What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-04 compared with 2023-05-08 · 202 added, 169 removed, 451 unchanged (45% 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.

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.

6 unchanged sentences

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

states and more than 70 different countries.

states and over 75 different countries.

We specialize in offering primarily ordinary whole life insurance, endowment products and final expense insurance in niche markets where we believe we can optimize our competitive position.

6 unchanged sentences

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, 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.

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 June 30, 2023 and the material changes in our results of operations for the three and six months ended June 30, 2023 as compared to the same periods 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

June 30, 2023 | 10-Q 41

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

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

Accounting Pronouncements in the notes to our consolidated financial statements.

The Factors that Drive our Operating Results

7 unchanged sentences

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

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

As we ceased operations in our property insurance business effective June 30, 2023, the premiums charts below only reflect life insurance and accident and health insurance ("A&H") premium results.

Our first year life and A&H premiums increased in the three and six months ended June 30, 2023 by 4% and 14%, respectively, due primarily to new products available for sale in both segments supported by focused marketing campaigns.

Our renewal life and A&H premium revenues decreased in the three and six months ended June 30, 2023 by 4% primarily due to the impact of a higher level of surrenders during the last few years and increased matured endowment benefits, which we expected due to contractual expiration dates.

June 30, 2023 | 10-Q 42

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

Our net investment income increased for the three and six months ended June 30, 2023 by 8% and 9%, respectively, compared to the same prior year periods due to a higher average portfolio yield resulting from the higher interest rate environment and investment income from our limited partnerships.

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

The three main components of this expense are reflected in the graphs above.

In the three and six months ended June 30, 2023 compared to the prior year periods:

• Death claim benefits decreased due to a lower number of reported death claims.

• Surrenders increased, which we believe is due to the number of our international life policies that are nearing maturity and carry little to no surrender charges.

• Matured endowments increased as expected due to many of our endowment policies reaching their contractual maturity dates.

June 30, 2023 | 10-Q 43

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

Consolidated Revenue Highlights

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.

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 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

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

Our general operating expenses for the three and six months ended June 30, 2023 increased compared to the prior year periods.

The increase was primarily driven by costs related to strategic growth initiatives, costs related to moving our international business from Bermuda to Puerto Rico and higher employee benefit costs.

FINANCIAL HIGHLIGHTS

Our net income was $6.1 million and $11.0 million for the three and six months ended June 30, 2023, respectively, compared to net income of $2.5 million and $8.9 million in the prior year periods, respectively.

The increase in net income is primarily driven by the improvements in the fair value of our limited partnership investments, which are recorded as investment related gains in the current year periods versus losses during both the three and six months ended June 30, 2022, as well as higher net investment income in the current year periods.

These improvements were partially offset by lower renewal year premiums and higher insurance benefits paid or provided, which are both primarily due to higher surrenders and matured endowments.

Our net income per share of Class A common stock was $0.12 and $0.22 for the three and six months ended June 30, 2023, respectively, compared to $0.05 and $0.18 in prior year periods.

Financial Condition at June 30, 2023

• Total assets of $1.6 billion

4 unchanged sentences

IMPACT OF INFLATION AND RISING INTEREST RATES

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.

The impact of inflation, which has led to market volatility, has affected the fair value of our equity securities, which led to investment related losses in 2022.

Investment related gains and losses can cause significant fluctuations from

June 30, 2023 | 10-Q 44

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

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.

These gains and losses have caused, and we believe 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 and continue to rise in 2023.

Higher interest rates typically reduce the market values of fixed income assets, as the interest payments on 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.

We reported pre-tax net unrealized losses of $178.6 million on our available-for-sale securities at June 30, 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.

March 31, 2023 | 10-Q 44

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

Another impact rising interest rates may have on our business is policyholders might surrender their policy to seek higher crediting rates.

We could experience higher surrenders and lapses and fewer sales 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.

IMPACT OF CEASING OPERATIONS OF OUR PROPERTY INSURANCE BUSINESS

The Company made a strategic decision to exit the property insurance business on June 30, 2023.

This business focused on selling limited liability property insurance policies in Louisiana and Arkansas.

This decision has negatively impacted our current year premium revenues and financial results.

We are contractually obligated to pay the majority of the remaining premiums for our catastrophic reinsurance through the end of 2023.

Because we ceased operations at the end of the second quarter, the property insurance premium amounts reflected in our income statements for the three and six months ended June 30, 2023 reflect the remaining amount due of $0.7 million under the reinsurance contract for 2023, and thus premium revenue for the three months ended June 30, 2023 is negative.

In addition, premium revenue declined in the second quarter of 2023 once we announced to our policyholders that we would cease operations June 30, 2023.

The property insurance business operates through SPFIC and represented less than 1% of the Company’s total consolidated assets as of June 30, 2023 and less than 1% of the Company's total consolidated revenues for the six months ended June 30, 2023.

This is not reported as a discontinued operation because it is immaterial to our total operations.

Additionally, there were no material charges incurred in relation to the exit of our property insurance operations.

OUR OPERATING SEGMENTS

3 unchanged sentences

See the discussion under Segment Operations below for detailed analysis.

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

Three Months Ended March 31, 2023 2022

The amount of insurance,

June 30, 2023 | 10-Q 45

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

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

Six Months Ended June 30, 2023 2022

Issued Number of

8 unchanged sentences

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.

These new products helped drive the 22% increase in total insurance issued in the six months ended June 30, 2023, from $268.5 million in the first six months of 2022 to $328.6 million in 2023.

The increase in total insurance issued was driven by higher average policy face amounts in both segments and an increase in total number of policies issued in our Life Insurance segment.

The growth in our Life Insurance segment is attributable to strong sales from the international whole life product introduced in 2022, which accounted for 70% of total insurance issued in this segment for the six months ended June 30, 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.

MANAGEMENT'S DISCUSSION & ANALYSIS

CONSOLIDATED RESULTS OF OPERATIONS

1 unchanged sentence

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

Three Months Ended

Three Months Ended Six Months Ended

June 30, June 30,

(In thousands) 2023 2022 2023 2022

7 unchanged sentences

Premium Income.

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.

Despite higher first year premium revenues in both segments, life insurance premium revenues decreased 4% and 3% in both the three and six months ended June 30, 2023, respectively, compared to the same

June 30, 2023 | 10-Q 46

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

periods in 2022 due to lower renewal premiums.

Accident and health insurance premiums increased in the 2023 periods due to sales of our new critical illness products that were launched in late 2022.

Property insurance premiums were negatively impacted for the three and six months ended June 30, 2023 compared to the same periods in 2022 as we stopped accepting renewal premiums at the end of May and ceased our operations on June 30, 2023.

Net Investment Income.

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

Three Months Ended

Three Months Ended Six Months Ended

June 30, June 30,

(In thousands, except for %) 2023 2022 2023 2022

11 unchanged sentences

Annualized yield on average invested assets 4.52 % 4.25 %

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 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.

Income from our fixed maturity securities constitutes the vast majority of our net investment income, as these securities comprise 88% of our investment portfolio based on fair value.

Our total investment income increased by 8% and 9% for the three and six months ended June 30, 2023, respectively, compared to the same periods 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 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.

Our yield increased 27 basis points to 4.52% in the first six 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 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.

We recorded investment related gains during the three and six months ended June 30, 2023 of $0.7 million and $0.4 million compared to losses of $5.0 million and $5.6 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 volatility in equity markets over the past year.

We did not sell these investments;

however, the changes in fair values of our equity securities are reflected as investment related gains or losses in our income statement, 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.

June 30, 2023 | 10-Q 47

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

BENEFITS AND EXPENSES

Three Months Ended

Three Months Ended Six Months Ended

June 30, June 30,

(In thousands) 2023 2022 2023 2022

12 unchanged sentences

Total benefits and expenses $ 52,483 49,768 101,682 97,947

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

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 benefits and other general expenses are our largest expenses.

Total benefits and expenses increased in the three and six months ended June 30, 2023 as compared to same period in 2022 driven by higher surrenders and matured endowments.

Claims and Surrenders.

Three Months Ended

Three Months Ended Six Months Ended

June 30, June 30,

(In thousands) 2023 2022 2023 2022

7 unchanged sentences

Total claims and surrenders $ 32,776 27,097 63,075 55,531

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.

Death claim benefits decreased for the three and six months ended June 30, 2023 compared to the same periods in 2022 due primarily to a lower volume of reported death claims.

Surrender benefits increased for the three and six months ended June 30, 2023 compared to the same periods in 2022 due to surrenders related to international policies that are nearing maturity and carry little to no surrender charges.

Matured endowment benefits increased for the three and six months ended June 30, 2023 compared to the same periods in 2022.

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

June 30, 2023 | 10-Q 48

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

Explanation of other benefits and expenses

1 unchanged sentence

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

In 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.

In the three and six months ended June 30, 2023, the change in future policy benefit reserves decreased compared to the same prior year periods despite increases in insurance issued and increases in our in force block of business due to the amount of reserves released in connection with the higher matured endowments.

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.

Other General Expenses.

General expenses increased in the three and six months ended June 30, 2023, compared to the same periods in 2022.

The increase was primarily driven by costs related to strategic growth initiatives, costs related to moving our international business from Bermuda to Puerto Rico and higher employee benefit costs.

Capitalization and Amortization of Deferred Policy Acquisition Costs.

6 unchanged sentences

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

March 31, 2023 | 10-Q 48

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

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

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.

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

Three Months Ended

Three Months Ended Six Months Ended

June 30, June 30,

(In thousands) 2023 2022 2023 2022

5 unchanged sentences

Total income (loss) before federal income tax expense $ 6,044 3,966 12,759 11,144

June 30, 2023 | 10-Q 49

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

LIFE INSURANCE

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

Three Months Ended

Net income in our Life Insurance segment before federal income tax of $7.5 million and $13.8 million in the three and six months ended June 30, 2023, respectively, increased from $3.3 million and $9.2 million in the prior year periods, respectively .

Detailed results of operations describing the year-over-year net income increases in the Life Insurance segment for the periods indicated are as follows:

Three Months Ended Six Months Ended

June 30, June 30,

(In thousands) 2023 2022 2023 2022

17 unchanged sentences

Total benefits and expenses 36,392 35,494 69,980 69,327

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.

Income (loss) before federal income tax $ 7,473 3,336 13,845 9,200

The main drivers of the year-over-year increases in the 2023 periods are higher net investment income and investment related gains (versus investment related losses in the 2022 periods).

These increases were partially offset by lower renewal premiums and higher claims and surrenders benefits paid or provided.

Life Insurance segment premium breakout is detailed below.

Three Months Ended

Three Months Ended Six Months Ended

June 30, June 30,

(In thousands) 2023 2022 2023 2022

2 unchanged sentences

Total premiums $ 28,773 29,834 54,980 56,765

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.

June 30, 2023 | 10-Q 50

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

Our total premiums for three and six months ended June 30, 2023 decreased 4% and 3%, respectively, compared to the same periods in 2022 as renewal premiums declined.

We derive most of our premium revenue in the Life Insurance segment from renewal premiums, which decreased 4% and 5%, respectively, in the three and six months ended June 30, 2023 as compared to the same periods in 2022.

As described above, this decline is due to high surrenders over the last several years and a high level of maturing endowments.

First year premiums increased slightly and 14% for three and six months ended June 30, 2023, respectively, compared to the same periods in 2022, which we believe is due to sales of new products and focused marketing campaigns.

International Life Insurance Premiums.

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

Life insurance premiums are generated largely from our international policyholders from over 75 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

The following table sets forth our premiums collected from the top five countries of our international life insurance business for the three and six months ended June 30, 2023 and 2022.

Three Months Ended Six Months Ended

June 30, June 30,

(In thousands) 2023 2022 2023 2022

5 unchanged sentences

Other Non-U.S.

9,534 10,880 18,375 18,570

Total $ 28,640 31,662 57,992 57,631

Domestic Life Insurance Premiums.

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.

Domestic premiums in our Life Insurance segment were lower in the three and six months ended June 30, 2023 compared to the same prior year periods.

As we have previously disclosed, our domestic in force business results are primarily from receipt of renewal premiums from closed blocks of business of various insurance companies we have acquired over the years.

We have recently re-launched our domestic life insurance business through CICA Life Insurance Company of America and currently offer whole life, credit life, credit disability and living benefit (including critical illness) products domestically.

Net Investment Income .

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.

Our net investment income increased by 9% and 10% for the three and six months ended June 30, 2023, respectively, compared to the same periods 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

Investment Related Gains (Losses), Net.

We recorded investment related gains of $0.7 million and $0.3 million during the three and six months ended June 30, 2023, respectively, compared to investment related losses of $4.0 million and $4.3 million during the same prior year periods, respectively, resulting from the change in estimated fair market value for our limited partnerships.

June 30, 2023 | 10-Q 51

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 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

The following table sets forth our primary claims and surrender benefits paid within our Life Insurance segment for the three and six months ended June 30, 2023 compared to the same periods in 2022.

Three Months Ended Six Months Ended

June 30, June 30,

(In thousands) 2023 2022 2023 2022

6 unchanged sentences

Total claims and surrenders $ 26,968 21,568 51,407 43,026

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.

During the three and six months ended June 30, 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.

We expect this trend to continue over the next few years.

Death claims benefits decreased for the three and six months ended June 30, 2023, respectively, compared to the prior year periods.

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

The change in future policy benefit reserves decreased as a result of reserves released from higher matured endowment and surrender benefits, which was partially offset by increases in insurance issued and normal increases in our in force block of business policy benefit reserves for the three and six months ended June 30, 2023 compared to the same periods in 2022.

June 30, 2023 | 10-Q 52

CITIZENS, INC.

2 unchanged sentences

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

Three Months Ended

Three Months Ended Six Months Ended

June 30, June 30,

(In thousands) 2023 2022 2023 2022

2 unchanged sentences

Investment related gains (losses), net (12) (925) 87 (1,167)

Other income 1 1 1 1

Total revenues 14,392 14,749 30,003 30,184

12 unchanged sentences

Total benefits and expenses 13,768 12,747 28,046 26,104

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

Income (loss) before federal income tax $ 624 2,002 1,957 4,080

In our Home Service Insurance segment we reported income before federal income tax of $0.6 million and $2.0 million in the three and six months ended June 30, 2023, respectively, as compared to income of $2.0 million and $4.1 million in the prior year periods.

These decreases are primarily driven by lower premiums due to the effects of ceasing our property insurance operations as of June 30, 2023 described above, higher total insurance benefits paid or provided and higher other general expenses due to higher employee health benefit costs.

These decreases were partially offset by the change in investment related gains (losses) due to the improvements in the fair value of our equity securities.

Total premium revenue declined by 12% and 7% in the three and six months ended June 30, 2023, respectively, compared to the same periods in 2022 despite an increase of 5% and 10% in first year premiums for the three and six months ended June 30, 2023, respectively, compared to the same periods in 2022.

The decrease in premiums was attributed to lower property insurance premiums due to the effects of ceasing our property insurance operations as of June 30, 2023 described above.

June 30, 2023 | 10-Q 53

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

Three Months Ended Six Months Ended

June 30, June 30,

(In thousands) 2023 2022 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 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.

Death claim benefits decreased 3% and 14% in the three and six months ended June 30, 2023, respectively, compared to the same 2022 periods 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.

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.

The change in future policy benefit reserves increased primarily as a result of increases in insurance issued for the three and six months ended June 30, 2023 compared to the same periods in 2022.

Other General Expenses.

General expenses increased in the three and six months ended June 30, 2023 compared to the same periods in 2022, primarily due to higher employee health benefit costs.

OTHER NON-INSURANCE ENTERPRISES

Three Months Ended

Three Months Ended Six Months Ended

June 30, June 30,

(In thousands)

2023 2022 2023 2022

Income (loss) before income tax expense $ (2,053) (1,372) (3,043) (2,136)

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Our investments are an integral part of our business success.

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.

Our cash and invested assets at June 30, 2023 were $1.4 billion, of which 87% 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.

March 31, 2023 | 10-Q 53

June 30, 2023 | 10-Q 54

CITIZENS, INC.

1 unchanged sentence

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

Carrying Value June 30, 2023 December 31, 2022

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

18 unchanged sentences

Total cash, cash equivalents and invested assets $ 1,394,562 100.0 % $ 1,363,754 100.0 %

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

(1) Includes $126.0 million and $133.2 million of securities guaranteed by third parties at June 30, 2023 and December 31, 2022, respectively.

(2) Includes $99.4 million and $98.8 million of U.S.

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.

Government-sponsored enterprises at June 30, 2023 and December 31, 2022, respectively.

The carrying value of the Company’s fixed maturity securities investment portfolio at June 30, 2023 was $1.21 billion compared to $1.18 billion at December 31, 2022.

The distribution of the credit ratings of our portfolio of fixed maturity securities by carrying value as of June 30, 2023 did not materially change from December 31, 2022 – the weighted average was “A” at both dates.

Cash and cash equivalents decreased as of June 30, 2023 from December 31, 2022 and can fluctuate from period to period primarily due to the timing of operating and investing activities.

Other long-term investments increased by $7.7 million as of June 30, 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 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

The Company’s fixed maturity securities investment portfolio at June 30, 2023 and December 31, 2022 included $301.8 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).

June 30, 2023 | 10-Q 55

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 March 31, 2023.

Detailed below is a presentation by the Nationally Recognized Statistical Rating Organization ("NRSRO") rating of these holdings by funding type as of June 30, 2023.

General Obligation Special Revenue Other Total % Based on Amortized

17 unchanged sentences

Total $ 71,666 72,624 213,827 242,147 16,314 16,937 301,807 331,708 100.0 %

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 March 31, 2023.

(In thousands) Fair

(In thousands, except for %) Fair

Value Amortized

3 unchanged sentences

Transportation 37,554 44,512 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 March 31, 2023.

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

The Company holds 22% and 14% of its municipal bond portfolio in Texas and California issuers, respectively, as of June 30, 2023.

There were no other states or individual issuer holdings that represented or exceeded 10% of the total municipal bond portfolio as of June 30, 2023.

June 30, 2023 | 10-Q 56

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

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

The table below represents the Company's detailed exposure to municipal bonds in Texas at June 30, 2023.

General Obligation Special Revenue Other Total

16 unchanged sentences

Total $ 31,082 30,980 34,434 41,153 — — 65,516 72,133

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

The table below represents the Company's detailed exposure to municipal bonds in California at June 30, 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 months ended March 31, 2023 or 2022.

The Company did not record any credit valuation allowances on fixed maturity securities in either of the three and six months ended June 30, 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

June 30, 2023 | 10-Q 57

CITIZENS, INC.

3 unchanged sentences

(In thousands)

March 31, 2023 December 31, 2022

June 30, 2023 December 31, 2022

Fixed maturity securities $ 1,206,483 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.

In the six months ended June 30, 2023 our operations generated $12.2 million of 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.

9 unchanged sentences

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

These laws and regulations require, among other things, that our insurance subsidiaries maintain minimum solvency requirements, which limit the amount of dividends that can be paid to the holding company.

These laws and regulations require, among other things, that our insurance subsidiaries maintain minimum solvency or premium to surplus ratio requirements, which limit the amount of dividends that can be paid to the holding company.

The regulations also require approval of our service agreements with the applicable regulatory authority in order to prevent insurance subsidiaries from moving large amounts of cash to the unregulated holding company.

5 unchanged sentences

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

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

As of June 30, 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 three months ended March 31, 2023.

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

1 unchanged sentence

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

June 30, 2023 | 10-Q 58

CITIZENS, INC.

2 unchanged sentences

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, invest in our business or make strategic acquisitions.

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

In the six months ended June 30, 2023, our operations provided $12.2 million in net cash.

Cash from Investing Activities.

1 unchanged sentence

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.

Net cash outflows from investing activities totaled $11.9 million for the six months ended June 30, 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.

5 unchanged sentences

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 three months ended March 31, 2023, surrender benefits have leveled.

We have been aggressively managing policyholder retention efforts, however, in the six months ended June 30, 2023, surrender benefits have increased.

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

1 unchanged sentence

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.

Approximately 18% of the endowments in force, totaling approximately 6% of our in force business as of June 30, 2023, 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.

1 unchanged sentence

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.

We currently anticipate that our available operating cash flow and capital resources will be adequate to meet our needs for funds, but we are monitoring closely our policyholder behavior patterns.

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.

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

March 31, 2023 | 10-Q 58

At June 30, 2023, our domestic insurance subsidiaries were above the required minimum RBC levels.

June 30, 2023 | 10-Q 59

CITIZENS, INC.

6 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.

The Insurance Code of Puerto Rico 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.

2 unchanged sentences

CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS

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

As of June 30, 2023, we have no additional contractual obligations or off-balance sheet arrangements other than those described in Part I.

Item 1, Note 7.

8 unchanged sentences

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.

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;

3 unchanged sentences

Approximately 92% 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

The remaining 8% are attributed to other costs that vary with and are directly related to the successful acquisition of new insurance business.

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

June 30, 2023 | 10-Q 60

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.

5 unchanged sentences

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.

The Company recognizes an intangible asset that arises in the application of U.S.

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.

3 unchanged sentences

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.

Management believes that our COIA is recoverable for the three and six months ended June 30, 2023.

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

11 unchanged sentences

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.

June 30, 2023 | 10-Q 61

CITIZENS, INC.

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