CITIZENS, INC. 10-Q

Item 1. FINANCIAL STATEMENTS CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Balance Sheets (Unaudited) (In thousands) June 30, 2023 December 31, 2022 Assets Investments: Fixed maturity securities available-for-sale, at fair value (amortized cost: $ 1,385,121 and $ 1,381,318 in 2023 and 2022, respectively) $ 1,206,483 1,179,619 Equity securities, at fair value 11,710 11,590 Policy loans 77,944 78,773 Other long-term investments (portion measured at fair value $ 76,999 and $ 66,846 in 2023 and 2022, respectively) 77,262 69,558 Short-term investments 249 1,241 Total investments 1,373,648 1,340,781 Cash and cash equivalents 20,914 22,973 Accrued investment income 17,054 17,131 Reinsurance recoverable 4,045 4,560 Deferred policy acquisition costs 168,341 162,927 Cost of insurance acquired 10,333 10,647 Current federal income tax receivable 1,562 601 Property and equipment, net 12,188 12,926 Due premiums 9,244 11,829 Other assets (less allowance for losses of $ 328 and $ 347 in 2023 and 2022, respectively) 6,665 6,328 Total assets $ 1,623,994 1,590,703 See accompanying Notes to Consolidated Financial Statements. June 30, 2023 | 10-Q 2 Table of Contents CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Balance Sheets, Continued (Unaudited) (In thousands, except share amounts) June 30, 2023 December 31, 2022 Liabilities and Stockholders' Equity Liabilities: Policy liabilities: Future policy benefit reserves: Life insurance $ 1,211,320 1,198,647 Accident and health insurance 926 767 Total future policy benefit reserves 1,212,246 1,199,414 Policyholders' funds: Annuities 127,485 121,422 Dividend accumulations 43,384 41,663 Premiums paid in advance 36,432 36,384 Policy claims payable 6,569 9,884 Other policyholders' funds 7,257 7,501 Total policyholders' funds 221,127 216,854 Total policy liabilities 1,433,373 1,416,268 Commissions payable 1,972 1,967 Deferred federal income tax liability 4,736 3,653 Other liabilities 37,067 41,025 Total liabilities 1,477,148 1,462,913 Commitments and contingencies ( Note 7 ) Stockholders' Equity: Common stock: Class A, no par value, 100,000,000 shares authorized, 53,864,545 and 53,758,176 shares issued and outstanding in 2023 and 2022, respectively, including shares in treasury of 4,261,005 in 2023 and 3,935,581 in 2022 268,243 268,147 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 27,307 16,309 Accumulated other comprehensive income (loss) ( 128,363 ) ( 137,044 ) Treasury stock, at cost ( 23,525 ) ( 22,806 ) Total stockholders' equity 146,846 127,790 Total liabilities and stockholders' equity $ 1,623,994 1,590,703 See accompanying Notes to Consolidated Financial Statements. June 30, 2023 | 10-Q 3 Table of Contents CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited) Three Months Ended Six Months Ended June 30, June 30, (In thousands, except per share amounts) 2023 2022 2023 2022 Revenues: Premiums: Life insurance $ 39,292 40,761 76,226 78,507 Accident and health insurance 547 280 905 566 Property insurance ( 113 ) 1,183 844 2,515 Net investment income 17,241 15,892 34,315 31,379 Investment related gains (losses), net 703 ( 5,016 ) 415 ( 5,598 ) Other income 857 634 1,736 1,722 Total revenues 58,527 53,734 114,441 109,091 Benefits and Expenses: Insurance benefits paid or provided: Claims and surrenders 32,776 27,097 63,075 55,531 Increase (decrease) in future policy benefit reserves ( 944 ) 3,730 ( 1,922 ) 3,844 Policyholder liability remeasurement (gain) loss 956 667 1,836 1,335 Policyholders' dividends 1,261 1,515 2,369 2,868 Total insurance benefits paid or provided 34,049 33,009 65,358 63,578 Commissions 8,883 8,924 17,896 16,597 Other general expenses 12,268 10,400 23,528 21,430 Capitalization of deferred policy acquisition costs ( 6,544 ) ( 6,184 ) ( 12,902 ) ( 10,965 ) Amortization of deferred policy acquisition costs 3,674 3,468 7,488 7,027 Amortization of cost of insurance acquired 153 151 314 280 Total benefits and expenses 52,483 49,768 101,682 97,947 Income (loss) before federal income tax 6,044 3,966 12,759 11,144 Federal income tax expense (benefit) ( 82 ) 1,474 1,761 2,203 Net income (loss) 6,126 2,492 10,998 8,941 Per Share Amounts: Basic and diluted earnings (losses) per share of Class A common stock 0.12 0.05 0.22 0.18 Other Comprehensive Income (Loss): Unrealized gains (losses) on fixed maturity securities: Unrealized holding gains (losses) arising during period ( 20,430 ) ( 119,531 ) 23,006 ( 252,296 ) Reclassification adjustment for losses (gains) included in net income (loss) 24 ( 24 ) 62 35 Unrealized gains (losses) on fixed maturity securities, net ( 20,406 ) ( 119,555 ) 23,068 ( 252,261 ) Change in current discount rate for liability for future policy benefits 6,251 120,437 ( 14,229 ) 272,044 Income tax expense (benefit) on other comprehensive income items ( 1,257 ) 4,634 158 6,346 Other comprehensive income (loss) ( 12,898 ) ( 3,752 ) 8,681 13,437 Total comprehensive income (loss) $ ( 6,772 ) ( 1,260 ) 19,679 22,378 See accompanying Notes to Consolidated Financial Statements. June 30, 2023 | 10-Q 4 Table of Contents CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Stockholders' Equity (Unaudited) Common Stock Retained Earnings (Accumulated Deficit) Accumulated Other Comprehensive Income (Loss) Treasury Stock Total Stockholders' Equity (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 Comprehensive income (loss): Net income (loss) — — 6,126 — — 6,126 Other comprehensive income (loss) — — — ( 12,898 ) — ( 12,898 ) Total comprehensive income (loss) — — 6,126 ( 12,898 ) — ( 6,772 ) Acquisition of treasury stock — — — — ( 719 ) ( 719 ) Stock-based compensation 46 — — — — 46 Balance at June 30, 2023 $ 268,243 3,184 27,307 ( 128,363 ) ( 23,525 ) 146,846 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 Comprehensive income (loss): Net income (loss) — — 2,492 — — 2,492 Other comprehensive income (loss) — — — ( 3,752 ) — ( 3,752 ) Total comprehensive income (loss) — — 2,492 ( 3,752 ) — ( 1,260 ) Issuance of common stock 455 — — — — 455 Acquisition of treasury stock — — — — ( 1,300 ) ( 1,300 ) Stock-based compensation ( 47 ) — — — — ( 47 ) Balance at June 30, 2022 $ 267,850 3,184 ( 757 ) ( 125,552 ) ( 21,401 ) 123,324 See accompanying Notes to Consolidated Financial Statements. June 30, 2023 | 10-Q 5 Table of Contents CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited) Six Months Ended June 30, (In thousands) 2023 2022 Cash flows from operating activities: Net income (loss) $ 10,998 8,941 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Investment related (gains) losses on sale of investments and other assets ( 415 ) 5,598 Net deferred policy acquisition costs ( 5,414 ) ( 3,938 ) Amortization of cost of insurance acquired 314 280 Depreciation 248 288 Amortization of premiums and discounts on investments 2,468 2,658 Stock-based compensation 146 150 Deferred federal income tax expense (benefit) 924 1,353 Change in: Accrued investment income 77 ( 300 ) Reinsurance recoverable 515 2,113 Due premiums 2,585 1,210 Future policy benefit reserves ( 1,397 ) 3,639 Other policyholders' liabilities 5,848 881 Federal income tax payable ( 961 ) 558 Commissions payable and other liabilities ( 3,383 ) 246 Other, net ( 355 ) ( 1,330 ) Net cash provided by (used in) operating activities 12,198 22,347 Cash flows from investing activities: Purchases of fixed maturity securities, available-for-sale ( 27,637 ) ( 64,689 ) Sales of fixed maturity securities, available-for-sale 4,244 28,828 Maturities and calls of fixed maturity securities, available-for-sale 17,104 18,234 Principal payments on mortgage loans 4 95 (Increase) decrease in policy loans, net 829 1,721 Sales of other long-term investments 2,538 2,699 Purchases of other long-term investments ( 9,409 ) ( 14,746 ) Purchases of property and equipment ( 84 ) ( 51 ) Maturities of short-term investments 500 — Purchases of short-term investments — ( 5 ) Net cash provided by (used in) investing activities ( 11,911 ) ( 27,914 ) See accompanying Notes to Consolidated Financial Statements. June 30, 2023 | 10-Q 6 Table of Contents CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Cash Flows, Continued (Unaudited) Six Months Ended June 30, (In thousands) 2023 2022 Cash flows from financing activities: Annuity deposits $ 3,813 4,160 Annuity withdrawals ( 5,390 ) ( 4,319 ) Acquisition of treasury stock ( 719 ) ( 1,300 ) Issuance of common stock — 2,244 Other ( 50 ) ( 105 ) Net cash provided by (used in) financing activities ( 2,346 ) 680 Net increase (decrease) in cash and cash equivalents ( 2,059 ) ( 4,887 ) Cash and cash equivalents at beginning of year 22,973 27,294 Cash and cash equivalents at end of period $ 20,914 22,407 SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES: During the six months ended June 30, 2023 and 2022, various fixed maturity issuers exchanged securities with book values of $ 5.4 million and $ 6.1 million, respectively, for securities of equal value. The Company had no net unsettled security trades at June 30, 2023 and $ 3.3 million at June 30, 2022. The Company recognized no right-of-use assets in exchange for new operating lease liabilities during the six months ended June 30, 2023 and $ 0.4 million during the six months ended June 30, 2022. See accompanying Notes to Consolidated Financial Statements. June 30, 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, a Puerto Rico holding company ("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 June 30, 2023, the consolidated statements of operations and comprehensive income (loss) and stockholders' equity for the three and six months ended June 30, 2023 and June 30, 2022 and the consolidated statements of cash flows for the six months ended June 30, 2023 and June 30, 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 June 30, 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. Prior to July 1, 2023, our domestic life insurance business operated through CICA and CNLIC. CICA issues ordinary whole life, life products with living benefits, critical illness, credit life and disability policies throughout the U.S. and CNLIC issued ordinary whole life and critical illness policies through June 30, 2023. CNLIC merged into CICA on July 1, 2023. 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. As of June 30, 2023, the Company ceased all operations for SPFIC. 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 June 30, 2023 | 10-Q 8 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and 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 sheets 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 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. 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. June 30, 2023 | 10-Q 9 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) Our traditional and limited-payment 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. June 30, 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 Service 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. June 30, 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 as follows: (In thousands) 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 ) — Total assets 1,569,970 20,733 1,590,703 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 Total liabilities 1,568,927 ( 106,014 ) 1,462,913 Retained earnings (accumulated deficit) ( 52,203 ) 68,512 16,309 Accumulated other comprehensive income (loss) ( 195,279 ) 58,235 ( 137,044 ) Total stockholders' equity 1,043 126,747 127,790 June 30, 2023 | 10-Q 12 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) (In thousands, except per share amounts) As Previously Reported Adoption of New Standard Post Adoption For the Three Months Ended June 30, 2022 Consolidated Statement of Operations Increase (decrease) in future policy benefit reserves $ 9,378 ( 5,648 ) 3,730 Policyholder liability remeasurement (gain) loss — 667 667 Amortization of deferred policy acquisition costs 5,970 ( 2,502 ) 3,468 Amortization of cost of insurance acquired 263 ( 112 ) 151 Federal income tax expense (benefit) ( 81 ) 1,555 1,474 Net income (loss) ( 3,548 ) 6,040 2,492 Basic and diluted earnings (losses) per share of Class A common stock ( 0.07 ) 0.12 0.05 Consolidated Statement of Comprehensive Income (Loss) Unrealized holding gains (losses) arising during period $ ( 120,934 ) 1,403 ( 119,531 ) Change in current discount rate for liability for future policy benefits — 120,437 120,437 Income tax expense (benefit) on other comprehensive income items ( 4,735 ) 9,369 4,634 Other comprehensive income (loss) ( 116,223 ) 112,471 ( 3,752 ) Total comprehensive income (loss) ( 119,771 ) 118,511 ( 1,260 ) For the Six Months Ended June 30, 2022 Consolidated Statement of Operations Increase (decrease) in future policy benefit reserves $ 15,947 ( 12,103 ) 3,844 Policyholder liability remeasurement (gain) loss — 1,335 1,335 Amortization of deferred policy acquisition costs 11,787 ( 4,760 ) 7,027 Amortization of cost of insurance acquired 499 219 280 Federal income tax expense (benefit) 278 1,925 2,203 Net income (loss) ( 4,881 ) 13,822 8,941 Basic and diluted earnings (losses) per share of Class A common stock ( 0.10 ) 0.28 0.18 Consolidated Statement of Comprehensive Income (Loss) Unrealized holding gains (losses) arising during period $ ( 254,276 ) 1,980 ( 252,296 ) Change in current discount rate for liability for future policy benefits — 272,044 272,044 Income tax expense (benefit) on other comprehensive income items ( 13,801 ) 20,147 6,346 Other comprehensive income (loss) ( 240,440 ) 253,877 13,437 Total comprehensive income (loss) ( 245,321 ) 267,699 22,378 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 June 30, 2023 | 10-Q 13 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) account, recognize and measure a contractual sale restriction. Disclosures on such restrictions are also required. 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 86.5 % of total cash and invested assets at June 30, 2023, as shown below. Carrying Value (In thousands, except for %) June 30, 2023 December 31, 2022 Amount % Amount % Cash and invested assets: Fixed maturity securities $ 1,206,483 86.5 % 1,179,619 86.5 % Equity securities 11,710 0.8 11,590 0.8 Policy loans 77,944 5.6 78,773 5.8 Other long-term investments 77,262 5.5 69,558 5.1 Short-term investments 249 — 1,241 0.1 Cash and cash equivalents 20,914 1.6 22,973 1.7 Total cash and invested assets $ 1,394,562 100.0 % 1,363,754 100.0 % June 30, 2023 | 10-Q 14 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) 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 June 30, 2023 (In thousands) Fixed maturity securities: Available-for-sale: U.S. Treasury securities $ 5,710 88 29 5,769 U.S. Government-sponsored enterprises 3,419 268 3 3,684 States and political subdivisions 331,708 1,581 31,482 301,807 Corporate: Financial 248,462 408 38,843 210,027 Consumer 249,961 1,184 42,172 208,973 Utilities 119,216 98 22,330 96,984 Energy 76,691 13 10,186 66,518 All other 186,470 572 25,439 161,603 Commercial mortgage-backed 171 — 4 167 Residential mortgage-backed 110,439 6 10,062 100,383 Asset-backed 52,774 53 2,359 50,468 Foreign governments 100 — — 100 Total fixed maturity securities $ 1,385,121 4,271 182,909 1,206,483 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 June 30, 2023 | 10-Q 15 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) Most of the Company's equity securities are diversified stock and bond mutual funds. Fair Value (In thousands) June 30, 2023 December 31, 2022 Equity securities: Stock mutual funds $ 2,727 2,615 Bond mutual funds 4,348 4,337 Common stock 790 857 Non-redeemable preferred stock 8 8 Non-redeemable preferred stock fund 3,837 3,773 Total equity securities $ 11,710 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 losses of $ 0.2 million and gains of $ 0.1 million on equity securities held for the three and six months ended June 30, 2023 and losses of $ 1.2 million and $ 2.0 million for the same periods ended June 30, 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 and six months ended June 30, 2023 and 2022, the Company recorded no credit valuation losses on fixed maturity securities. June 30, 2023 | 10-Q 16 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 June 30, 2023 and December 31, 2022. June 30, 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 $ 740 20 3 65 9 2 805 29 5 U.S. Government-sponsored enterprises 220 3 1 — — — 220 3 1 States and political subdivisions 94,929 3,360 121 112,451 28,122 141 207,380 31,482 262 Corporate: Financial 38,326 1,768 59 152,433 37,075 195 190,759 38,843 254 Consumer 48,950 2,896 57 139,405 39,276 189 188,355 42,172 246 Utilities 16,392 593 58 75,728 21,737 121 92,120 22,330 179 Energy 12,636 426 17 53,020 9,760 66 65,656 10,186 83 All Other 43,739 1,959 55 108,752 23,480 133 152,491 25,439 188 Commercial mortgage-backed 167 4 2 — — — 167 4 2 Residential mortgage-backed 82,833 7,194 78 17,384 2,868 26 100,217 10,062 104 Asset-backed 11,309 285 20 31,365 2,074 35 42,674 2,359 55 Total fixed maturity securities $ 350,241 18,508 471 690,603 164,401 908 1,040,844 182,909 1,379 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 June 30, 2023 | 10-Q 17 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 June 30, 2023 and December 31, 2022, 99 % 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 June 30, 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. June 30, 2023 Amortized Cost Fair Value (In thousands) Fixed maturity securities: Due in one year or less $ 15,095 14,965 Due after one year through five years 125,549 122,715 Due after five years through ten years 263,546 251,588 Due after ten years 980,931 817,215 Total fixed maturity securities $ 1,385,121 1,206,483 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 Six Months Ended June 30, June 30, (In thousands) 2023 2022 2023 2022 Fixed maturity securities, available-for-sale: Proceeds $ 1,379 27,728 4,244 28,828 Gross realized gains $ — 101 5 101 Gross realized losses $ 5 102 17 102 (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 securities and certain other long-term investments at fair value with changes in fair value reported through the consolidated statements of operations. June 30, 2023 | 10-Q 18 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) 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. June 30, 2023 | 10-Q 19 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. June 30, 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 $ 5,769 3,684 — 9,453 States and political subdivisions — 301,807 — 301,807 Corporate 45 744,060 — 744,105 Commercial mortgage-backed — 167 — 167 Residential mortgage-backed — 100,383 — 100,383 Asset-backed — 50,468 — 50,468 Foreign governments — 100 — 100 Total fixed maturity securities available-for-sale 5,814 1,200,669 — 1,206,483 Equity securities: Stock mutual funds 2,727 — — 2,727 Bond mutual funds 4,348 — — 4,348 Common stock 790 — — 790 Non-redeemable preferred stock 8 — — 8 Non-redeemable preferred stock fund 3,837 — — 3,837 Total equity securities 11,710 — — 11,710 Other long-term investments (1) — — — 76,999 Total financial assets $ 17,524 1,200,669 — 1,295,192 (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. June 30, 2023 | 10-Q 20 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 $ 9,567 3,711 — 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 9,611 1,170,008 — 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 $ 21,201 1,170,008 — 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 June 30, 2023, fixed maturity securities, valued using a third-party pricing source, totaled $ 1.2 billion for Level 2 assets and comprised 93 % 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 June 30, 2023. As of June 30, 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 gains of $ 0.9 million and $ 0.3 million and losses of $ 4.4 million and June 30, 2023 | 10-Q 21 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) $ 5.2 million on limited partnerships held for the three and six months ended June 30, 2023 and June 30, 2022, respectively. These investments are included in other long-term investments on the consolidated balance sheets. June 30, 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 $ 34,996 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 9,758 — 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 18,705 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 13,540 12,416 10 to 12 7,683 4,107 11 Total limited partnerships $ 76,999 33,040 $ 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: June 30, 2023 December 31, 2022 (In thousands) Carrying Value Fair Value Carrying Value Fair Value Financial Assets: Policy loans $ 77,944 77,944 78,773 78,773 Residential mortgage loan 45 46 49 50 Cash and cash equivalents 20,914 20,914 22,973 22,973 Financial Liabilities: Annuity - investment contracts 67,136 62,253 67,344 61,701 June 30, 2023 | 10-Q 22 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 June 30, 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 7.0 % at both June 30, 2023 and December 31, 2022. At June 30, 2023, the remaining loan matures in five years . Management estimated the fair value using an annual interest rate of 6.25 % at June 30, 2023. Our mortgage loan is considered a Level 3 asset in the fair value hierarchy and is included in other long-term investments on the consolidated balance sheets. 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 June 30, 2023 and December 31, 2022 using discounted cash flows based upon spot rates adjusted for various risk adjustments ranging from 4.00 % to 4.71 % 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 ) June 30, 2023 December 31, 2022 Other long-term investments: Limited partnerships $ 76,999 69,294 FHLB common stock 196 193 Mortgage loans 45 49 All other investments 22 22 Total other long-term investments $ 77,262 69,558 We carried no limited partnership investments at cost at June 30, 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 six months ended June 30, 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. June 30, 2023 | 10-Q 23 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) Six Months Ended June 30, 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 7,212 1,436 169 8,817 Amortization expense ( 5,909 ) ( 382 ) ( 38 ) ( 6,329 ) Balance, end of period 102,229 12,596 1,147 115,972 Home Service Insurance: Balance, beginning of year 38,793 9,729 921 49,443 Capitalizations 3,340 629 116 4,085 Amortization expense ( 1,015 ) ( 196 ) 52 ( 1,159 ) Balance, end of period 41,118 10,162 1,089 52,369 Consolidated: Balance, beginning of year 139,719 21,271 1,937 162,927 Capitalizations 10,552 2,065 285 12,902 Amortization expense ( 6,924 ) ( 578 ) 14 ( 7,488 ) Balance, end of period $ 143,347 22,758 2,236 168,341 Six Months Ended June 30, 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 6,079 1,545 ( 11 ) 7,613 Amortization expense ( 5,607 ) ( 309 ) ( 54 ) ( 5,970 ) Balance, end of period 98,147 10,237 961 109,345 Home Service Insurance: Balance, beginning of year 35,137 8,723 856 44,716 Capitalizations 2,615 727 10 3,352 Amortization expense ( 896 ) ( 179 ) 18 ( 1,057 ) Balance, end of period 36,856 9,271 884 47,011 Consolidated: Balance, beginning of year 132,812 17,724 1,882 152,418 Capitalizations 8,694 2,272 ( 1 ) 10,965 Amortization expense ( 6,503 ) ( 488 ) ( 36 ) ( 7,027 ) Balance, end of period $ 135,003 19,508 1,845 156,356 DAC capitalization increased for the six months ended June 30, 2023, compared to the same prior year period mainly from increased commissions from higher first year sales across our business segments. June 30, 2023 | 10-Q 24 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) COIA The following tables provide rollforwards of the COIA balances for the six months ended June 30, 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. Six Months Ended June 30, 2023 (In thousands) Permanent Permanent Limited Pay Other Business Total Life Insurance: Balance, beginning of year $ 267 750 444 1,461 Amortization expense ( 10 ) ( 30 ) ( 18 ) ( 58 ) Balance, end of period 257 720 426 1,403 Home Service Insurance: Balance, beginning of year 7,583 176 1,427 9,186 Amortization expense ( 197 ) ( 4 ) ( 55 ) ( 256 ) Balance, end of period 7,386 172 1,372 8,930 Consolidated: Balance, beginning of year 7,850 926 1,871 10,647 Amortization expense ( 207 ) ( 34 ) ( 73 ) ( 314 ) Balance, end of period $ 7,643 892 1,798 10,333 Six Months Ended June 30, 2022 (In thousands) Permanent Permanent Limited Pay Other Business Total Life Insurance: Balance, beginning of year $ 287 812 485 1,584 Amortization expense ( 10 ) ( 31 ) ( 21 ) ( 62 ) Balance, end of period 277 781 464 1,522 Home Service Insurance: Balance, beginning of year 7,989 184 1,511 9,684 Amortization expense ( 205 ) ( 4 ) ( 9 ) ( 218 ) Balance, end of period 7,784 180 1,502 9,466 Consolidated: Balance, beginning of year 8,276 996 1,996 11,268 Amortization expense ( 215 ) ( 35 ) ( 30 ) ( 280 ) Balance, end of period $ 8,061 961 1,966 10,988 June 30, 2023 | 10-Q 25 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. June 30, 2023 (In thousands) Life Insurance Segment Home Service Insurance Permanent Permanent Limited Pay Total Permanent Permanent Limited Pay Total Present Value of Expected Net Premiums Balance, beginning of year $ 235,228 10,209 245,437 93,508 13,255 106,763 Beginning balance at original discount rate 247,601 10,682 258,283 100,225 14,394 114,619 Effects of actual variances from expected experience 3,081 466 3,547 ( 2,910 ) ( 2,291 ) ( 5,201 ) Adjusted beginning of year balance 250,682 11,148 261,830 97,315 12,103 109,418 Issuances 13,189 1,449 14,638 9,091 2,125 11,216 Interest accrual 4,571 150 4,721 1,996 230 2,226 Net premiums collected ( 20,049 ) ( 1,203 ) ( 21,252 ) ( 5,919 ) 948 ( 4,971 ) Derecognition and other 293 60 353 272 82 354 Ending balance at original discount rate 248,686 11,604 260,290 102,755 15,488 118,243 Effect of changes in discount rates ( 10,320 ) ( 404 ) ( 10,724 ) ( 5,247 ) ( 927 ) ( 6,174 ) Balance, end of period $ 238,366 11,200 249,566 97,508 14,561 112,069 Present Value of Expected Future Policy Benefits Balance, beginning of year $ 947,415 195,612 1,143,027 200,351 116,356 316,707 Beginning balance at original discount rate 996,169 208,051 1,204,220 214,188 121,908 336,096 Effects of actual variances from expected experience 4,533 2,114 6,647 ( 2,750 ) ( 579 ) ( 3,329 ) Adjusted beginning of year balance 1,000,702 210,165 1,210,867 211,438 121,329 332,767 Issuances 13,442 1,479 14,921 9,090 2,129 11,219 Interest accrual 21,673 4,210 25,883 4,642 2,822 7,464 Benefit payments ( 39,414 ) ( 10,676 ) ( 50,090 ) ( 8,532 ) ( 3,317 ) ( 11,849 ) Derecognition and other 31 29 60 268 80 348 Ending balance at original discount rate 996,434 205,207 1,201,641 216,906 123,043 339,949 Effect of changes in discount rates ( 38,485 ) ( 10,615 ) ( 49,100 ) ( 10,009 ) ( 3,436 ) ( 13,445 ) Balance, end of period $ 957,949 194,592 1,152,541 206,897 119,607 326,504 Net liability for future policy benefits $ 719,583 183,392 902,975 109,389 105,046 214,435 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. The Home Service Insurance segment impact of June 30, 2023 | 10-Q 26 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) updating actual experience for the current period contributed to an increase in liabilities due to higher premiums collected than expected. June 30, 2022 (In thousands) Life Insurance Home Service Insurance Permanent Permanent Limited Pay Total Permanent Permanent Limited Pay Total Present Value of Expected Net Premiums Balance, beginning of year $ 269,528 4,939 274,467 104,556 10,196 114,752 Beginning balance at original discount rate 246,386 5,093 251,479 90,012 9,532 99,544 Effects of actual variances from expected experience 3,613 539 4,152 2,123 ( 2,594 ) ( 471 ) Adjusted beginning of year balance 249,999 5,632 255,631 92,135 6,938 99,073 Issuances 15,212 2,100 17,312 8,737 2,695 11,432 Interest accrual 4,189 9 4,198 1,660 98 1,758 Net premiums collected ( 19,100 ) 175 ( 18,925 ) ( 5,444 ) 3,049 ( 2,395 ) Derecognition and other 199 62 261 ( 895 ) 91 ( 804 ) Ending balance at original discount rate 250,499 7,978 258,477 96,193 12,871 109,064 Effect of changes in discount rates ( 6,258 ) ( 436 ) ( 6,694 ) ( 2,927 ) ( 882 ) ( 3,809 ) Balance, end of period $ 244,241 7,542 251,783 93,266 11,989 105,255 Present Value of Expected Future Policy Benefits Balance, beginning of year $ 1,168,282 240,679 1,408,961 266,206 161,715 427,921 Beginning balance at original discount rate 990,921 207,105 1,198,026 205,340 117,425 322,765 Effects of actual variances from expected experience 4,412 2,399 6,811 2,428 659 3,087 Adjusted beginning of year balance 995,333 209,504 1,204,837 207,768 118,084 325,852 Issuances 15,471 2,155 17,626 8,743 2,696 11,439 Interest accrual 21,315 4,243 25,558 4,327 2,702 7,029 Benefit payments ( 33,133 ) ( 8,086 ) ( 41,219 ) ( 10,216 ) ( 3,681 ) ( 13,897 ) Derecognition and other ( 42 ) 7 ( 35 ) ( 900 ) 88 ( 812 ) Ending balance at original discount rate 998,944 207,823 1,206,767 209,722 119,889 329,611 Effect of changes in discount rates ( 6,954 ) ( 3,148 ) ( 10,102 ) 672 4,628 5,300 Balance, end of period $ 991,990 204,675 1,196,665 210,394 124,517 334,911 Net liability for future policy benefits $ 747,749 197,133 944,882 117,128 112,528 229,656 Plus: Flooring impact — — — 27 71 98 Net liability for future policy benefits, after flooring impact $ 747,749 197,133 944,882 117,155 112,599 229,754 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. 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. June 30, 2023 | 10-Q 27 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) Net premiums collected is 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 six months ended June 30, 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 six months ended June 30, 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. The following table reconciles the net liability for future policy benefits shown above to the liability for future policy benefits reported in the consolidated balance sheets. June 30, 2023 June 30, 2022 (In thousands) Life Insurance Home Service Insurance Consolidated Life Insurance Home Service Insurance Consolidated Life Insurance Permanent $ 719,583 109,389 828,972 747,749 117,155 864,904 Permanent limited pay 183,392 105,046 288,438 197,133 112,599 309,732 Deferred profit liability 26,602 25,667 52,269 23,379 23,394 46,773 Other 27,781 13,860 41,641 28,286 13,651 41,937 Total life insurance 957,358 253,962 1,211,320 996,547 266,799 1,263,346 Accident & Health Other 662 264 926 502 243 745 Total future policy benefit reserves $ 958,020 254,226 1,212,246 997,049 267,042 1,264,091 June 30, 2023 | 10-Q 28 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) The following table provides the amount of undiscounted and discounted expected gross premiums and expected future benefit payments for long-term duration contracts. June 30, 2023 June 30, 2022 (In thousands) Life Insurance Home Service Insurance Life Insurance Home Service Insurance Undiscounted: Permanent Expected future gross premiums $ 603,067 464,108 620,766 465,996 Expected future benefit payments 1,478,283 482,298 1,474,632 460,674 Permanent Limited Pay Expected future gross premiums 46,441 78,064 48,280 70,669 Expected future benefit payments 319,604 319,950 322,842 308,976 Discounted: Permanent Expected future gross premiums $ 467,315 275,847 496,865 288,122 Expected future benefit payments 957,949 206,897 991,990 210,394 Permanent Limited Pay Expected future gross premiums 41,200 53,518 43,534 52,999 Expected future benefit payments 194,592 119,607 204,675 124,517 June 30, 2023 | 10-Q 29 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: Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 (In thousands) Gross Premiums Interest Expense Gross Premiums Interest Expense Gross Premiums Interest Expense Gross Premiums Interest Expense Life Insurance Segment: Life Insurance Permanent $ 22,507 8,532 22,818 8,556 44,965 17,102 45,075 17,126 Permanent Limited Pay 3,610 2,167 3,336 2,305 7,778 4,503 6,992 4,655 Other 2,738 — 3,845 — 2,815 — 5,270 — Less: Reinsurance 412 — 253 — 1,060 — 753 — Total, net of reinsurance 28,443 10,699 29,746 10,861 54,498 21,605 56,584 21,781 Accident & Health Other 332 — 89 — 484 — 183 — Less: Reinsurance 2 — 1 — 2 — 2 — Total, net of reinsurance 330 — 88 — 482 — 181 — Total $ 28,773 10,699 29,834 10,861 54,980 21,605 56,765 21,781 Home Service Insurance Segment: Life Insurance Permanent $ 8,268 1,322 8,292 1,325 16,640 2,646 16,748 2,667 Permanent Limited Pay 2,117 1,592 2,102 1,561 4,271 3,178 4,143 3,120 Other 466 — 1,051 — 834 — 1,051 — Less: Reinsurance 2 — 5 — 17 — 19 — Total, net of reinsurance 10,849 2,914 11,440 2,886 21,728 5,824 21,923 5,787 Accident & Health Other 217 — 192 — 423 — 385 — Less: Reinsurance — — — — — — — — Total, net of reinsurance 217 — 192 — 423 — 385 — Total $ 11,066 2,914 11,632 2,886 22,151 5,824 22,308 5,787 June 30, 2023 | 10-Q 30 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) The following table provides the weighted-average durations of the liability for future policy benefits. June 30, 2023 June 30, 2022 (In years) Life Insurance Home Service Insurance Life Insurance Home Service Insurance Permanent Duration at original discount rate 8.1 16.2 8.1 15.4 Duration at current discount rate 8.4 16.5 8.7 16.4 Permanent Limited Pay Duration at original discount rate 7.7 14.7 7.6 14.4 Duration at current discount rate 7.6 15.3 7.9 15.7 The following table provides the weighted-average interest rates for the liability for future policy benefits. June 30, 2023 June 30, 2022 Life Insurance Home Service Insurance Life Insurance Home Service Insurance Permanent Interest rate at original discount rate 4.91 % 4.98 % 4.95 % 5.02 % Interest rate at current discount rate 5.02 % 5.09 % 4.40 % 4.60 % Permanent Limited Pay Interest rate at original discount rate 4.30 % 5.04 % 4.32 % 5.06 % Interest rate at current discount rate 4.99 % 5.09 % 4.36 % 4.59 % 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. At Guaranteed Minimum 1 Basis Point- 50 Basis Points Above 51 Basis Points- 150 Basis Points Above Greater Than 150 Basis Points Above Total June 30, 2023 (In thousands) Range of Guaranteed Minimum Crediting Rates 0.00 % - 1.49 % $ 749 — 1,131 37,814 39,694 1.50 % - 2.99 % 28,207 616 62 — 28,885 3.00 % - 4.49 % 103,006 10 — — 103,016 Greater or equal to 4.50 % 31,560 — — — 31,560 Total $ 163,522 626 1,193 37,814 203,155 June 30, 2023 | 10-Q 31 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) At Guaranteed Minimum 1 Basis Point- 50 Basis Points Above 51 Basis Points- 150 Basis Points Above Greater Than 150 Basis Points Above Total June 30, 2022 (In thousands) Range of Guaranteed Minimum Crediting Rates 0.00 % - 1.49 % $ 715 — 768 41,087 42,570 1.50 % - 2.99 % 20,857 592 23 — 21,472 3.00 % - 4.49 % 94,093 10 — — 94,103 Greater or equal to 4.50 % 31,750 — — — 31,750 Total $ 147,415 602 791 41,087 189,895 The following tables summarize balances of and changes in policyholders' account balances. June 30, 2023 (In thousands, except for %) Supplemental Contracts Without Life Contingencies Fixed Annuity Dividend Accumulations Premiums Paid in Advance Balance, beginning of year $ 32,995 86,807 41,663 34,603 Issuances 10,989 1,515 298 2,043 Premiums received 49 2,147 2,816 515 Interest credited 724 1,335 670 998 Less: Surrenders and withdrawals — 5,246 2,063 4,339 Benefit payments 5,364 — — — Balance, end of period $ 39,393 86,558 43,384 33,820 Weighted-average crediting rates 4.03 % 3.57 % 3.05 % 2.97 % Cash surrender value $ 39,393 86,558 43,384 33,820 June 30, 2022 (In thousands, except for %) Supplemental Contracts Without Life Contingencies Fixed Annuity Dividend Accumulations Premiums Paid in Advance Balance, beginning of year $ 23,950 83,917 37,760 38,875 Issuances 5,499 1,577 267 1,138 Premiums received 26 2,352 2,694 332 Interest credited 490 1,314 591 521 Less: Surrenders and withdrawals — 3,981 1,690 3,911 Benefit payments 1,826 — — — Balance, end of period $ 28,139 85,179 39,622 36,955 Weighted-average crediting rates 4.08 % 3.60 % 3.08 % 3.07 % Cash surrender value $ 28,139 85,179 39,622 36,955 June 30, 2023 | 10-Q 32 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) The following table reconciles policyholders' account balances shown above to the policyholders' account balances liability in the consolidated balance sheets. As of June 30, (In thousands) 2023 2022 Annuities: Supplemental contracts without life contingencies $ 39,393 28,139 Fixed annuity 86,558 85,179 Unearned revenue reserve 1,534 1,605 Total annuities $ 127,485 114,923 Premiums Paid in Advance: Premiums paid in advance $ 33,820 36,955 Other 2,612 2,681 Total premiums paid in advance $ 36,432 39,636 (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 June 30, 2023, CICA International is committed to fund investments up to $ 33.0 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 (a fluctuating rate per annum) equal to the greatest of (a) Regions' prime rate, (b) the federal funds rate plus 0.50 %, or (c) 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. 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 June 30, 2023, the Company had no t borrowed any funds against the Credit Facility and was not in violation of any covenants. June 30, 2023 | 10-Q 33 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) (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: Six Months Ended June 30, 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 — — — 475 — — Stock issued for compensation 106 — — 81 — — Acquisition of Class A shares — — 325 — — 392 Other share issuance — — — 16 — — Balance at end of period 53,864 1,002 5,262 53,742 1,002 4,530 EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings (loss) per share. Three Months Ended June 30, 2023 2022 (In thousands, except per share amounts) Basic and diluted earnings (loss) per share: Numerator: Net income (loss) $ 6,126 2,492 Net income (loss) allocated to Class A common stock $ 6,126 2,492 Denominator: Weighted average shares of Class A outstanding - basic 49,758 50,373 Weighted average shares of Class A outstanding - diluted 50,552 51,065 Basic and diluted earnings (loss) per share of Class A common stock $ 0.12 0.05 June 30, 2023 | 10-Q 34 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) Six Months Ended June 30, 2023 2022 (In thousands, except per share amounts) Basic and diluted earnings (loss) per share: Numerator: Net income (loss) $ 10,998 8,941 Net income (loss) allocated to Class A common stock $ 10,998 8,941 Denominator: Weighted average shares of Class A outstanding - basic 49,791 50,278 Weighted average shares of Class A outstanding - diluted 50,584 50,970 Basic and diluted earnings (loss) per share of Class A common stock $ 0.22 0.18 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 June 30, 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 June 30, 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 PR is a Puerto Rico domiciled company. 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 Office of the Commissioner of Insurance ("OIC") that includes proposed minimum capital and surplus. CICA PR is required to maintain a minimum of $750,000 in capital and maintain a premium to surplus ratio of 7 to 1 . CICA PR began issuing new business as of January 1, 2023 and since higher costs are associated with new business than renewal business (e.g., first year commissions), we expect that Citizens will have to contribute capital to CICA PR in 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 benefits to enhance accumulations. CICA issues ordinary whole life, life products with living benefits, critical illness, credit life and disability policies throughout the U.S. and CNLIC issued ordinary whole life and critical illness policies through June 30, 2023. CNLIC merged into CICA on July 1, 2023. June 30, 2023 | 10-Q 35 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) 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 sold property insurance policies in Louisiana and Arkansas until operations were ceased effective June 30, 2023. The Life Insurance and Home Service Insurance portions of the Company constitute separate businesses. In addition to the Life Insurance and Home Service Insurance businesses, 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 June 30, 2023 (In thousands) Revenues: Premiums $ 28,773 10,953 — 39,726 Net investment income 13,498 3,450 293 17,241 Investment related gains (losses), net 738 ( 12 ) ( 23 ) 703 Other income 856 1 — 857 Total revenues 43,865 14,392 270 58,527 Benefits and expenses: Insurance benefits paid or provided: Claims and surrenders 26,968 5,808 — 32,776 Increase (decrease) in future policy benefit reserves ( 1,863 ) 919 — ( 944 ) Policyholder liability remeasurement (gain) loss 885 71 — 956 Policyholders' dividends 1,255 6 — 1,261 Total insurance benefits paid or provided 27,245 6,804 — 34,049 Commissions 4,765 4,118 — 8,883 Other general expenses 5,646 4,299 2,323 12,268 Capitalization of deferred policy acquisition costs ( 4,457 ) ( 2,087 ) — ( 6,544 ) Amortization of deferred policy acquisition costs 3,167 507 — 3,674 Amortization of cost of insurance acquired 26 127 — 153 Total benefits and expenses 36,392 13,768 2,323 52,483 Income (loss) before federal income tax $ 7,473 624 ( 2,053 ) 6,044 June 30, 2023 | 10-Q 36 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) Life Insurance Home Service Insurance Other Non-Insurance Enterprises Consolidated Six Months Ended June 30, 2023 (In thousands) Revenues: Premiums $ 54,980 22,995 — 77,975 Net investment income 26,809 6,920 586 34,315 Investment related gains (losses), net 301 87 27 415 Other income 1,735 1 — 1,736 Total revenues 83,825 30,003 613 114,441 Benefits and expenses: Insurance benefits paid or provided: Claims and surrenders 51,407 11,668 — 63,075 Increase (decrease) in future policy benefit reserves ( 3,683 ) 1,761 — ( 1,922 ) Policyholder liability remeasurement (gain) loss 1,701 135 — 1,836 Policyholders' dividends 2,356 13 — 2,369 Total insurance benefits paid or provided 51,781 13,577 — 65,358 Commissions 9,524 8,372 — 17,896 Other general expenses 11,105 8,767 3,656 23,528 Capitalization of deferred policy acquisition costs ( 8,817 ) ( 4,085 ) — ( 12,902 ) Amortization of deferred policy acquisition costs 6,329 1,159 — 7,488 Amortization of cost of insurance acquired 58 256 — 314 Total benefits and expenses 69,980 28,046 3,656 101,682 Income (loss) before federal income tax $ 13,845 1,957 ( 3,043 ) 12,759 June 30, 2023 | 10-Q 37 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) Life Insurance Home Service Insurance Other Non-Insurance Enterprises Consolidated Three Months Ended June 30, 2022 (In thousands) Revenues: Premiums $ 29,834 12,390 — 42,224 Net investment income 12,347 3,283 262 15,892 Investment related gains (losses), net ( 3,984 ) ( 925 ) ( 107 ) ( 5,016 ) Other income 633 1 — 634 Total revenues 38,830 14,749 155 53,734 Benefits and expenses: Insurance benefits paid or provided: Claims and surrenders 21,568 5,529 — 27,097 Increase (decrease) in future policy benefit reserves 3,006 724 — 3,730 Policyholder liability remeasurement (gain) loss 580 87 — 667 Policyholders' dividends 1,509 6 — 1,515 Total insurance benefits paid or provided 26,663 6,346 — 33,009 Commissions 4,792 4,132 — 8,924 Other general expenses 5,358 3,515 1,527 10,400 Capitalization of deferred policy acquisition costs ( 4,307 ) ( 1,877 ) — ( 6,184 ) Amortization of deferred policy acquisition costs 2,950 518 — 3,468 Amortization of cost of insurance acquired 38 113 — 151 Total benefits and expenses 35,494 12,747 1,527 49,768 Income (loss) before federal income tax $ 3,336 2,002 ( 1,372 ) 3,966 June 30, 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 Six Months Ended June 30, 2022 (In thousands) Revenues: Premiums $ 56,765 24,823 — 81,588 Net investment income 24,318 6,527 534 31,379 Investment related gains (losses), net ( 4,277 ) ( 1,167 ) ( 154 ) ( 5,598 ) Other income 1,721 1 — 1,722 Total revenues 78,527 30,184 380 109,091 Benefits and expenses: Insurance benefits paid or provided: Claims and surrenders 43,026 12,505 — 55,531 Increase (decrease) in future policy benefit reserves 4,382 ( 538 ) — 3,844 Policyholder liability remeasurement (gain) loss 994 341 — 1,335 Policyholders' dividends 2,859 9 — 2,868 Total insurance benefits paid or provided 51,261 12,317 — 63,578 Commissions 8,598 7,999 — 16,597 Other general expenses 11,049 7,865 2,516 21,430 Capitalization of deferred policy acquisition costs ( 7,613 ) ( 3,352 ) — ( 10,965 ) Amortization of deferred policy acquisition costs 5,970 1,057 — 7,027 Amortization of cost of insurance acquired 62 218 — 280 Total benefits and expenses 69,327 26,104 2,516 97,947 Income (loss) before federal income tax $ 9,200 4,080 ( 2,136 ) 11,144 (10) INCOME TAXES The effective tax rate is the ratio of tax expense (benefit) over pre-tax income (loss). The effective tax rate was ( 1.4 )% and 13.8 % for the three and six months ended June 30, 2023, compared to 37.2 % and 19.8 % for the same periods 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 June 30, 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 $ 3.9 million through Other Comprehensive Income (Loss). June 30, 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 and six months ended June 30, 2023 and 2022, as indicated below. Three Months Ended June 30, 2023 2022 (In thousands) Amount Tax Effect Total Amount Tax Effect Total Unrealized gains (losses): Unrealized holding gains (losses) arising during the period $ ( 20,430 ) 1,111 ( 19,319 ) ( 119,531 ) 4,435 ( 115,096 ) Reclassification adjustment for (gains) losses included in net income 24 ( 5 ) 19 ( 24 ) 5 ( 19 ) Unrealized holding gains (losses), net ( 20,406 ) 1,106 ( 19,300 ) ( 119,555 ) 4,440 ( 115,115 ) Change in current discount rate for liability for future policy benefits 6,251 151 6,402 120,437 ( 9,074 ) 111,363 Other comprehensive income (loss) $ ( 14,155 ) 1,257 ( 12,898 ) 882 ( 4,634 ) ( 3,752 ) Six Months Ended June 30, 2023 2022 (In thousands) Amount Tax Effect Total Amount Tax Effect Total Unrealized gains (losses): Unrealized holding gains (losses) arising during the period $ 23,006 ( 1,169 ) 21,837 ( 252,296 ) 13,392 ( 238,904 ) Reclassification adjustment for (gains) losses included in net income 62 ( 13 ) 49 35 ( 7 ) 28 Unrealized holding gains (losses), net 23,068 ( 1,182 ) 21,886 ( 252,261 ) 13,385 ( 238,876 ) Change in current discount rate for liability for future policy benefits ( 14,229 ) 1,024 ( 13,205 ) 272,044 ( 19,731 ) 252,313 Other comprehensive income (loss) $ 8,839 ( 158 ) 8,681 19,783 ( 6,346 ) 13,437 (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 six months ended June 30, 2023. See our Form 10-K for a comprehensive discussion of related party transactions. (13) SUBSEQUENT EVENTS 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. June 30, 2023 | 10-Q 40 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS