CITIZENS, INC. 10-Q

Item 1. FINANCIAL STATEMENTS CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Balance Sheets (Unaudited) (In thousands) March 31, 2023 December 31, 2022 Assets Investments: Fixed maturity securities available-for-sale, at fair value (amortized cost: $ 1,387,919 and $ 1,381,318 in 2023 and 2022, respectively) $ 1,229,691 1,179,619 Equity securities, at fair value 11,899 11,590 Policy loans 78,659 78,773 Other long-term investments (portion measured at fair value $ 71,990 and $ 66,846 in 2023 and 2022, respectively) 72,254 69,558 Short-term investments 1,244 1,241 Total investments 1,393,747 1,340,781 Cash and cash equivalents 18,924 22,973 Accrued investment income 16,958 17,131 Reinsurance recoverable 4,323 4,560 Deferred policy acquisition costs 165,471 162,927 Cost of insurance acquired 10,486 10,647 Current federal income tax receivable — 601 Property and equipment, net 12,592 12,926 Due premiums 9,181 11,829 Other assets (less allowance for losses of $ 359 and $ 347 in 2023 and 2022, respectively) 6,799 6,328 Total assets $ 1,638,481 1,590,703 See accompanying Notes to Consolidated Financial Statements. March 31, 2023 | 10-Q 2 Table of Contents CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Balance Sheets, Continued (Unaudited) (In thousands, except share amounts) March 31, 2023 December 31, 2022 Liabilities and Stockholders' Equity (Deficit) Liabilities: Policy liabilities: Future policy benefit reserves: Life insurance $ 1,218,295 1,198,647 Accident and health 848 767 Total future policy benefit reserves 1,219,143 1,199,414 Policyholders' funds: Annuities 124,528 121,422 Dividend accumulations 42,668 41,663 Premiums paid in advance 36,697 36,384 Policy claims payable 7,485 9,884 Other policyholders' funds 7,325 7,501 Total policyholders' funds 218,703 216,854 Total policy liabilities 1,437,846 1,416,268 Commissions payable 1,948 1,967 Current federal income tax payable 537 — Deferred federal income tax liability 5,775 3,653 Other liabilities 38,084 41,025 Total liabilities 1,484,190 1,462,913 Commitments and contingencies ( Note 7 ) Stockholders' Equity: Common stock: Class A, no par value, 100,000,000 shares authorized, 53,792,476 and 53,758,176 shares issued and outstanding in 2023 and 2022, respectively, including shares in treasury of 3,935,581 in 2023 and 2022 268,197 268,147 Class B, no par value, 2,000,000 shares authorized, 1,001,714 shares issued and outstanding in 2023 and 2022, including shares in treasury of 1,001,714 in 2023 and 2022 3,184 3,184 Retained earnings 21,181 16,309 Accumulated other comprehensive income (loss) ( 115,465 ) ( 137,044 ) Treasury stock, at cost ( 22,806 ) ( 22,806 ) Total stockholders' equity 154,291 127,790 Total liabilities and stockholders' equity $ 1,638,481 1,590,703 See accompanying Notes to Consolidated Financial Statements. March 31, 2023 | 10-Q 3 Table of Contents CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited) Three Months Ended March 31, (In thousands, except per share amounts) 2023 2022 Revenues: Premiums: Life insurance $ 36,934 37,746 Accident and health insurance 358 286 Property insurance 957 1,332 Net investment income 17,074 15,487 Investment related gains (losses), net ( 288 ) ( 582 ) Other income 879 1,088 Total revenues 55,914 55,357 Benefits and Expenses: Insurance benefits paid or provided: Claims and surrenders 30,299 28,434 Increase (decrease) in future policy benefit reserves ( 978 ) 114 Policyholder liability remeasurement (gain) loss 880 668 Policyholders' dividends 1,108 1,353 Total insurance benefits paid or provided 31,309 30,569 Commissions 9,013 7,673 Other general expenses 11,260 11,030 Capitalization of deferred policy acquisition costs ( 6,358 ) ( 4,781 ) Amortization of deferred policy acquisition costs 3,814 3,559 Amortization of cost of insurance acquired 161 129 Total benefits and expenses 49,199 48,179 Income (loss) before federal income tax 6,715 7,178 Federal income tax expense (benefit) 1,843 729 Net income (loss) 4,872 6,449 Per Share Amounts: Basic and diluted earnings (losses) per share of Class A common stock 0.10 0.13 Other Comprehensive Income (Loss): Unrealized gains (losses) on fixed maturity securities: Unrealized holding gains (losses) arising during period 43,436 ( 132,765 ) Reclassification adjustment for losses (gains) included in net income (loss) 38 59 Unrealized gains (losses) on fixed maturity securities, net 43,474 ( 132,706 ) Change in current discount rate for liability for future policy benefits ( 20,480 ) 151,607 Income tax expense (benefit) on other comprehensive income items 1,415 1,712 Other comprehensive income (loss) 21,579 17,189 Total comprehensive income (loss) $ 26,451 23,638 See accompanying Notes to Consolidated Financial Statements. March 31, 2023 | 10-Q 4 Table of Contents CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Stockholders' Equity (Deficit) (Unaudited) Common Stock Retained Earnings (Accumulated Deficit) Accumulated Other Comprehensive Income (Loss) Treasury Stock Total Stockholders' Equity (Deficit) (In thousands) Class A Class B Balance at December 31, 2022 $ 268,147 3,184 16,309 ( 137,044 ) ( 22,806 ) 127,790 Comprehensive income (loss): Net income (loss) — — 4,872 — — 4,872 Other comprehensive income (loss) — — — 21,579 — 21,579 Total comprehensive income (loss) — — 4,872 21,579 — 26,451 Stock-based compensation 50 — — — — 50 Balance at March 31, 2023 $ 268,197 3,184 21,181 ( 115,465 ) ( 22,806 ) 154,291 Balance at December 31, 2021 $ 265,561 3,184 ( 9,698 ) ( 138,989 ) ( 20,101 ) 99,957 Comprehensive income (loss): Net income (loss) — — 6,449 — — 6,449 Other comprehensive income (loss) — — — 17,189 — 17,189 Total comprehensive income (loss) — — 6,449 17,189 — 23,638 Issuance of common stock 1,788 — — — — 1,788 Stock-based compensation 93 — — — — 93 Balance at March 31, 2022 $ 267,442 3,184 ( 3,249 ) ( 121,800 ) ( 20,101 ) 125,476 See accompanying Notes to Consolidated Financial Statements. March 31, 2023 | 10-Q 5 Table of Contents CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited) Three Months Ended March 31, (In thousands) 2023 2022 Cash flows from operating activities: Net income (loss) $ 4,872 6,449 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Investment related (gains) losses on sale of investments and other assets 288 582 Net deferred policy acquisition costs ( 2,544 ) ( 1,222 ) Amortization of cost of insurance acquired 161 129 Depreciation 122 153 Amortization of premiums and discounts on investments 1,203 1,386 Stock-based compensation 70 132 Deferred federal income tax expense (benefit) 706 896 Change in: Accrued investment income 173 442 Reinsurance recoverable 237 1,965 Due premiums 2,648 1,777 Future policy benefit reserves ( 125 ) 706 Other policyholders' liabilities 1,582 ( 2,406 ) Federal income tax payable 1,138 ( 166 ) Commissions payable and other liabilities ( 2,673 ) 1,489 Other, net ( 504 ) ( 172 ) Net cash provided by (used in) operating activities 7,354 12,140 Cash flows from investing activities: Purchases of fixed maturity securities, available-for-sale ( 25,114 ) ( 26,050 ) Sales of fixed maturity securities, available-for-sale 2,865 1,100 Maturities and calls of fixed maturity securities, available-for-sale 14,426 10,435 Principal payments on mortgage loans 2 2 (Increase) decrease in policy loans, net 114 962 Sales of other long-term investments 249 1,681 Purchases of other long-term investments ( 3,495 ) ( 7,940 ) Purchases of property and equipment ( 73 ) ( 34 ) Purchases of short-term investments — ( 5 ) Net cash provided by (used in) investing activities ( 11,026 ) ( 19,849 ) See accompanying Notes to Consolidated Financial Statements. March 31, 2023 | 10-Q 6 Table of Contents CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Cash Flows, Continued (Unaudited) Three Months Ended March 31, (In thousands) 2023 2022 Cash flows from financing activities: Annuity deposits $ 2,008 2,227 Annuity withdrawals ( 2,365 ) ( 2,263 ) Issuance of common stock — 1,788 Other ( 20 ) ( 39 ) Net cash provided by (used in) financing activities ( 377 ) 1,713 Net increase (decrease) in cash and cash equivalents ( 4,049 ) ( 5,996 ) Cash and cash equivalents at beginning of year 22,973 27,294 Cash and cash equivalents at end of period $ 18,924 21,298 SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES: During the three months ended March 31, 2023 and 2022, various fixed maturity issuers exchanged securities with book values of $ 2.1 million and $ 0.6 million, respectively, for securities of equal value. The Company had no net unsettled security trades during the three months ended March 31, 2023 and $ 3.8 million during the three months ended March 31, 2022. The Company recognized no right-of-use assets in exchange for new operating lease liabilities during the three months ended March 31, 2023 and $ 0.4 million during the three months ended March 31, 2022. See accompanying Notes to Consolidated Financial Statements. March 31, 2023 | 10-Q 7 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) (1) FINANCIAL STATEMENTS BASIS OF PRESENTATION AND CONSOLIDATION The consolidated financial statements include the accounts and operations of Citizens, Inc. ("Citizens" or the "Company"), a Colorado corporation, and its wholly-owned subsidiaries, CICA Life Insurance Company of America ("CICA"), CICA Life Ltd. ("CICA International"), CICA Life A.I., a Puerto Rico company ("CICA PR"), Citizens National Life Insurance Company ("CNLIC"), Security Plan Life Insurance Company ("SPLIC"), Security Plan Fire Insurance Company ("SPFIC"), Magnolia Guaranty Life Insurance Company ("MGLIC"), Computing Technology, Inc. ("CTI"), and Nexo Global Services, LLC ("Nexo"). All significant inter-company accounts and transactions have been eliminated. Citizens and its wholly-owned subsidiaries are collectively referred to as the "Company", "it", "we", "us" or "our". The consolidated balance sheet as of March 31, 2023, the consolidated statements of operations and comprehensive income (loss) and stockholders' equity (deficit) for the three months ended March 31, 2023 and March 31, 2022 and the consolidated statements of cash flows for the three months ended March 31, 2023 and March 31, 2022 have been prepared by the Company without audit and are not subject to audit. In the opinion of management, all normal and recurring adjustments to present fairly the financial position, results of operations, and changes in cash flows at March 31, 2023 and for comparative periods have been made. The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q adopted by the Securities and Exchange Commission ("SEC"). Accordingly, the consolidated financial statements do not include all the information and footnotes required for complete financial statements and should be read in conjunction with the Company’s consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2022 ("Form 10-K"). Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period. Our Life Insurance segment operates through CICA International, CICA PR, CICA and CNLIC. Until December 31, 2022, our international life insurance business, operated through CICA International. Beginning January 1, 2023, all new international policies are issued by CICA PR. These companies provide U.S. dollar-denominated endowment contracts internationally, which are principally accumulation contracts that incorporate an element of life insurance protection and ordinary whole life insurance in U.S. dollar-denominated amounts sold to non-U.S. residents. These contracts are designed to provide a fixed amount of insurance coverage over the life of the insured and may utilize rider benefits to provide additional increasing or decreasing coverage and annuity benefits to enhance accumulations. Our domestic life insurance business operates through CICA and CNLIC. CICA issues ordinary whole life, credit life and disability policies and CNLIC issues ordinary whole life and critical illness policies mainly in Texas and Florida. Both companies service whole life and accident and health policies primarily in the Southern U.S., Midwest and Mountain West. Our Home Service Insurance segment operates through our subsidiaries SPLIC, MGLIC and SPFIC, and focuses on the life insurance needs of the middle- and lower-income markets, primarily in Louisiana, Mississippi and Arkansas. Our products in this segment consist primarily of small face amount ordinary whole life, industrial life and pre-need policies, which are designed to fund final expenses for the insured, primarily consisting of funeral and burial costs as well as critical illness and property insurance policies, which cover dwelling and contents. CTI provides data processing systems and services to the Company. USE OF ESTIMATES The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and March 31, 2023 | 10-Q 8 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include those used in the evaluation of credit allowances on fixed maturity securities, actuarially determined assets and liabilities and assumptions and valuation allowance on deferred tax assets. Certain of these estimates are particularly sensitive to market conditions, and deterioration and/or volatility in the worldwide debt or equity markets could have a material impact on the consolidated financial statements. SIGNIFICANT ACCOUNTING POLICIES For a description of all significant accounting policies, see Part IV, Item 15, Note 1. Summary of Significant Accounting Policies in the notes to our consolidated financial statements included in our Form 10-K , which should be read in conjunction with these accompanying consolidated financial statements. 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. Contracts are grouped by contract type and issue year into cohorts consistent with the grouping used in estimating the associated liability. DAC is amortized on a constant level basis for the grouped contracts 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 with respect to mortality and lapse. If those assumptions are updated, the DAC amortization basis is recalculated and the effect of the assumption change will be reflected in the cohort level amortization in future periods. Amortization of DAC is included in the consolidated statements of comprehensive income or loss. The DAC balance on the consolidated balance sheet is reduced for actual experience in excess of expected experience. Changes in future estimates are recognized prospectively over the remaining expected contract term. 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. FUTURE POLICY BENEFITS AND EXPENSES As premium revenue is recognized, a liability for future policy benefits, which 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, is accrued. The liability is estimated using current assumptions that include discount rate, mortality and lapses. These current assumptions are based on judgements that consider the Company’s historical experience, industry data, and other factors. March 31, 2023 | 10-Q 9 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) For traditional and limited-payment contracts, contracts are grouped into cohorts by contract type and issue year. Our reporting cohorts are (i) Permanent, which summarizes insurance policies with premiums payable over the lifetime of the policy, and (ii) Permanent Limited Pay, which summarizes insurance policies with premiums payable for a limited time after which the policy is fully paid up. Both reporting cohorts include whole life and endowment policies. The liability is adjusted for differences between actual and expected experience. The Company reviews its historical cash flow assumptions quarterly and in the third quarter of the year, the Company reviews its future cash flow assumptions. The net premium ratio used to calculate the liability is updated each quarter based on the current period's actual experience relative to expected experience. The revised net premium ratio is used to derive an updated liability for future policy benefits as of the beginning of the current reporting period, discounted at the locked-in discount rate. This amount is then compared to the carrying amount of the liability as of that same date, before the updating of cash flow assumptions, to determine the current period change in liability estimate. The current period change in the liability is the policyholder liability remeasurement gain or loss and is presented as a separate component of total insurance benefits paid or provided in the consolidated statements of comprehensive income or loss. In subsequent periods, the revised net premiums are used to measure the liability for future policy benefits, subject to future revisions. For traditional and limited-payment contracts, 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 bonds. The Company selects fixed-income instruments that have been A rated by one of the major credit rating agencies, such as Moody’s, Standard & Poor’s, or Fitch. 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. DEFERRED PROFIT LIABILITY For limited-payment products, gross premiums received in excess of net premiums are deferred at initial recognition as a deferred profit liability (“DPL”). Gross premiums are measured using assumptions consistent with those used in the measurement of the liability for future policy benefit life reserves, including discount rate, mortality and lapses. The DPL is amortized and recognized in net income within the increase in future policy benefit reserves. The amortization basis for the DPL is the present value of insurance in force for life insurance contracts. Interest is accreted on the balance of the DPL using the locked-in discount rate. The Company reviews and updates its estimates of cash flows for the DPL at the same time as the estimates of cash flows for the liability for future policy benefit life reserves. The DPL is updated each quarter based on the current period's actual experience relative to expected experience with the changes recorded within the increase in future policy benefit reserves in the consolidated statements of comprehensive income or loss. On the consolidated balance sheets, DPL is recorded as a component of the liability for future policy benefits. March 31, 2023 | 10-Q 10 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) (2) ACCOUNTING PRONOUNCEMENTS ACCOUNTING STANDARDS RECENTLY ADOPTED Impacts at Transition Date In August 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") No. 2018-12, Financial Services-Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts. The Company adopted ASU 2018-12 for the liability for future policy benefits, DAC and COIA on a modified retrospective basis such that those balances were adjusted to conform to ASU 2018-12 effective January 1, 2021. The following table summarizes the balance of and changes in the liability for future policy benefits, annuity reserves, DAC and COIA due to the adoption of ASU 2018-12. (In thousands) Life Insurance Segment Home Services Insurance Segment Consolidated Liability for Future Policy Benefits Pre-adoption liability as of 12/31/2020 $ 987,373 255,513 1,242,886 Change in discount rate assumptions 261,823 108,468 370,291 Effect of reserve changes 6 96 102 Post-adoption liability as of 1/1/2021 $ 1,249,202 364,077 1,613,279 Fixed Annuity Liability Pre-adoption liability as of 12/31/2020 $ 60,027 18,277 78,304 Adjustments for the removal of shadow adjustments — 3,426 3,426 Post-adoption liability as of 1/1/2021 $ 60,027 21,703 81,730 Deferred Acquisition Costs Pre-adoption balance as of 12/31/2020 $ 94,771 10,142 104,913 Adjustments for the removal of shadow adjustments 8,270 29,905 38,175 Impact of flooring cohorts at zero 23 12 35 Post adoption balance as of 1/1/2021 $ 103,064 40,059 143,123 Cost of Insurance Acquired Pre-adoption balance as of 12/31/2020 $ 1,734 9,807 11,541 Adjustments for the removal of shadow adjustments — 484 484 Post adoption balance as of 1/1/2021 $ 1,734 10,291 12,025 At transition, the Company recorded a charge of $ 0.1 million to retained earnings, net of tax, primarily from capping net premium ratios for certain policyholder benefit cohorts at 100%, increasing reserves for certain non-premium paying cohorts and flooring certain DAC cohorts at zero. Other comprehensive income ("OCI") was reduced by $ 316.8 million primarily due to the difference in the discount rate used prior to transition and the discount rate at January 1, 2021. The Company also removed shadow adjustments previously recorded in OCI for the impact of unrealized gains and losses on annuity products that previously amortized unearned revenue, DAC and COIA over expected future gross profits. March 31, 2023 | 10-Q 11 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) Impacts to Previously Reported Results Adoption of the standard impacted our previously reported consolidated financial results are as follows: (in thousands, except per share amounts) As Previously Reported Adoption of New Standard Post Adoption As of December 31, 2022 Consolidated Balance Sheet Deferred policy acquisition costs $ 140,167 22,760 162,927 Cost of insurance acquired 10,260 387 10,647 Deferred tax asset, net 2,414 ( 2,414 ) — Future policy benefit reserves: Life insurance 1,305,506 ( 106,859 ) 1,198,647 Annuities 91,234 ( 91,234 ) — Policyholders' funds: Annuities — 121,422 121,422 Other policyholders' funds 40,497 ( 32,996 ) 7,501 Deferred federal income tax liability — 3,653 3,653 Retained earnings (accumulated deficit) ( 52,203 ) 68,512 16,309 Accumulated other comprehensive income (loss) ( 195,279 ) 58,235 ( 137,044 ) For the Three Months Ended March 31, 2022 Consolidated Statement of Operations Increase (decrease) in future policy benefit reserves $ 6,569 ( 6,455 ) 114 Policyholder liability remeasurement (gain) loss — 668 668 Amortization of deferred policy acquisition costs 5,817 ( 2,258 ) 3,559 Amortization of cost of insurance acquired 236 ( 107 ) 129 Federal income tax expense (benefit) 359 370 729 Basic and diluted earnings (losses) per share of Class A common stock ( 0.03 ) 0.16 0.13 Consolidated Statement of Comprehensive Income (Loss) Unrealized holding gains (losses) arising during period $ ( 133,342 ) 577 ( 132,765 ) Change in current discount rate for liability for future policy benefits — 151,607 151,607 Income tax expense (benefit) on other comprehensive income items ( 9,066 ) 10,778 1,712 ACCOUNTING STANDARDS NOT YET ADOPTED On June 30, 2022, the FASB issued ASU No. 2022-03, Fair Value Measurement (Topic 820: Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions. This standard clarifies that contractual restrictions on equity security sales are not considered part of the security unit of account and, therefore, are not considered in measuring fair value. In addition, the amendments clarify that an entity cannot, as a separate unit of account, recognize and measure a contractual sale restriction. Disclosures on such restrictions are also required. March 31, 2023 | 10-Q 12 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) The amendments are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years, and are required to be applied prospectively, with any adjustments from the adoption recognized in earnings and disclosed. Early adoption is available. Adoption of this standard will have no impact on our consolidated financial statements. No other new accounting pronouncements issued or effective during the year had, or is expected to have, a material impact on our consolidated financial statements. (3) INVESTMENTS The Company invests primarily in fixed maturity securities, which totaled 87.0 % of total cash and invested assets at March 31, 2023, as shown below. Carrying Value (In thousands, except for %) March 31, 2023 December 31, 2022 Amount % Amount % Cash and invested assets: Fixed maturity securities $ 1,229,691 87.0 % 1,179,619 86.5 % Equity securities 11,899 0.8 % 11,590 0.8 % Policy loans 78,659 5.6 % 78,773 5.8 % Other long-term investments 72,254 5.1 % 69,558 5.1 % Short-term investments 1,244 0.1 % 1,241 0.1 % Cash and cash equivalents 18,924 1.4 % 22,973 1.7 % Total cash and invested assets $ 1,412,671 100.0 % 1,363,754 100.0 % The following tables represent the amortized cost, gross unrealized gains and losses and fair value of fixed maturity securities as of the dates indicated. Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value March 31, 2023 (In thousands) Fixed maturity securities: Available-for-sale: U.S. Treasury securities $ 5,720 215 10 5,925 U.S. Government-sponsored enterprises 3,427 337 1 3,763 States and political subdivisions 334,887 2,311 28,618 308,580 Corporate: Financial 249,030 790 36,119 213,701 Consumer 250,189 1,634 38,514 213,309 Utilities 121,236 269 20,204 101,301 Energy 74,564 42 8,840 65,766 All other 186,640 813 22,556 164,897 Commercial mortgage-backed 171 — 3 168 Residential mortgage-backed 110,579 10 7,686 102,903 Asset-backed 51,376 333 2,432 49,277 Foreign governments 100 1 — 101 Total fixed maturity securities $ 1,387,919 6,755 164,983 1,229,691 March 31, 2023 | 10-Q 13 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value December 31, 2022 (In thousands) Fixed maturity securities: Available-for-sale: U.S. Treasury securities $ 9,425 152 9 9,568 U.S. Government-sponsored enterprises 3,434 277 1 3,710 States and political subdivisions 344,208 1,114 37,964 307,358 Corporate: Financial 243,758 512 42,383 201,887 Consumer 247,824 758 47,138 201,444 Utilities 115,738 39 23,790 91,987 Energy 76,065 — 11,395 64,670 All other 184,022 683 29,048 155,657 Commercial mortgage-backed 171 — 2 169 Residential mortgage-backed 110,582 9 10,765 99,826 Asset-backed 45,991 18 2,767 43,242 Foreign governments 100 1 — 101 Total fixed maturity securities $ 1,381,318 3,563 205,262 1,179,619 Most of the Company's equity securities are diversified stock and bond mutual funds. Fair Value (In thousands) March 31, 2023 December 31, 2022 Equity securities: Stock mutual funds $ 2,683 2,615 Bond mutual funds 4,409 4,337 Common stock 924 857 Non-redeemable preferred stock 9 8 Non-redeemable preferred stock fund 3,874 3,773 Total equity securities $ 11,899 11,590 VALUATION OF INVESTMENTS Available-for-sale ("AFS") fixed maturity securities are reported in the consolidated financial statements at fair value. Equity securities are measured at fair value with the change in fair value recorded through net income (loss). The Company recognized net investment related gains of $ 0.3 million on equity securities held for the three months ended March 31, 2023 and losses of $ 0.8 million for the same period ended March 31, 2022, respectively. The Company considers several factors in its review and evaluation of individual investments, using the process described in Part IV, Item 15, Note 2. Investments in the notes to the consolidated financial statements of our Form 10-K to determine whether a credit valuation loss exists. For the three months ended March 31, 2023 and 2022, the Company recorded no credit valuation losses on fixed maturity securities. March 31, 2023 | 10-Q 14 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) The following tables present the fair values and gross unrealized losses of fixed maturity securities that are not deemed to have credit losses, aggregated by investment category and length of time that individual securities have been in a continuous loss position at March 31, 2023 and December 31, 2022. March 31, 2023 Less than 12 months Greater than 12 months Total (In thousands, except for # of securities) Fair Value Unrealized Losses # of Securities Fair Value Unrealized Losses # of Securities Fair Value Unrealized Losses # of Securities Fixed maturity securities: Available-for-sale securities: U.S. Treasury securities $ 514 2 2 66 8 2 580 10 4 U.S. Government-sponsored enterprises 223 1 1 — — — 223 1 1 States and political subdivisions 111,550 5,674 131 80,193 22,944 100 191,743 28,618 231 Corporate: Financial 102,783 9,440 119 89,543 26,679 130 192,326 36,119 249 Consumer 81,680 5,352 90 108,995 33,162 153 190,675 38,514 243 Utilities 30,814 2,271 55 61,557 17,933 104 92,371 20,204 159 Energy 36,270 2,270 41 26,992 6,570 37 63,262 8,840 78 All Other 93,285 6,463 99 57,461 16,093 80 150,746 22,556 179 Commercial mortgage-backed 168 3 2 — — — 168 3 2 Residential mortgage-backed 101,277 7,354 87 1,296 332 12 102,573 7,686 99 Asset-backed 12,725 692 19 23,609 1,740 28 36,334 2,432 47 Total fixed maturity securities $ 571,289 39,522 646 449,712 125,461 646 1,021,001 164,983 1,292 December 31, 2022 Less than 12 months Greater than 12 months Total (In thousands, except for # of securities) Fair Value Unrealized Losses # of Securities Fair Value Unrealized Losses # of Securities Fair Value Unrealized Losses # of Securities Fixed maturity securities: Available-for-sale securities: U.S. Treasury securities $ — — — 64 9 2 64 9 2 U.S. Government-sponsored enterprises 223 1 1 — — — 223 1 1 States and political subdivisions 189,084 30,866 242 14,184 7,098 14 203,268 37,964 256 Corporate: Financial 182,447 39,122 237 6,144 3,261 16 188,591 42,383 253 Consumer 164,224 34,823 220 23,417 12,315 30 187,641 47,138 250 Utilities 73,483 15,959 152 16,413 7,831 18 89,896 23,790 170 Energy 59,053 9,601 75 5,617 1,794 8 64,670 11,395 83 All Other 140,955 25,337 171 7,910 3,711 15 148,865 29,048 186 Commercial mortgage-backed 168 2 2 — — — 168 2 2 Residential mortgage-backed 98,758 10,514 95 759 251 5 99,517 10,765 100 Asset-backed 37,067 2,485 41 4,264 282 9 41,331 2,767 50 Total fixed maturity securities $ 945,462 168,710 1,236 78,772 36,552 117 1,024,234 205,262 1,353 March 31, 2023 | 10-Q 15 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) In each category of our fixed maturity securities described above, we do not intend to sell our investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases. As of March 31, 2023 and December 31, 2022, 98.7 % of the fair value of our fixed maturity securities portfolio was rated investment grade. While the losses are currently unrealized, we continue to monitor all fixed maturity securities on an on-going basis as future information may become available which could result in an allowance being recorded. While we experience unrealized losses across several corporate sectors, the financial sector includes exposure to banks which have been impacted the most by recent economic and interest rate pressures. We have assessed our exposure in this sector and believe our investments have access to sufficient liquidity to meet their debt obligations. These unrealized losses on fixed maturity securities are due to noncredit-related factors, including widening credit spreads and rising interest rates since purchase, which have little bearing on the recoverability of our investments, hence they are not recognized as credit losses. The fair value is expected to recover as the securities approach maturity or if market yields for such investments decline. The amortized cost and fair value of fixed maturity securities at March 31, 2023 by contractual maturity are shown in the table below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date have been reflected based upon final stated maturity. March 31, 2023 Amortized Cost Fair Value (In thousands) Fixed maturity securities: Due in one year or less $ 9,753 9,718 Due after one year through five years 131,003 129,487 Due after five years through ten years 248,095 240,207 Due after ten years 999,068 850,279 Total fixed maturity securities $ 1,387,919 1,229,691 The Company uses the specific identification method of the individual security to determine the cost basis used in the calculation of realized gains and losses related to security sales. Three Months Ended March 31, (In thousands) 2023 2022 Fixed maturity securities, available-for-sale: Proceeds $ 2,865 1,100 Gross realized gains $ 5 — Gross realized losses $ 12 — The Company sold 4 AFS fixed maturity securities during the three months ended March 31, 2023 and 1 during the three months ended March 31, 2022, respectively. (4) FAIR VALUE MEASUREMENTS Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We hold AFS fixed maturity securities, which are carried at fair value with changes in fair value reported through other comprehensive income (loss). We also report our equity March 31, 2023 | 10-Q 16 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) securities and certain other long-term investments at fair value with changes in fair value reported through the consolidated statements of operations. Fair value measurements are generally based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our view of market assumptions in the absence of observable market information. We utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. All assets and liabilities carried at fair value are required to be classified and disclosed in one of the following three categories: • Level 1 - Quoted prices for identical instruments in active markets. • Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs or whose significant value drivers are observable. • Level 3 - Instruments whose significant value drivers are unobservable. Level 1 primarily consists of financial instruments whose value is based on quoted market prices such as U.S. Treasury securities and actively traded mutual fund and stock investments. Level 2 includes those financial instruments that are valued by independent pricing services or broker quotes. These pricing models are primarily industry-standard models that consider various inputs, such as interest rates, credit spreads and foreign exchange rates for the underlying financial instruments. All significant inputs are observable or derived from observable information in the marketplace or are supported by observable levels at which transactions are executed in the marketplace. Financial instruments in this category primarily include corporate securities, U.S. Government-sponsored enterprise securities, securities issued by states and political subdivisions and certain mortgage and asset-backed securities. Level 3 is comprised of financial instruments whose fair value is estimated based on non-binding broker prices utilizing significant inputs not based on or corroborated by readily available market information. We have no investments in this category. March 31, 2023 | 10-Q 17 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) The following tables set forth our assets that are measured at fair value on a recurring basis as of the dates indicated. March 31, 2023 Level 1 Level 2 Level 3 Total Fair Value (In thousands) Financial Assets Fixed maturity securities available-for-sale: U.S. Treasury and U.S. Government-sponsored enterprises $ 5,925 3,763 — 9,688 States and political subdivisions — 308,580 — 308,580 Corporate 47 758,927 — 758,974 Commercial mortgage-backed — 168 — 168 Residential mortgage-backed — 102,903 — 102,903 Asset-backed — 49,277 — 49,277 Foreign governments — 101 — 101 Total fixed maturity securities available-for-sale 5,972 1,223,719 — 1,229,691 Equity securities: Stock mutual funds 2,683 — — 2,683 Bond mutual funds 4,409 — — 4,409 Common stock 924 — — 924 Non-redeemable preferred stock 9 — — 9 Non-redeemable preferred stock fund 3,874 — — 3,874 Total equity securities 11,899 — — 11,899 Other long-term investments (1) — — — 71,990 Total financial assets $ 17,871 1,223,719 — 1,313,580 (1) In accordance with Subtopic 820-10, certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient are not classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the consolidated balance sheets. March 31, 2023 | 10-Q 18 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) December 31, 2022 Level 1 Level 2 Level 3 Total Fair Value (In thousands) Financial Assets Fixed maturity securities available-for-sale: U.S. Treasury and U.S. Government-sponsored enterprises $ 9,568 3,710 — 13,278 States and political subdivisions — 307,358 — 307,358 Corporate 44 715,601 — 715,645 Commercial mortgage-backed — 169 — 169 Residential mortgage-backed — 99,826 — 99,826 Asset-backed — 43,242 — 43,242 Foreign governments — 101 — 101 Total fixed maturity securities available-for-sale 9,612 1,170,007 — 1,179,619 Equity securities: Stock mutual funds 2,615 — — 2,615 Bond mutual funds 4,337 — — 4,337 Common stock 857 — — 857 Non-redeemable preferred stock 8 — — 8 Non-redeemable preferred stock fund 3,773 — — 3,773 Total equity securities 11,590 — — 11,590 Other long-term investments (1) — — — 66,846 Total financial assets $ 21,202 1,170,007 — 1,258,055 (1) In accordance with Subtopic 820-10, certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient are not classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the consolidated balance sheets. FINANCIAL INSTRUMENTS VALUATION FINANCIAL INSTRUMENTS CARRIED AT FAIR VALUE Fixed maturity securities, available-for-sale. At March 31, 2023, fixed maturity securities, valued using a third-party pricing source, totaled $ 1.2 billion for Level 2 assets and comprised 93.2 % of total reported fair value of our financial assets. The Level 1 and Level 2 valuations are reviewed and updated quarterly through testing by comparisons to separate pricing models, other third-party pricing services, and back tested to recent trades. In addition, we obtain information annually relative to the third-party pricing models and review model parameters for reasonableness. There were no Level 3 assets at March 31, 2023. As of March 31, 2023, there were no material changes to the valuation methods or assumptions used to determine fair values, and no broker or third-party prices were changed from the values received. Equity securities. Our equity securities are classified as Level 1 assets as their fair values are based upon quoted market prices. Limited partnerships. The Company considers the net asset value ("NAV") to represent the value of the investment fund and is measured by the total value of assets minus the total value of liabilities. The following table includes information related to our investments in limited partnerships that calculate NAV per share. For these investments, which are measured at fair value on a recurring basis, we use the NAV per share to measure fair value. The Company recognized net investment related losses of $ 0.6 million and $ 0.8 million on limited partnerships held for March 31, 2023 | 10-Q 19 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) the three months ended March 31, 2023 and March 31, 2022, respectively. These investments are included in other long-term investments on the consolidated balance sheets. March 31, 2023 December 31, 2022 (In thousands, except years) Fair Value Using NAV Per Share Unfunded Commit- ments Range (In years) Fair Value Using NAV Per Share Unfunded Commit- ments Range (In years) Description Limited partnerships Middle market Investments in privately-originated, performing senior secured debt primarily in North America-based companies $ 33,643 3,452 4 $ 33,234 6,011 5 Global equity fund Investments in common stocks of U.S., international developed and emerging markets with a focus on long-term capital growth 9,329 — 0 9,037 — 0 Late-stage growth Investments in private late-stage, established companies seeking capital to accelerate growth prior to an IPO or sale 18,315 17,172 5 to 7 16,892 18,444 5 to 7 Infrastructure Investments in climate infrastructure assets, focusing on renewable power generation in wind and solar energy 10,703 14,926 10 to 12 7,683 4,107 11 Total limited partnerships $ 71,990 35,550 $ 66,846 28,562 The majority of our limited partnership investments are not redeemable because distributions from the funds will be received when the underlying investments of the funds are liquidated. The life spans indicated above may be shortened or extended at the fund manager's discretion, typically in one or two-year increments. The global equity fund is redeemable monthly. FINANCIAL INSTRUMENTS NOT CARRIED AT FAIR VALUE Estimates of fair values are made at a specific point in time, based on relevant market prices and information about the financial instruments. The estimated fair values of financial instruments presented below are not necessarily indicative of the amounts the Company might realize in actual market transactions. The carrying amount and fair value for the financial assets and liabilities on the consolidated financial statements not otherwise disclosed for the periods indicated were as follows: March 31, 2023 December 31, 2022 (In thousands) Carrying Value Fair Value Carrying Value Fair Value Financial Assets: Policy loans $ 78,659 78,659 78,773 78,773 Residential mortgage loan 47 48 49 50 Cash and cash equivalents 18,924 18,924 22,973 22,973 Financial Liabilities: Annuity - investment contracts 67,799 62,968 67,344 61,701 March 31, 2023 | 10-Q 20 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) Policy loans. Policy loans had a weighted average annual interest rate of 7.7 % at both March 31, 2023 and December 31, 2022 and no specified maturity dates. The aggregate fair value of policy loans approximates the carrying value reflected on the consolidated balance sheets. Policy loans are an integral part of the life insurance policies we have in force, cannot be valued separately and are not marketable. Therefore, the fair value of policy loans approximates the carrying value and policy loans are considered Level 3 assets in the fair value hierarchy. Residential mortgage loan. The mortgage loan is secured principally by a residential property. The interest rate for this loan was approximately 7.0 % at both March 31, 2023 and December 31, 2022. At March 31, 2023, the remaining loan matures in five years . Management estimated the fair value using an annual interest rate of 6.25 % at March 31, 2023. Our mortgage loan is considered Level 3 assets in the fair value hierarchy and is included in other long-term investments on the consolidated balance sheet. Cash and cash equivalents. The fair value of cash and cash equivalents approximates carrying value and are characterized as Level 1 assets in the fair value hierarchy. Annuity liabilities. The fair value of the Company's liabilities under annuity contract policies, which are considered Level 3 liabilities, was estimated at March 31, 2023 and December 31, 2022 using discounted cash flows based upon spot rates adjusted for various risk adjustments ranging from 4.18 % to 4.41 % and 4.74 % to 5.09 %, respectively. The fair value of liabilities under all insurance contracts are taken into consideration in the overall management of interest rate risk, which seeks to minimize exposure to changing interest rates through the matching of investment maturities with amounts due under insurance contracts. Other long-term investments. Financial instruments included in other long-term investments are classified in various levels of the fair value hierarchy. The following table summarizes the carrying amounts of these investments. Carrying Value (In thousands ) March 31, 2023 December 31, 2022 Other long-term investments: Limited partnerships $ 71,990 69,294 FHLB common stock 195 193 Mortgage loans 47 49 All other investments 22 22 Total other long-term investments $ 72,254 69,558 We carried no limited partnership investments at cost at March 31, 2023 while $ 2.4 million were carried at cost at December 31, 2022. We are a member of the Federal Home Loan Bank ("FHLB") of Dallas and such membership requires members to own stock in the FHLB. Our FHLB stock is carried at amortized cost, which approximates fair value. (5) DEFERRED POLICY ACQUISITION COSTS AND COST OF INSURANCE ACQUIRED DAC The following tables roll forward the DAC asset for the three months ended March 31, 2023 and 2022 by reporting cohort. Our reporting cohorts are Permanent, which summarizes insurance policies with premiums payable over the lifetime of the policy, and Permanent Limited Pay, which summarizes insurance policies with premiums payable for a limited time after which the policy is fully paid up. Both reporting cohorts include whole life and endowment policies. March 31, 2023 | 10-Q 21 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) Three Months Ended March 31, 2023 (In thousands) Permanent Permanent Limited Pay Other Business Total Life Insurance: Balance, beginning of year $ 100,926 11,542 1,016 113,484 Capitalizations 3,453 822 85 4,360 Amortization expense ( 2,918 ) ( 186 ) ( 58 ) ( 3,162 ) Balance, end of period $ 101,461 12,178 1,043 114,682 Home Service Insurance: Balance, beginning of year $ 38,793 9,729 921 49,443 Capitalizations 1,615 331 52 1,998 Amortization expense ( 492 ) ( 95 ) ( 65 ) ( 652 ) Balance, end of period $ 39,916 9,965 908 50,789 Consolidated: Balance, beginning of year $ 139,719 21,271 1,937 162,927 Capitalizations 5,068 1,153 137 6,358 Amortization expense ( 3,410 ) ( 281 ) ( 123 ) ( 3,814 ) Balance, end of period $ 141,377 22,143 1,951 165,471 Three Months Ended March 31, 2022 (In thousands) Permanent Permanent Limited Pay Other Business Total Life Insurance: Balance, beginning of year $ 97,675 9,001 1,026 107,702 Capitalizations 2,439 838 29 3,306 Amortization expense ( 2,793 ) ( 150 ) ( 77 ) ( 3,020 ) Balance, end of period $ 97,321 9,689 978 107,988 Home Service Insurance: Balance, beginning of year $ 35,137 8,723 856 44,716 Capitalizations 1,149 323 3 1,475 Amortization expense ( 444 ) ( 89 ) ( 6 ) ( 539 ) Balance, end of period $ 35,842 8,957 853 45,652 Consolidated: Balance, beginning of year $ 132,812 17,724 1,882 152,418 Capitalizations 3,588 1,161 32 4,781 Amortization expense ( 3,237 ) ( 239 ) ( 83 ) ( 3,559 ) Balance, end of period $ 133,163 18,646 1,831 153,640 DAC capitalization increased for the three months ended March 31, 2023, compared to the same prior year period mainly from increased commissions from higher first year sales across our business segments. March 31, 2023 | 10-Q 22 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) COIA The following tables provide rollforwards of the COIA balances for the three months ended March 31, 2023 and 2022 by reporting cohort. Our reporting cohorts are Permanent, which summarizes insurance policies with premiums payable over the lifetime of the policy, and Permanent Limited Pay, which summarizes insurance policies with premiums payable for a limited time after which the policy is fully paid up. Both reporting cohorts include whole life and endowment policies. Three Months Ended March 31, 2023 (In thousands) Permanent Permanent Limited Pay Other Business Total Life Insurance: Balance, beginning of year $ 267 750 444 1,461 Amortization expense ( 4 ) ( 15 ) ( 13 ) ( 32 ) Balance, end of period $ 263 735 431 1,429 Home Service Insurance: Balance, beginning of year $ 7,583 176 1,427 9,186 Amortization expense ( 99 ) ( 2 ) ( 28 ) ( 129 ) Balance, end of period $ 7,484 174 1,399 9,057 Consolidated: Balance, beginning of year $ 7,850 926 1,871 10,647 Amortization expense ( 103 ) ( 17 ) ( 41 ) ( 161 ) Balance, end of period $ 7,747 909 1,830 10,486 Three Months Ended March 31, 2022 (In thousands) Permanent Permanent Limited Pay Other Business Total Life Insurance: Balance, beginning of year $ 287 812 485 1,584 Amortization expense ( 5 ) ( 16 ) ( 3 ) ( 24 ) Balance, end of period $ 282 796 482 1,560 Home Service Insurance: Balance, beginning of year $ 7,989 184 1,511 9,684 Amortization expense ( 103 ) ( 2 ) — ( 105 ) Balance, end of period $ 7,886 182 1,511 9,579 Consolidated: Balance, beginning of year $ 8,276 996 1,996 11,268 Amortization expense ( 108 ) ( 18 ) ( 3 ) ( 129 ) Balance, end of period $ 8,168 978 1,993 11,139 March 31, 2023 | 10-Q 23 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) (6) POLICYHOLDERS’ LIABILITIES LIABILITY FOR FUTURE POLICY BENEFITS The following tables summarize balances of and changes in the liability for future policy benefits for our reporting cohorts: Permanent, which summarizes insurance policies with premiums payable over the lifetime of the policy, and Permanent Limited Pay, which summarizes insurance policies with premiums payable for a limited time after which the policy is fully paid up. Both reporting cohorts include whole life and endowment policies. Life Insurance Segment March 31, 2023 (In thousands) Permanent Permanent Limited Pay Total Present Value of Expected Net Premiums Balance, beginning of year $ 235,228 10,209 245,437 Beginning balance at original discount rate 247,601 10,682 258,283 Effects of actual variances from expected experience 1,742 365 2,107 Adjusted beginning of year balance 249,343 11,047 260,390 Issuances 6,236 759 6,995 Interest accrual 2,272 72 2,344 Net premiums collected ( 9,715 ) ( 751 ) ( 10,466 ) Derecognition and other 153 38 191 Ending balance at original discount rate 248,289 11,165 259,454 Effect of changes in discount rates ( 8,766 ) ( 370 ) ( 9,136 ) Balance, end of period $ 239,523 10,795 250,318 Present Value of Expected Future Policy Benefits Balance, beginning of year $ 947,415 195,612 1,143,027 Beginning balance at original discount rate 996,169 208,051 1,204,220 Effects of actual variances from expected experience 2,538 1,045 3,583 Adjusted beginning of year balance 998,707 209,096 1,207,803 Issuances 6,375 785 7,160 Interest accrual 10,842 2,112 12,954 Benefit payments ( 19,153 ) ( 4,873 ) ( 24,026 ) Derecognition and other 14 12 26 Ending balance at original discount rate 996,785 207,132 1,203,917 Effect of changes in discount rates ( 31,065 ) ( 9,459 ) ( 40,524 ) Balance, end of period $ 965,720 197,673 1,163,393 Net liability for future policy benefits $ 726,197 186,878 913,075 The Life Insurance segment impact of updating actual experience for the current period contributed to an increase in liabilities primarily due to higher benefits than expected. March 31, 2023 | 10-Q 24 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) Home Service Insurance March 31, 2023 (In thousands) Permanent Permanent Limited Pay Total Present Value of Expected Net Premiums Balance, beginning of year $ 93,508 13,255 106,763 Beginning balance at original discount rate 100,225 14,394 114,619 Effects of actual variances from expected experience ( 1,371 ) ( 809 ) ( 2,180 ) Adjusted beginning of year balance 98,854 13,585 112,439 Issuances 4,789 1,176 5,965 Interest accrual 986 114 1,100 Net premiums collected ( 2,967 ) 467 ( 2,500 ) Derecognition and other 132 46 178 Ending balance at original discount rate 101,794 15,388 117,182 Effect of changes in discount rates ( 4,925 ) ( 873 ) ( 5,798 ) Balance, end of period $ 96,869 14,515 111,384 Present Value of Expected Future Policy Benefits Balance, beginning of year $ 200,351 116,356 316,707 Beginning balance at original discount rate 214,188 121,908 336,096 Effects of actual variances from expected experience ( 1,299 ) 25 ( 1,274 ) Adjusted beginning of year balance 212,889 121,933 334,822 Issuances 4,789 1,176 5,965 Interest accrual 2,310 1,410 3,720 Benefit payments ( 4,178 ) ( 1,748 ) ( 5,926 ) Derecognition and other 132 45 177 Ending balance at original discount rate 215,942 122,816 338,758 Effect of changes in discount rates ( 10,101 ) ( 3,712 ) ( 13,813 ) Balance, end of period $ 205,841 119,104 324,945 Net liability for future policy benefits $ 108,972 104,589 213,561 Net premiums collected are defined as the transactional gross premiums collected in the current period times the net premium ratio. Issuances are calculated as the present value, using the locked-in discount rate of the expected net premiums or the expected future policy benefits related to new policies issued during the three months ended March 31, 2023 and 2022. Interest accrual is the interest earned on the beginning present value of either the expected net premiums or the expected future policy benefits using the locked-in discount rate. Benefit payments are the transactional benefits (death, lapse, surrenders and maturities) paid in the current period. Derecognition refers to a subset of the issuances or the present value of future premiums released on new issues that lapsed during the three months ended March 31, 2023 and 2022 as well as other reconciling items. The effects of actual variances from expected experience lines are primarily impacted by the actual policy cash flows during the period compared to that which was expected in the reserve assumptions. If the net of the two lines is a positive number, the implication is an unfavorable result with policy cash flows less favorable than assumed while a negative number implies a favorable result compared to assumptions. Our policy experience will vary from actual experience in any one period, either favorably or unfavorably. March 31, 2023 | 10-Q 25 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) The Home Service Insurance segment impact of updating actual experience for the current period contributed to an increase in liabilities due to higher premiums collected than expected. Life Insurance March 31, 2022 (In thousands) Permanent Permanent Limited Pay Total Present Value of Expected Net Premiums Balance, beginning of year $ 269,528 4,939 274,467 Beginning balance at original discount rate 246,386 5,093 251,479 Effects of actual variances from expected experience 1,693 422 2,115 Adjusted beginning of year balance 248,079 5,515 253,594 Issuances 5,795 1,121 6,916 Interest accrual 2,088 ( 2 ) 2,086 Net premiums collected ( 9,166 ) 133 ( 9,033 ) Derecognition and other 57 24 81 Ending balance at original discount rate 246,853 6,791 253,644 Effect of changes in discount rates 6,040 ( 291 ) 5,749 Balance, end of period $ 252,893 6,500 259,393 Present Value of Expected Future Policy Benefits Balance, beginning of year $ 1,168,282 240,679 1,408,961 Beginning balance at original discount rate 990,921 207,105 1,198,026 Effects of actual variances from expected experience 1,998 1,407 3,405 Adjusted beginning of year balance 992,919 208,512 1,201,431 Issuances 5,863 1,141 7,004 Interest accrual 10,658 2,125 12,783 Benefit payments ( 17,715 ) ( 3,918 ) ( 21,633 ) Derecognition and other ( 10 ) 4 ( 6 ) Ending balance at original discount rate 991,715 207,864 1,199,579 Effect of changes in discount rates 72,720 12,917 85,637 Balance, end of period $ 1,064,435 220,781 1,285,216 Net liability for future policy benefits $ 811,542 214,281 1,025,823 The Life Insurance segment impact of updating actual experience for the current period contributed to an increase in liabilities primarily due to higher benefits paid than expected. March 31, 2023 | 10-Q 26 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) Home Service Insurance March 31, 2022 (In thousands) Permanent Permanent Limited Pay Total Present Value of Expected Net Premiums Balance, beginning of year $ 104,556 10,196 114,752 Beginning balance at original discount rate 90,012 9,532 99,544 Effects of actual variances from expected experience 876 ( 1,083 ) ( 207 ) Adjusted beginning of year balance 90,888 8,449 99,337 Issuances 4,349 711 5,060 Interest accrual 822 43 865 Net premiums collected ( 2,723 ) 1,610 ( 1,113 ) Derecognition and other ( 1,113 ) 24 ( 1,089 ) Ending balance at original discount rate 92,223 10,837 103,060 Effect of changes in discount rates 5,130 ( 112 ) 5,018 Balance, end of period $ 97,353 10,725 108,078 Present Value of Expected Future Policy Benefits Balance, beginning of year $ 266,206 161,715 427,921 Beginning balance at original discount rate 205,340 117,425 322,765 Effects of actual variances from expected experience 1,090 625 1,715 Adjusted beginning of year balance 206,430 118,050 324,480 Issuances 4,350 708 5,058 Interest accrual 2,164 1,349 3,513 Benefit payments ( 5,832 ) ( 2,057 ) ( 7,889 ) Derecognition and other ( 1,114 ) 24 ( 1,090 ) Ending balance at original discount rate 205,998 118,074 324,072 Effect of changes in discount rates 28,342 23,076 51,418 Balance, end of period $ 234,340 141,150 375,490 Net liability for future policy benefits $ 136,987 130,425 267,412 The Home Service Insurance segment impact of updating actual experience for the current period contributed to an increase in liabilities due to higher premiums collected than expected. March 31, 2023 | 10-Q 27 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) The following table reconciles the net liability for future policy benefits shown above to the liability for future policy benefits in the consolidated balance sheet. March 31, 2023 March 31, 2022 (In thousands) Life Insurance Home Service Insurance Consolidated Life Insurance Home Service Insurance Consolidated Life Insurance Permanent $ 726,197 108,972 835,169 811,542 136,987 948,529 Permanent limited pay 186,878 104,589 291,467 214,281 130,425 344,706 Deferred profit liability 26,347 25,113 51,460 23,042 22,502 45,544 Other 26,474 13,725 40,199 27,918 13,403 41,321 Total life insurance 965,896 252,399 1,218,295 1,076,783 303,317 1,380,100 Accident & Health Other 599 249 848 521 245 766 Total $ 966,495 252,648 1,219,143 1,077,304 303,562 1,380,866 The following table provides the amount of undiscounted and discounted expected gross premiums and expected future benefit payments for long-term duration contracts. As of March 31, 2023 2022 (In thousands) Life Insurance Home Service Insurance Life Insurance Home Service Insurance Undiscounted: Permanent Expected future gross premiums 607,319 463,491 623,969 459,627 Expected future benefit payments $ 1,478,777 478,978 1,468,066 453,855 Permanent Limited Pay Expected future gross premiums 46,845 77,743 47,904 65,371 Expected future benefit payments 321,985 319,390 322,955 304,278 Discounted: Permanent Expected future gross premiums 474,777 277,098 523,290 308,271 Expected future benefit payments $ 965,720 205,841 1,064,435 234,340 Permanent Limited Pay Expected future gross premiums 41,719 54,170 44,202 53,038 Expected future benefit payments 197,673 119,104 220,781 141,150 March 31, 2023 | 10-Q 28 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) The following tables summarize the amount of revenue and interest related to long-term duration contracts recognized in the consolidated statement of operations: Life Insurance Home Service Insurance Three Months Ended March 31, 2023 (In thousands) Gross Premiums Interest Expense Gross Premiums Interest Expense Life Insurance Permanent $ 22,458 8,570 8,372 1,324 Permanent Limited Pay 4,168 2,336 2,154 1,586 Other 77 — 368 — Reinsurance ( 648 ) — ( 15 ) — Total, net of reinsurance 26,055 10,906 10,879 2,910 Accident & Health Other 152 — 206 — Reinsurance — — — — Total, net of reinsurance 152 — 206 — Total $ 26,207 10,906 11,085 2,910 Life Insurance Home Service Insurance Three Months Ended March 31, 2022 (In thousands) Gross Premiums Interest Expense Gross Premiums Interest Expense Life Insurance Permanent $ 22,257 8,570 8,456 1,342 Permanent Limited Pay 3,656 2,350 2,041 1,559 Other 1,425 — — — Reinsurance ( 500 ) — ( 14 ) — Total, net of reinsurance 26,838 10,920 10,483 2,901 Accident & Health Other 94 — 193 — Reinsurance ( 1 ) — — — Total, net of reinsurance 93 — 193 — Total $ 26,931 10,920 10,676 2,901 The following table provides the weighted-average durations of the liability for future policy benefits. March 31, 2023 March 31, 2022 (In years) Life Insurance Home Service Insurance Life Insurance Home Service Insurance Permanent Original duration 8.1 15.9 8.8 16.0 Current duration 8.4 16.1 9.1 16.3 Permanent Limited Pay Original duration 7.6 14.5 8.0 15.2 Current duration 7.6 15.2 8.4 17.5 March 31, 2023 | 10-Q 29 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) The following table provides the weighted-average interest rates for the liability for future policy benefits. March 31, 2023 March 31, 2022 (In thousands) Life Insurance Home Service Insurance Life Insurance Home Service Insurance Permanent Original discount rate 4.92 % 4.99 % 4.93 % 5.01 % Current discount rate 4.86 % 5.09 % 3.43 % 3.68 % Permanent Limited Pay Original discount rate 4.30 % 5.05 % 4.33 % 5.06 % Current discount rate 4.85 % 5.08 % 3.38 % 3.67 % March 31, 2023 | 10-Q 30 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) LIABILITY FOR POLICYHOLDERS’ ACCOUNT BALANCES The following table presents the policyholders' account balances by range of guaranteed minimum crediting rates and the related range of the difference, in basis points, between rates being credited and the respective guaranteed minimums. March 31, 2023 At Guaranteed Minimum 1 Basis Point- 50 Basis Points Above 51 Basis Points- 150 Basis Points Above Greater Than 150 Basis Points Above Total (In thousands) Range of Guaranteed Minimum Crediting Rate Life Insurance: SCWOLC (1) 0.00 % - 1.49 % $ — — — — — 1.50 % - 2.99 % 1,452 — — — 1,452 3.00 % - 4.49 % 33,940 — — — 33,940 Greater or equal to 4.50 % 134 — — — 134 Total $ 35,526 — — — 35,526 Fixed annuity 0.00 % - 1.49 % $ 197 — 1,144 — 1,341 1.50 % - 2.99 % 13,078 — 59 — 13,137 3.00 % - 4.49 % 21,568 10 — — 21,578 Greater or equal to 4.50 % 30,944 — — — 30,944 Total $ 65,787 10 1,203 — 67,000 Dividend accumulations 0.00 % - 1.49 % $ 239 — — 3,499 3,738 1.50 % - 2.99 % 11,144 551 7 — 11,702 3.00 % - 4.49 % 26,985 — — — 26,985 Greater or equal to 4.50 % 3 — — — 3 Total $ 38,371 551 7 3,499 42,428 Premiums paid in advance 0.00 % - 1.49 % $ — — — 34,122 34,122 1.50 % - 2.99 % — — — — — 3.00 % - 4.49 % — — — — — Greater or equal to 4.50 % — — — — — Total $ — — — 34,122 34,122 Home Service Insurance: SCWOLC (1) 0.00 % - 1.49 % $ 4 — — — 4 1.50 % - 2.99 % 250 — — — 250 3.00 % - 4.49 % 55 — — — 55 Greater or equal to 4.50 % — — — — — Total $ 309 — — — 309 Fixed annuity 0.00 % - 1.49 % $ 296 — — 392 688 1.50 % - 2.99 % — — — — — 3.00 % - 4.49 % 18,696 — — — 18,696 Greater or equal to 4.50 % 777 — — — 777 Total $ 19,769 — — 392 20,161 Dividend accumulations 0.00 % - 1.49 % $ — — — 173 173 1.50 % - 2.99 % 5 42 — — 47 3.00 % - 4.49 % 20 — — — 20 Greater or equal to 4.50 % — — — — — Total $ 25 42 — 173 240 (1) Supplemental Contracts Without Life Contingencies March 31, 2023 | 10-Q 31 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) March 31, 2022 At Guaranteed Minimum 1 Basis Point- 50 Basis Points Above 51 Basis Points- 150 Basis Points Above Greater Than 150 Basis Points Above Total (In thousands) Range of Guaranteed Minimum Crediting Rate Life Insurance: SCWOLC (1) 0.00 % - 1.49 % $ — — — — — 1.50 % - 2.99 % 256 — — — 256 3.00 % - 4.49 % 24,862 — — — 24,862 Greater or equal to 4.50 % 145 — — — 145 Total $ 25,263 — — — 25,263 Fixed annuity 0.00 % - 1.49 % $ 203 — 813 — 1,016 1.50 % - 2.99 % 10,584 — 12 — 10,596 3.00 % - 4.49 % 21,976 9 — — 21,985 Greater or equal to 4.50 % 30,662 — — — 30,662 Total $ 63,425 9 825 — 64,259 Dividend accumulations 0.00 % - 1.49 % $ 250 — — 3,529 3,779 1.50 % - 2.99 % 8,501 533 11 — 9,045 3.00 % - 4.49 % 25,507 — — — 25,507 Greater or equal to 4.50 % 3 — — — 3 Total $ 34,261 533 11 3,529 38,334 Premiums paid in advance 0.00 % - 1.49 % $ — — — 37,922 37,922 1.50 % - 2.99 % — — — — — 3.00 % - 4.49 % — — — — — Greater or equal to 4.50 % — — — — — Total $ — — — 37,922 37,922 Home Service Insurance: SCWOLC (1) 0.00 % - 1.49 % $ 6 — — — 6 1.50 % - 2.99 % 249 — — — 249 3.00 % - 4.49 % 49 — — — 49 Greater or equal to 4.50 % — — — — — Total $ 304 — — — 304 Fixed annuity 0.00 % - 1.49 % $ 284 — — 408 692 1.50 % - 2.99 % — — — — — 3.00 % - 4.49 % 18,743 — — — 18,743 Greater or equal to 4.50 % 903 — — — 903 Total $ 19,930 — — 408 20,338 Dividend accumulations 0.00 % - 1.49 % $ — — — 173 173 1.50 % - 2.99 % 5 44 — — 49 3.00 % - 4.49 % 19 — — — 19 Greater or equal to 4.50 % — — — — — Total $ 24 44 — 173 241 (1) Supplemental Contracts Without Life Contingencies March 31, 2023 | 10-Q 32 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) The following tables summarize balances of and changes in policyholders' account balances. March 31, 2023 (In thousands) SCWOLC (1) Fixed Annuity Dividend Accumulations Premiums Paid in Advance Life Insurance: Balance, beginning of year $ 32,667 66,543 41,424 34,603 Issuances 4,788 536 147 905 Premiums received 18 1,025 1,383 145 Interest credited 341 536 322 226 Less: Surrenders and withdrawals — 1,640 848 1,757 Benefit payments 2,288 — — — Balance, end of period $ 35,526 67,000 42,428 34,122 Weighted-average crediting rates 4.10 % 3.70 % 3.49 % 3.00 % Cash surrender value $ 35,526 67,000 42,428 34,122 Home Service Insurance: Balance, beginning of year $ 328 20,264 239 — Issuances — 227 1 — Premiums received — 145 1 — Interest credited 2 132 2 — Less: Surrenders and withdrawals — 607 3 — Benefit payments 21 — — — Balance, end of period $ 309 20,161 240 — Weighted-average crediting rates 2.20 % 3.10 % 3.09 % 4.00 % Cash surrender value $ 309 20,161 240 — Consolidated: Balance, beginning of year $ 32,995 86,807 41,663 34,603 Issuances 4,788 763 148 905 Premiums received 18 1,170 1,384 145 Interest credited 343 668 324 226 Less: Surrenders and withdrawals — 2,247 851 1,757 Benefit payments 2,309 — — — Balance, end of period $ 35,835 87,161 42,668 34,122 Weighted-average crediting rates 4.05 % 3.57 % 3.05 % 2.98 % Cash surrender value $ 35,835 87,161 42,668 34,122 (1) Supplemental Contracts Without Life Contingencies March 31, 2023 | 10-Q 33 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) March 31, 2022 (In thousands) SCWOLC (1) Fixed Annuity Dividend Accumulations Premiums Paid in Advance Life Insurance: Balance, beginning of year $ 23,628 63,591 37,513 38,875 Issuances 2,392 604 123 469 Premiums received 12 995 1,264 132 Interest credited 232 517 292 275 Less: Surrenders and withdrawals — 1,448 858 1,829 Benefit payments 1,001 — — — Balance, end of period $ 25,263 64,259 38,334 37,922 Weighted-average crediting rates 4.11 % 3.76 % 3.50 % 3.09 % Cash surrender value $ 25,263 64,259 38,334 37,922 Home Service Insurance: Balance, beginning of year $ 322 20,326 247 — Issuances 10 213 3 — Premiums received — 189 1 — Interest credited 2 140 2 — Less: Surrenders and withdrawals — 530 12 — Benefit payments 30 — — — Balance, end of period $ 304 20,338 241 — Weighted-average crediting rates 2.13 % 3.11 % 3.10 % 4.00 % Cash surrender value $ 304 20,338 241 — Consolidated: Balance, beginning of year $ 23,950 83,917 37,760 38,875 Issuances 2,402 817 126 469 Premiums received 12 1,184 1,265 132 Interest credited 234 657 294 275 Less: Surrenders and withdrawals — 1,978 870 1,829 Benefit payments 1,031 — — — Balance, end of period $ 25,567 84,597 38,575 37,922 Weighted-average crediting rates 4.08 % 3.60 % 3.08 % 3.09 % Cash surrender value $ 25,567 84,597 38,575 37,922 (1) Supplemental Contracts Without Life Contingencies March 31, 2023 | 10-Q 34 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) The following table reconciles policyholders' account balances to the policyholders' account balances' liability in the consolidated balance sheet. March 31, 2023 March 31, 2022 (In thousands) Life Insurance Home Service Insurance Consolidated Life Insurance Home Service Insurance Consolidated Annuities: SCWOLC (1) $ 35,526 309 35,835 25,263 304 25,567 Fixed annuity 67,000 20,161 87,161 64,259 20,338 84,597 Unearned revenue reserve — 1,531 1,531 — 1,588 1,588 Other 1 — 1 — ( 1 ) ( 1 ) Total annuities $ 102,527 22,001 124,528 89,522 22,229 111,751 (1) Supplemental Contracts Without Life Contingencies Dividend Accumulations: Dividend accumulations $ 42,428 240 42,668 38,334 241 38,575 Other 1 ( 1 ) — — — — Total dividend accumulations $ 42,429 239 42,668 38,334 241 38,575 Premiums Paid in Advance: Premiums paid in advance $ 34,122 — 34,122 37,922 — 37,922 Other 2,294 281 2,575 2,180 331 2,511 Total premiums paid in advance $ 36,416 281 36,697 40,102 331 40,433 (7) COMMITMENTS AND CONTINGENCIES LITIGATION AND REGULATORY ACTIONS From time to time, we are subject to legal and regulatory actions relating to our business. We may incur defense costs, including attorneys' fees, and other direct litigation costs associated with defending claims. If we suffer an adverse judgment as a result of litigation claims, it could have a material adverse effect on our business, results of operations and financial condition. CONTRACTUAL OBLIGATIONS As of March 31, 2023, CICA International is committed to fund investments up to $ 35.6 million related to limited partnerships previously described. CREDIT FACILITY On May 5, 2021 , the Company entered into a $ 20 million senior secured revolving credit facility (the “Credit Facility”) with Regions Bank ("Regions"). The Credit Facility has a three-year term, maturing on May 5, 2024 , and allows the Company to borrow up to $ 20 million for working capital purposes, capital expenditures and other corporate purposes. Revolving loans may be requested by the Company in aggregate minimum principal amounts of $ 0.5 million per loan. At the Company's election, the revolving loans may either bear a base rate, which is 1.75 % plus a base rate March 31, 2023 | 10-Q 35 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) (a fluctuating rate per annum) equal to the greatest of (a) Regions' prime rate, (b) the federal funds rate plus 0.50 %, (c) the one-month LIBOR rate plus 1 %, and (d) 0.75 %; or an adjusted LIBOR rate, which is 2.75 % plus an adjusted LIBOR rate but cannot be less than 0.75 %. The Company is required to pay Regions an annual commitment fee of 0.375 % of the unused portion of the Credit Facility in quarterly installments, which the Company expenses as it is incurred. Regions informed the Company that after June 30, 2023, the United Kingdom's Financial Conduct Authority will no longer publish a LIBOR rate that may be used as the benchmark interest rate index. Regions will transition to a replacement interest rate index on any future draws. Obligations under the Credit Facility are secured by substantially all of the assets of the Company other than the equity interests in all of the regulated insurance subsidiaries, real estate owned by the Company, and other limited exceptions. The Credit Facility contains customary events of default and financial, affirmative and negative covenants, including but not limited to restrictions on indebtedness, liens, investments, asset dispositions and restricted payments. As of March 31, 2023, the Company had no t borrowed any funds against the Credit Facility and was not in violation of any covenants. (8) STOCKHOLDERS' EQUITY AND RESTRICTIONS STOCK Our Restated and Amended Articles of Incorporation authorize the issuance of 127,000,000 shares, of which 100,000,000 shares shall be Class A common stock, 2,000,000 shares shall be Class B common stock, and 25,000,000 shall be preferred stock. The two authorized classes of common stock are equal in all respects, except (a) each share of Class A common stock is entitled to receive twice the cash dividends paid on a per share basis to the Class B common stock, if any; and (b) the holders of the Class B common stock have the exclusive right to elect a simple majority of the Board of Directors of Citizens. In April 2021, we repurchased all of the outstanding Class B common stock, which is now classified as treasury stock. As a result, all of the directors are elected by the holders of the Class A common stock. Citizens has never issued any preferred stock. A summary of the change in number of shares of Class A and Class B common stock and treasury stock issued is as follows: Three Months Ended March 31, 2023 2022 (In thousands) Common Stock Treasury Common Stock Treasury Class A Class B Stock Class A Class B Stock Balance at beginning of year 53,758 1,002 4,937 53,170 1,002 4,138 Stock issued under stock investment plan — — — 345 — — Stock issued for compensation 34 — — 18 — — Balance at end of period 53,792 1,002 4,937 53,533 1,002 4,138 March 31, 2023 | 10-Q 36 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings (loss) per share. Three Months Ended March 31, 2023 2022 (In thousands, except per share amounts) Basic and diluted earnings (loss) per share: Numerator: Net income (loss) $ 4,872 6,449 Net income (loss) allocated to Class A common stock $ 4,872 6,449 Denominator: Weighted average shares of Class A outstanding - basic 49,840 50,236 Weighted average shares of Class A outstanding - diluted 50,609 50,906 Basic and diluted earnings (loss) per share of Class A common stock $ 0.10 0.13 CAPITAL AND SURPLUS Each of our regulated insurance subsidiaries is required to meet stipulated regulatory capital requirements. These include capital requirements imposed by the U.S. National Association of Insurance Commissioners ("NAIC") and the Bermuda Monetary Authority ("BMA"). All domestic insurance subsidiaries exceeded the minimum capital requirements at March 31, 2023. In order to minimize the risk of a shortfall in capital arising from an unexpected adverse deviation or excess risk, the BMA has established a threshold capital level (termed the Target Capital Level ("TCL")), which is set at 120 % of a company’s enhanced capital requirement. The TCL serves as an early warning tool for the BMA. As of March 31, 2023, CICA International was above the TCL threshold. At the request of the BMA, on April 15, 2021, Citizens and CICA International entered into a Keep Well Agreement. The Keep Well Agreement requires Citizens to contribute up to $ 10 million in capital to CICA International as necessary to ensure that CICA International has a minimum capital level of 120 % (equal to the TCL). Since CICA International’s capital level currently exceeds 120% , Citizens is not required to make a capital contribution. 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 Office of the Commissioner of Insurance 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. (9) SEGMENT INFORMATION The Company has two reportable segments: Life Insurance and Home Service Insurance. Our Life Insurance segment issues endowment contracts, which are principally accumulation contracts that incorporate an element of life insurance protection and ordinary whole life insurance, to non-U.S. residents through CICA International and, beginning January 1, 2023, CICA PR. These contracts are designed to provide a fixed amount of insurance coverage over the life of the insured and may utilize rider benefits to provide additional coverage and annuity March 31, 2023 | 10-Q 37 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) benefits to enhance accumulations. Domestically, we currently offer whole life, credit life, credit disability, and critical illness products. The critical illness products are sold in Texas and Florida through CICA and CNLIC. Both CICA and CNLIC also service whole life and accident and health policies primarily in the Southern U.S., Midwest and Mountain West. Our Home Service Insurance segment operates through our subsidiaries SPLIC, MGLIC and SPFIC, and focuses on the life insurance needs of the middle- and lower-income markets, primarily in Louisiana, Mississippi and Arkansas. Our policies are sold and serviced through funeral homes and independent agents who sell policies, collect premiums and service policyholders. Our Home Service Insurance segment also sells property insurance policies in Louisiana. The Life Insurance and Home Service Insurance portions of the Company constitute separate businesses. In addition to the Life Insurance and Home Service Insurance business, the Company also operates other non-insurance portions of the Company ("Other Non-Insurance Enterprises"), which primarily include the Company’s IT and Corporate-support functions. The accounting policies of the reportable segments and Other Non-Insurance Enterprises are presented in accordance with U.S. GAAP and are the same as those described in the summary of significant accounting policies in our Form 10-K . The Company evaluates profit and loss performance based on U.S. GAAP net income (loss) before federal income taxes for its two reportable segments. The Company's Other Non-Insurance Enterprises is the only reportable difference between segments and consolidated operations. Life Insurance Home Service Insurance Other Non-Insurance Enterprises Consolidated Three Months Ended March 31, 2023 (In thousands) Revenues: Premiums $ 26,207 12,042 — 38,249 Net investment income 13,311 3,470 293 17,074 Investment related gains (losses), net ( 437 ) 99 50 ( 288 ) Other income (loss) 879 — — 879 Total revenues 39,960 15,611 343 55,914 Benefits and expenses: Insurance benefits paid or provided: Claims and surrenders 24,439 5,860 — 30,299 Increase (decrease) in future policy benefit reserves ( 1,820 ) 842 — ( 978 ) Policyholder liability remeasurement (gain) loss 816 64 — 880 Policyholders' dividends 1,101 7 — 1,108 Total insurance benefits paid or provided 24,536 6,773 — 31,309 Commissions 4,759 4,254 — 9,013 Other general expenses 5,459 4,468 1,333 11,260 Capitalization of deferred policy acquisition costs ( 4,360 ) ( 1,998 ) — ( 6,358 ) Amortization of deferred policy acquisition costs 3,162 652 — 3,814 Amortization of cost of insurance acquired 32 129 — 161 Total benefits and expenses 33,588 14,278 1,333 49,199 Income (loss) before federal income tax $ 6,372 1,333 ( 990 ) 6,715 March 31, 2023 | 10-Q 38 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) Life Insurance Home Service Insurance Other Non-Insurance Enterprises Consolidated Three Months Ended March 31, 2022 (In thousands) Revenues: Premiums $ 26,931 12,433 — 39,364 Net investment income 11,971 3,244 272 15,487 Investment related gains (losses), net ( 293 ) ( 242 ) ( 47 ) ( 582 ) Other income (loss) 1,088 — — 1,088 Total revenues 39,697 15,435 225 55,357 Benefits and expenses: Insurance benefits paid or provided: Claims and surrenders 21,458 6,976 — 28,434 Increase in future policy benefit reserves 1,376 ( 1,262 ) — 114 Policyholder liability remeasurement (gain) loss 414 254 — 668 Policyholders' dividends 1,350 3 — 1,353 Total insurance benefits paid or provided 24,598 5,971 — 30,569 Commissions 3,806 3,867 — 7,673 Other general expenses 5,691 4,350 989 11,030 Capitalization of deferred policy acquisition costs ( 3,306 ) ( 1,475 ) — ( 4,781 ) Amortization of deferred policy acquisition costs 3,020 539 — 3,559 Amortization of cost of insurance acquired 24 105 — 129 Total benefits and expenses 33,833 13,357 989 48,179 Income (loss) before federal income tax $ 5,864 2,078 ( 764 ) 7,178 (10) INCOME TAXES The effective tax rate is the ratio of tax expense (benefit) over pre-tax income (loss). The effective tax rate was 27.4 % for the three months ended March 31, 2023, compared to 10.2 % for the same period in 2022, respectively. CICA International is considered a controlled foreign corporation for federal tax purposes. As a result, the insurance activity of CICA International is subject to Subpart F of the Internal Revenue Code and is included in Citizens’ taxable income. Due to the 0 % enacted tax rate in Bermuda, there are no deferred taxes recorded for CICA International's temporary differences. The effective tax rate varies from the prevailing corporate federal income tax rate of 21.0% mainly due to the impact of Subpart F and uncertain tax positions. At March 31, 2023, we determined it was more likely than not that a portion of our capital deferred tax assets would not be realized in their entirety. The Company recorded a valuation allowance of $ 3.7 million through Other Comprehensive Income (Loss). March 31, 2023 | 10-Q 39 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) (11) OTHER COMPREHENSIVE INCOME (LOSS) The changes in the components of other comprehensive income (loss) are reported net of the effects of income taxes of 21% as of the three months ended March 31, 2023 and 2022, as indicated below. Three Months Ended March 31, 2023 2022 (In thousands) Amount Tax Effect Total Amount Tax Effect Total Unrealized gains (losses): Unrealized holding gains (losses) arising during the period $ 43,436 ( 2,280 ) 41,156 ( 132,765 ) 8,957 ( 123,808 ) Reclassification adjustment for (gains) losses included in net income 38 ( 8 ) 30 59 ( 12 ) 47 Unrealized holding gains (losses), net 43,474 ( 2,288 ) 41,186 ( 132,706 ) 8,945 ( 123,761 ) Change in current discount rate for liability for future policy benefits ( 20,480 ) 873 ( 19,607 ) 151,607 ( 10,657 ) 140,950 Other comprehensive income (loss) $ 22,994 ( 1,415 ) 21,579 18,901 ( 1,712 ) 17,189 (12) RELATED PARTY TRANSACTIONS The Company has various routine related party transactions in conjunction with our holding company structure, such as a management service agreement related to costs incurred, a tax sharing agreement between entities, and inter-company dividends and capital contributions. There were no changes related to these relationships during the three months ended March 31, 2023. See our Form 10-K for a comprehensive discussion of related party transactions. (13) SUBSEQUENT EVENTS The Company has a plan of disposal to cease operations for its property insurance business on June 30, 2023. The property insurance business operates through SPFIC and represented less than 1 % of the Company’s total consolidated assets as of March 31, 2023 and less than 2 % of the Company's total consolidated revenues for the three months ended March 31, 2023. The Company has evaluated the impact of subsequent events as defined by the accounting guidance through the date this report was issued and determined that no other significant subsequent events need to be recognized or disclosed at this time. March 31, 2023 | 10-Q 40 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS