30, September 30,

Three Months Ended

(In thousands) 2023 2022

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Premium Income.

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

• Three months ended September 30, 2022 :

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

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

• Nine months ended September 30, 2022:

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

Life insurance premiums declined 1.1%.

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

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

September 30, 2022 | 10-Q 37

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

Total life insurance premium revenues decreased $0.8 million for the three months ended March 31, 2023 compared to the same period in 2022 primarily driven by lower renewal premiums.

Property insurance premiums were impacted by an increase in premiums paid for catastrophic reinsurance coverage.

Net Investment Income.

A summary of our net investment income and annualized net investment income performance are summarized as follows:

Three Months Ended Nine Months Ended

September 30, September 30,

Three Months Ended

(In thousands, except for %) 2023 2022

11 unchanged sentences

Annualized yield on average invested assets 4.50 % 4.20 %

March 31, 2023 | 10-Q 46

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

Income from our fixed maturity securities constitutes the vast majority of our net investment income, as they comprise 88.2% of our investment portfolio based on fair value.

Our total investment income increased by 7.9% and 4.5% for the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021, primarily due to a higher average portfolio yield on our fixed maturity securities in the current year period.

Our total investment income increased by 9.4% for the three months ended March 31, 2023 compared to the same period in 2022, primarily due to a higher average portfolio yield on our fixed maturity securities in the current period.

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

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

Our yield increased 30 basis points to 4.50% in the first three months of 2023 compared to the prior year period due to the rising interest rate environment.

Investment Related Gains (Losses), Net.

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

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

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

We recorded investment related losses during the three months ended March 31, 2023 of $0.3 million compared to $0.6 million during the same prior year period.

The losses are primarily related to the fair value change of our limited partnership and equity security investments resulting from the inflationary environment and volatility in equity markets.

We did not sell these investments as 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.

Other Income.

Other income consists primarily of supplemental contracts issued to policyholders in our Life Insurance segment upon the surrender or maturity of their original policies.

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

September 30, 2022 | 10-Q 38

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

BENEFITS AND EXPENSES

Three Months Ended Nine Months Ended

September 30, September 30,

Three Months Ended

(In thousands) 2023 2022

2 unchanged sentences

Claims and surrenders $ 30,299 28,434

Increase in future policy benefit reserves 7,090 10,888 23,037 22,407

Increase (decrease) in future policy benefit reserves (978) 114

Policyholder liability remeasurement (gain) loss 880 668

Policyholders' dividends 1,108 1,353

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Claims and surrenders benefits and other general expenses are our primary expenses.

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

Total benefits and expenses increased in the three months ended March 31, 2023 as compared to same period in 2022.

March 31, 2023 | 10-Q 47

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

Claims and Surrenders.

Three Months Ended Nine Months Ended

September 30, September 30,

Three Months Ended

(In thousands) 2023 2022

7 unchanged sentences

Total claims and surrenders $ 30,299 28,434

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

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

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

Surrender benefits represented less than 0.8% of total direct ordinary whole life insurance in force of $4.7 billion as of September 30, 2022.

We have focused our efforts on retaining policyholders and believe we have begun to see positive benefits from these efforts starting in the second half of 2021;

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

September 30, 2022 | 10-Q 39

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

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

We anticipated this increase based upon the contractual maturity dates.

Death claim benefits decreased 23.3% for the three months ended March 31, 2023 compared to the same period in 2022 due primarily to a lower volume of reported death claims.

Matured endowment benefits increased 42.9% for the three months ended March 31, 2023 compared to the same period in 2022.

We anticipated this increase based upon the contractual maturity dates of the policies.

Explanation of other benefits and expenses

Other General Expenses.

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

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

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

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

Increase in Future Policy Benefit Reserves.

Increase (Decrease) in Future Policy Benefit Reserves.

Future policy benefit reserves reflect the liability established to provide for the payment of policy benefits that we expect to pay in the future and thus generally increase when we have a larger in force block of business due to higher sales and better persistency (i.e., more policies on which we expect to pay future benefits) and decrease when we have lower sales and persistency.

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

In the three months ended March 31, 2023, the change in future policy benefit reserves decreased compared to the same prior year period due to the impact of reserves released from higher matured endowment benefits despite increases in insurance issued and increases in our in force block of business policy benefit reserves.

Commission expenses are a cost of acquiring business, as commissions are the primary compensation paid to our independent consultants and independent agents for selling our products.

First year commission rates are higher than renewal commission rates and thus commissions fluctuate directly in relation to first year sales.

As discussed above, in the three months ended March 31, 2023, we experienced a 24% increase in first year sales leading to an increase in commissions related expenses.

Capitalization and Amortization of Deferred Policy Acquisition Costs.

Costs capitalized include certain commissions, policy issuance costs, and underwriting and agency expenses that relate to successful sales efforts for insurance contracts and thus fluctuate primarily with first year sales.

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

Amortization is on a constant level basis for the grouped contracts over the expected term of the related contracts to approximate straight-line amortization.

SEGMENT OPERATIONS

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These segments are reported in accordance with U.S.

The Company's Other Non-Insurance enterprises include non-insurance operations such as IT and corporate-support functions, which are included in the table presented below to properly reconcile the segment information with the consolidated financial statements of the Company.

September 30, 2022 | 10-Q 40

The Company's Other Non-Insurance enterprises include non-insurance operations such as IT and corporate-support functions, which are included in the table

March 31, 2023 | 10-Q 48

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

The following table shows income (loss) before federal income taxes by segment during the periods indicated.

Three Months Ended Nine Months Ended

September 30, September 30,

presented below to properly reconcile the segment information with the consolidated financial statements of the Company.

The following table sets forth income (loss) before federal income taxes by segment during the periods indicated.

Three Months Ended

(In thousands) 2023 2022

6 unchanged sentences

LIFE INSURANCE

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

As discussed above in "Financial Highlights" this change was due primarily to investment related losses in the current year periods.

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

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

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

September 30, 2022 | 10-Q 41

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

Detailed results of operations for the Life Insurance segment for the periods indicated are as follows:

Three Months Ended Nine Months Ended

September 30, September 30,

Three Months Ended

(In thousands) 2023 2022

7 unchanged sentences

Claims and surrenders 24,439 21,458

Increase in future policy benefit reserves 6,040 9,369 18,746 17,081

Increase (decrease) in future policy benefit reserves (1,820) 1,376

Policyholder liability remeasurement (gain) loss 816 414

Policyholders' dividends 1,101 1,350

7 unchanged sentences

Income (loss) before federal income tax expense $ 6,372 5,864

March 31, 2023 | 10-Q 49

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

In our Life Insurance segment we reported income before federal income tax of $6.4 million in the three months ended March 31, 2023 as compared to income of $5.9 million in the prior year period primarily driven by higher net investment income, partially offset by lower renewal year premiums.

Life Insurance segment premium breakout is detailed below.

Three Months Ended Nine Months Ended

September 30, September 30,

Three Months Ended

(In thousands) 2023 2022

2 unchanged sentences

Total premiums $ 26,207 26,931

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

We derive most of our premium revenue in the Life Insurance segment from renewal premiums, which decreased 2.2% and 0.8% in the three and nine months ended September 30, 2022, respectively, as compared to the same periods in 2021.

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

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

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

September 30, 2022 | 10-Q 42

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

continued decline in production in Venezuela due to one of our top distributors leaving our Company.

As we discussed in Item 3 - Legal Proceedings in our Annual Report on Form 10-K for the year ended December 31, 2021, we believe these distributors are illegally competing with us and stealing our trade secrets and business.

First year premiums increased 30.5% for three months ended March 31, 2023 compared to the same period in 2022, which we believe is due to sales campaigns and our new international whole life product, which launched in March 2022.

Our total premiums for three months ended March 31, 2023 decreased 2.7% compared to the same period in 2022.

We derive most of our premium revenue in the Life Insurance segment from renewal premiums, which decreased 5.3% in the three months ended March 31, 2023 as compared to the same period in 2022.

International Life Insurance Premiums.

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

Three Months Ended Nine Months Ended

September 30, September 30,

Life insurance premiums are generated largely from our international policyholders from more than 70 different countries across the globe.

The majority of our international premiums are derived from whole life and endowment products.

The following table sets forth our premiums collected from the top five countries of our international life insurance business for the three months ended March 31, 2023 and 2022.

Three Months Ended

(In thousands) 2023 2022

5 unchanged sentences

Other Non-U.S.

10,141 10,259 28,711 28,447

Total $ 29,352 28,863

Domestic Life Insurance Premiums.

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

Our domestic in force business results primarily from blocks of business of insurance companies we have acquired over the years as we ceased selling ordinary life in 2017.

We currently offer credit life, credit disability and critical illness products domestically.

Domestic premiums in our Life Insurance segment remained consistent in the three months ended March 31, 2023 compared to the same prior year period.

Our domestic in force business results primarily from receipt of renewal premiums from blocks of business of various insurance companies we have acquired over the years as we ceased selling ordinary life in 2017.

We currently offer whole life, credit life, credit disability and critical illness products domestically.

Net Investment Income .

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

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

Investment Related Gains (Losses), Net.

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

September 30, 2022 | 10-Q 43

Our net investment income increased by 11.2% for the three months ended March 31, 2023 compared to the same period in 2022 due to our higher average portfolio yield.

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.

March 31, 2023 | 10-Q 50

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

Investment Related Gains (Losses), Net.

We recorded investment related losses of $0.4 million during the three months ended March 31, 2023 compared to investment related losses of $0.3 million during the same prior year period resulting from the change in estimated fair market value for our limited partnerships, as previously discussed.

Claims and Surrenders.

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

Three Months Ended Nine Months Ended

September 30, September 30,

The following table sets forth our primary claims and surrender benefits paid within our Life Insurance segment for the three months ended March 31, 2023 compared to the same period in 2022.

Three Months Ended

(In thousands) 2023 2022

6 unchanged sentences

Total claims and surrenders $ 24,439 21,458

During the three and nine months ended September 30, 2022 and 2021, the majority of our claims and surrender benefits in our Life Insurance segment were related to payment of surrender benefits and matured endowment benefits.

Surrenders decreased 0.4% and 7.7% in the three and nine months ended September 30, 2022, respectively, as compared to the same prior year periods.

We believe this improvement is due to the success of our retention programs aimed at curbing surrenders.

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

Death claims benefits decreased for the three and nine months ended September 30, 2022, as compared to the prior year periods.

We believe that the COVID-19 pandemic contributed to high death claims in the 2021 period.

Increase in Future Policy Benefit Reserves.

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

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

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

Other General Expenses.

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

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

HOME SERVICE INSURANCE

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

September 30, 2022 | 10-Q 44

During the three months ended March 31, 2023 and 2022, the majority of our claims and surrender benefits in our Life Insurance segment were related to payment of surrender benefits and matured endowment benefits.

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

Death claims benefits decreased for the three months ended March 31, 2023 compared to the prior year period.

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

Increase (Decrease) in Future Policy Benefit Reserves.

The change in future policy benefit reserves decreased as a result of reserves released from higher matured endowment benefits which is offset by increases in our in force block of business for the three months ended March 31, 2023 compared to the same period in 2022.

March 31, 2023 | 10-Q 51

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

HOME SERVICE INSURANCE

Detailed results of operations for the Home Service Insurance segment for the periods indicated are as follows:

Three Months Ended Nine Months Ended

September 30, September 30,

Three Months Ended

(In thousands) 2023 2022

2 unchanged sentences

Investment related gains (losses), net 99 (242)

Other income — 1 1 3

Total revenues 15,611 15,435

2 unchanged sentences

Claims and surrenders 5,860 6,976

Increase in future policy benefit reserves 1,050 1,519 4,291 5,326

Increase (decrease) in future policy benefit reserves 842 (1,262)

Policyholder liability remeasurement (gain) loss 64 254

Policyholders' dividends 7 3

6 unchanged sentences

Total benefits and expenses 14,278 13,357

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

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

We believe that our premium revenue is impacted by changes in our business mix as we continue the strategic transformation of this business and introduce new products, which are lower cost to policyholders than some of our legacy products.

Premium revenue increased by 3.4% in the nine months ended September 30, 2022 compared to the same period in 2021.

This increase is due to higher renewal premiums during the nine months ended September 30, 2022 as a result of collection efforts by our independent agents as well as the impact from a pricing increase on our property casualty business products and the change to property premiums due to the prior year impact of Hurricane Ida.

September 30, 2022 | 10-Q 45

Income before federal income tax expense $ 1,333 2,078

In our Home Service Insurance segment we reported income before federal income tax of $1.3 million in the three months ended March 31, 2023 as compared to income of $2.1 million in the prior year period.

This decrease is primarily driven by an increase in catastrophic reinsurance costs and higher total insurance benefits paid or provided partially offset by investment related gains due to the changes in the fair value of our equity securities.

Total premium revenue declined by 3.1% in the three months ended March 31, 2023 compared to the same period in 2022 despite an increase of 15.1% in first year premiums for three months ended March 31, 2023 compared to the same period in 2022.

The decline in premium was attributed to lower property insurance premiums from an increase in catastrophic reinsurance costs and lower life insurance renewal year premiums.

March 31, 2023 | 10-Q 52

CITIZENS, INC.

2 unchanged sentences

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

Three Months Ended Nine Months Ended

September 30, September 30,

Three Months Ended

(In thousands) 2023 2022

8 unchanged sentences

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

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

The decrease in death claim benefits was due primarily to a lower volume of reported claims, including less COVID-19 related deaths.

Death claim benefits decreased 23.1% in the three months ended March 31, 2023 compared to the same 2022 period.

The decrease in death claim benefits was due primarily to a lower volume of reported claims.

Mortality experience is closely monitored by the Company as a key performance indicator and fluctuates from quarter-to-quarter based on reported claims.

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

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

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

Amortization of Deferred Policy Acquisition Costs.

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

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

Increase in Future Policy Benefit Reserves.

The change in future policy benefit reserves increased as a result of increases in insurance issued and lower total death claim benefits for the three months ended March 31, 2023 compared to the same period in 2022.

OTHER NON-INSURANCE ENTERPRISES

Three Months Ended Nine Months Ended

September 30, September 30,

Three Months Ended

(In thousands)

2022 2021 2022 2021

Income (loss) before income tax expense $ (990) (764)

4 unchanged sentences

Our investments are an integral part of our business success.

Our cash and invested assets at September 30, 2022 were $1.3 billion, of which 86.9% was invested in fixed maturity securities, all of which are classified as available-for-sale.

Our cash and invested assets at March 31, 2023 were $1.4 billion, of which 87.0% was invested in fixed maturity securities, all of which are classified as available-for-sale.

We closely monitor the duration of our fixed maturity investments, and investment purchases and sales are executed with the objective of having adequate funds available to satisfy our insurance obligations.

September 30, 2022 | 10-Q 46

March 31, 2023 | 10-Q 53

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

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

Carrying Value September 30, 2022 December 31, 2021

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

Carrying Value March 31, 2023 December 31, 2022

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

18 unchanged sentences

Total cash, cash equivalents and invested assets $ 1,412,671 100.0 % $ 1,363,754 100.0 %

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

(1) Includes $128.5 million and $133.2 million of securities guaranteed by third parties at March 31, 2023 and December 31, 2022, respectively.

(2) Includes $102.7 million and $98.8 million of U.S.

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

The carrying value of the Company’s fixed maturity securities investment portfolio at September 30, 2022 was $1.2 billion compared to $1.5 billion at December 31, 2021.

As discussed above, this decline reflects the impact of interest rate sensitivity on the fair value of our fixed maturity securities.

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

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

Other long-term investments increased by $5.3 million as of September 30, 2022 from December 31, 2021 due to additional funding of our limited partnership investments.

Government-sponsored enterprises at March 31, 2023 and December 31, 2022, respectively.

The carrying value of the Company’s fixed maturity securities investment portfolio at March 31, 2023 was $1.23 billion compared to $1.18 billion at December 31, 2022.

As discussed above, this increase 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 March 31, 2023 did not materially change from December 31, 2022 – the weighted average was “A” at both dates.

Cash and cash equivalents decreased as of March 31, 2023 from December 31, 2022 and can fluctuate from period to period primarily due to the timing from operating and investing activities.

Other long-term investments increased by $2.7 million as of March 31, 2023 from December 31, 2022 due to additional funding of our limited partnership investments.

Obligations of States and Political Subdivisions

The Company’s fixed maturity securities investment portfolio at September 30, 2022 and December 31, 2021 included $315.3 million and $384.0 million, respectively, of securities that are obligations of states and political subdivisions, including municipalities (collectively referred to as the municipal bond portfolio).

September 30, 2022 | 10-Q 47

The Company’s fixed maturity securities investment portfolio at March 31, 2023 and December 31, 2022 included $308.6 million and $307.4 million, respectively, of securities that are obligations of states and political subdivisions, including municipalities (collectively referred to as the municipal bond portfolio).

March 31, 2023 | 10-Q 54

CITIZENS, INC.

1 unchanged sentence

The Company's municipal bond portfolio includes third-party guarantees.

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

Detailed below is a presentation by the Nationally Recognized Statistical Rating Organization ("NRSRO") rating of these holdings by funding type as of March 31, 2023.

General Obligation Special Revenue Other Total % Based on Amortized

17 unchanged sentences

Total $ 72,351 72,683 219,666 245,261 16,563 16,943 308,580 334,887 100.0 %

The table below shows the categories in which the Company held investments in special revenue bonds that were greater than 10% of fair value based upon the Company's total municipal bond portfolio at September 30, 2022.

(In thousands) Fair

4 unchanged sentences

Transportation 38,239 44,661 12.4 %

The Company's municipal bond portfolio is spread across many states, however, municipal bonds from Texas and California comprise the most significant concentration of the total municipal bond portfolio as of September 30, 2022.

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

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

September 30, 2022 | 10-Q 48

The Company holds 21.7% and 14.3% of its municipal bond portfolio in Texas and California issuers, respectively, as of March 31, 2023.

There were no other states or individual issuer holdings that represented or exceeded 10% of the total municipal bond portfolio as of March 31, 2023.

March 31, 2023 | 10-Q 55

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

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

The table below represents the Company's detailed exposure to municipal bonds in Texas at March 31, 2023.

General Obligation Special Revenue Other Total

8 unchanged sentences

A — — 17,458 22,195 — — 17,458 22,195

BBB — — 1,813 1,822 — — 1,813 1,822

BB and other — — 500 501 — — 500 501

6 unchanged sentences

Total $ 31,136 30,991 35,748 42,053 — — 66,884 73,044

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

The table below represents the Company's detailed exposure to municipal bonds in California at March 31, 2023.

General Obligation Special Revenue Other Total

16 unchanged sentences

IMPAIRMENT CONSIDERATIONS RELATED TO INVESTMENTS IN FIXED MATURITY AND EQUITY SECURITIES

The Company did not record any credit valuation allowances on fixed maturity securities in either of the three and nine months ended September 30, 2022 or 2021.

September 30, 2022 | 10-Q 49

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

The Company did not record any credit valuation allowances on fixed maturity securities in either of the three months ended March 31, 2023 or 2022.

Information on both unrealized and realized gains and losses by category is set forth in Part I, Item 1, Note 3.

Investments of the notes to our consolidated financial statements herein.

March 31, 2023 | 10-Q 56

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

LIQUIDITY AND CAPITAL RESOURCES

1 unchanged sentence

(In thousands)

September 30, 2022 December 31, 2021

March 31, 2023 December 31, 2022

Fixed maturity securities $ 1,229,691 1,179,619

1 unchanged sentence

Liquidity refers to a company's ability to generate sufficient cash flows to meet the needs of its operations.

In the three months ended March 31, 2023 our operations resulted in $7.4 million in net cash.

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

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

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

As described above, cash and cash equivalents decreased as of September 30, 2022 from December 31, 2021 due primarily to the reinvestment of funds in higher interest rate securities and the decline in the fair value of our fixed maturity securities is due to rising interest rates.

As discussed in Part I, Item 1.

Investments in the notes to our consolidated financial statements herein, we expect the fair value to recover as the securities approach maturity.

We have recorded a $0.1 million unrealized gain on securities due in one year or less.

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

5 unchanged sentences

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

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

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

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

7 unchanged sentences

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

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

September 30, 2022 | 10-Q 50

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

As of March 31, 2023, we have not borrowed any money under the Credit Facility and have no immediate plans to do so.

INSURANCE COMPANY SUBSIDIARY LIQUIDITY AND CAPITAL RESOURCES

2 unchanged sentences

Historically, cash flow from our operations has been sufficient to meet our cash needs.

We have not had to liquidate a material amount of investments to pay our expenses and we did not do so in the nine months ended September 30, 2022.

We have not had to liquidate a material amount of investments to pay our expenses and we did not do so in the three months ended March 31, 2023.

We believe that we have adequate capital resources to support the liquidity requirements of our insurance operations if the cash flow from our insurance operations is insufficient to meet our cash needs.

See Contractual Obligations and Off-balance Sheet Arrangements in our Form 10-K and below for a discussion of known and estimated cash needs.

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

March 31, 2023 | 10-Q 57

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

Cash from Operating Activities.

Cash provided by or used in operating activities is an important liquidity metric because it reflects, during a given period, the amount of cash generated that is available to pay our operating expenses or make strategic acquisitions.

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

In the three months ended March 31, 2023, our operations provided $7.4 million in net cash.

Cash from Investing Activities.

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

These cash flows, for the most part, are reinvested in new investments.

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

Due to the higher interest rate environment, we purchased $102.3 million in fixed maturity securities and we also used $18.2 million to purchase other long-term investments.

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

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

These cash flows, for the most part, are reinvested in fixed income securities and to a lesser extent limited partnerships or other alternative investments.

Net cash outflows from investing activities totaled $11.0 million for the three months ended March 31, 2023.

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

We purchased $25.1 million in fixed maturity securities and we also used $3.5 million to purchase other long-term investments.

87% of our total cash, cash equivalents and 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

Because claims and surrender benefits are our largest expense, a primary liquidity concern is the risk of either (i) an extraordinary level of early policyholder surrenders, or (ii) higher than expected mortality.

Because claims and surrenders are our largest expense, a primary liquidity concern is the risk of either (i) an extraordinary level of early policyholder surrenders, or (ii) higher than expected mortality experience.

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

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

However, we have been aggressively managing policyholder retention efforts and in the nine months ended September 30, 2022, surrender benefits slightly decreased.

Our whole life and endowment products provide the policyholder with alternatives once the policy matures - they can choose to take a lump sum payout or leave the money on deposit at interest with the Company.

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

However, we have been aggressively managing policyholder retention efforts and in the three months ended March 31, 2023, surrender benefits have leveled.

To the extent that early surrenders are higher than expected, our liquidity could be negatively impacted.

We continue to monitor surrenders and early withdrawals.

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 March 31, 2023, 37% of the Company's total insurance in force was in endowment products.

Approximately 17% of the endowments in force will mature in the next five years.

Policyholder election behavior is unknown, but if too many policyholders elect lump sum distributions, the Company could be exposed to liquidity risk in years of high maturities.

Meeting these distributions could require the Company to sell securities at inopportune times to pay policyholder withdrawals.

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.

Death claims, which were high in 2021 due in part to COVID, have decreased to pre-pandemic levels during the first nine months of 2022.

We continue to closely monitor claim volumes to evaluate whether there is a delay in reporting or filing for benefits as a result of the COVID-19 pandemic.

As discussed above, we are subject to regulatory capital requirements that could affect the Company’s ability to access capital from our insurance operations or cause the Company to have to put additional cash in our wholly-owned subsidiaries.

September 30, 2022 | 10-Q 51

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

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

3 unchanged sentences

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

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

At March 31, 2023, our domestic insurance subsidiaries were above the required minimum RBC levels.

March 31, 2023 | 10-Q 58

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

CICA International is a Bermuda domiciled company.

The BMA requires Bermuda insurers to maintain available statutory economic capital and surplus at a level equal to or in excess of the BMA's Enhanced Capital Requirement, which requires a certain Target Capital Level ("TCL").

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

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

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

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

2 unchanged sentences

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.

CICA International had previously been granted a permitted practice by the BMA to report its fixed income maturity securities at amortized cost in its unconsolidated statutory financial statements.

This permitted practice has expired.

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

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

As of March 31, 2023, we have no additional contractual obligations or off-balance sheet arrangements other than those described in Part I.

Item 1, Note 7.

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We believe that the accounting policies set forth in Part I, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations - "Critical Accounting Policies" and Part IV, Item 15, Note 1.

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

September 30, 2022 | 10-Q 52

The following items have changed due to adoption of Accounting Standard Update ("ASU") No.

2018-12, Financial Services-Insurance (Topic 944):

Targeted Improvements to the Accounting for Long-Duration Contracts.

DEFERRED POLICY ACQUISITION COSTS

Deferred policy acquisition costs (“DAC”) are costs that are incremental and directly related to the successful acquisition of new or renewal insurance contracts.

Such costs include the incremental direct costs of contract acquisition, such as sales commissions;

the portion of employees’ total compensation and payroll-related fringe benefits related directly to time spent performing acquisition activities, such as underwriting, issuing, and processing policies for contracts that have actually been acquired;

and other costs related directly to acquisition activities that would not have been incurred if the contract had not been acquired.

Inherent in the capitalization and amortization of DAC are certain management judgements about what acquisition costs are deferred.

Approximately 94.0% of our capitalized DAC are attributed to first year and renewal excess commissions.

The remaining 6.0% are attributed to other costs that vary with and are directly related to the

March 31, 2023 | 10-Q 59

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

successful acquisition of new insurance business.

Those costs generally include costs related to the production, underwriting and issuance of new business.

DAC is amortized on a constant level basis over the expected term of the related contracts to approximate straight-line amortization.

For the Life Insurance Segment, the constant level basis used is policy count in force.

For the Home Service Insurance Segment, the constant level basis used is face amount in force.

The constant level bases used for amortization are projected using mortality and lapse assumptions that are based on the Company’s experience, industry data, and other factors at the end of each reporting period and are consistent with those used for the liability for future policy benefit life reserves.

Annually, the Company completes experience studies to evaluate mortality and lapse.

If those assumptions are updated, the DAC amortization basis is recalculated and the impact of the assumption change will be reflected in the cohort level amortization in future periods.

COST OF INSURANCE ACQUIRED

The Company recognizes an intangible asset that arises in the application of GAAP purchase accounting as the difference between the reported value and the fair value of insurance contract liabilities, or comparable amounts determined in purchased insurance business combinations.

This intangible asset is referred to as the Cost of Insurance Acquired (“COIA”), which is amortized on a basis consistent with DAC, such that it is amortized in proportion to policies in force for the Life Insurance Segment and face amount in force for the Home Service Insurance Segment to approximate straight-line amortization.

Inherent in the amortization of COIA are certain management judgements about the ending asset balance and the annual amortization.

The key assumptions are based upon interest, mortality and lapses at the time of purchase.

A recoverability test that considers, among other things, actual experience and projected future experience is performed at least annually.

These annual recoverability tests are based initially on an estimate of the available premium (gross premium less the benefit and expense portion of premium) for the next 50 years using best estimate assumptions related to interest rates, mortality and lapses.

Management believes that our COIA is recoverable for the three months ended March 31, 2023.

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

POLICY LIABILITIES

As premium revenue is recognized, a liability for future policy benefits is accrued.

The liability for a future policy benefit is the present value of estimated future policy benefits to be paid to or on behalf of policyholders less the present value of estimated future net premiums to be collected from policyholders.

The liability is estimated using current assumptions that include investment yields, discount rate, mortality and lapses and withdrawals.

These current assumptions are based on judgements that consider the Company’s historical experience, industry data, and other factors.

Annually, the Company completes experience studies to evaluate mortality and lapse.

The results of these studies are used to update current year best estimate assumptions used in establishing benefit liabilities and DAC.

The current discount rate assumption is a yield curve that equals the yield of an upper-medium grade fixed income instrument, based on an A-quality corporate bond.

The current discount rate assumption is updated quarterly and used to remeasure the liability at the reporting date, with the resulting change reflected in other comprehensive income.

For liability cash flows that are projected beyond the duration of market-observable A credit-rated fixed-income instruments, the Company uses the last market-observable yield level and uses linear interpolation to determine yield assumptions for durations that do not have market observable yields.

The locked-in discount rate for policies issued prior to transition equals the rate set at contract issuance.

For current year issues, the locked-in discount rate is the average of the current year quarterly discount rates and will change throughout the year as new discount rates are calculated, with the change reflected in net income.

March 31, 2023 | 10-Q 60

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-Q

Item 2. Management’s Discussion and Analysis