CITIZENS, INC. 10-Q

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS This section and other parts of this Quarterly Report on Form 10-Q ("Form 10-Q") contain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Forward-looking statements can also be identified by words such as “future,” “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “will,” “would,” “could,” “can,” “may,” and similar terms. 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 and Quarterly Report on Form 10-Q for the quarter ended March 31, 2023, 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. The Company assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law. The U.S. Securities and Exchange Commission ("SEC") maintains a website that contains reports, proxy and information statements, and other information regarding issuers, including the Company, that file electronically with the SEC. The public can obtain any documents that the Company files with the SEC at http://www.sec.gov. We also make available, free of charge, through our website (http://www.citizensinc.com), our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Section 16 Reports filed by officers and directors, news releases, and, if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable after we electronically file such reports with, or furnish such reports to, the SEC. We are not including any of the information contained on our website as part of, or incorporating it by reference into, this Form 10-Q. OVERVIEW For almost 50 years, we have been fulfilling the needs of our policyholders and their families by providing insurance products that offer both living and death benefits. Citizens conducts insurance related operations through its insurance subsidiaries, which provide benefits to residents in 32 U.S. 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. As an insurance provider, we collect premiums on an ongoing basis from our policyholders and invest the majority of the premiums to pay future benefits, including claims and surrenders and policyholder dividends. Accordingly, the Company derives its revenues principally from: (1) life insurance premiums earned for insurance coverages provided to insureds in our two operating segments – Life Insurance and Home Service Insurance; and (2) net investment income. In addition to paying and reserving for insurance benefits that we pay to our policyholders, our expenses consist primarily of the costs of selling our insurance products (e.g., commissions, underwriting, marketing expenses), operating expenses and income taxes. Objective of our Management's Discussion and Analysis 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 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. June 30, 2023 | 10-Q 41 Table of Contents 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 We see the following as the primary factors that drive our operating results: • Sales ( i.e. , premium revenues) • Investments • Claims and surrenders • Operating expenses Premium revenues and investment income are our two primary sources of income and thus key to our profitability. Premium revenues consist of both new sales (first year premiums) and "resells" ( i.e ., retaining the policy), which lead to renewal premiums. 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 Table of Contents 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. 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 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS 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 • Total investments of $1.4 billion; fixed maturity securities comprised 88% of total investments • $4.9 billion of direct insurance in force • No debt • Fully diluted income per share of Class A common stock of $0.22 IMPACT OF INFLATION AND RISING INTEREST RATES 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 Table of Contents 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 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 $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. 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 We manage our business in two operating segments: Life Insurance and Home Service Insurance. Our insurance operations are the primary focus of the Company, as these operations generate most of our income. See the discussion under Segment Operations below for detailed analysis. The amount of insurance, June 30, 2023 | 10-Q 45 Table of Contents 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 Amount of Insurance Issued Number of Policies Issued Average Policy Face Amount Issued Amount of Insurance Issued Number of Policies Issued Average Policy Face Amount Issued Ordinary Life Policies: Life Insurance $ 175,176,911 2,040 $ 85,871 $ 140,351,224 1,849 $ 75,907 Home Service Insurance 153,445,775 12,005 12,782 128,118,014 14,134 9,065 Total $ 328,622,686 14,045 $ 268,469,238 15,983 As we previously disclosed, our strategic initiatives include the introduction of new products tailored to our specific markets. 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. CONSOLIDATED RESULTS OF OPERATIONS A discussion of consolidated results is presented below, followed by a discussion of segment operations and financial results by segment. REVENUES Our revenues are generated primarily by insurance renewal premiums and investment income from invested assets. Three Months Ended Six Months Ended June 30, June 30, (In thousands) 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 Premium Income. 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 Table of Contents 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 Six Months Ended June 30, June 30, (In thousands, except for %) 2023 2022 2023 2022 Gross investment income: Fixed maturity securities $ 15,006 14,259 29,951 28,142 Equity securities 159 144 324 295 Policy loans 1,514 1,517 3,053 3,106 Long-term investments 1,091 576 2,012 1,099 Other investment income 140 31 264 52 Total investment income 17,910 16,527 35,604 32,694 Investment expenses (669) (635) (1,289) (1,315) Net investment income $ 17,241 15,892 34,315 31,379 Net investment income, annualized $ 68,630 62,758 Average invested assets, at amortized cost $ 1,518,827 1,476,336 Annualized yield on average invested assets 4.52 % 4.25 % 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 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 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 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS BENEFITS AND EXPENSES Three Months Ended Six Months Ended June 30, June 30, (In thousands) 2023 2022 2023 2022 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 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 Six Months Ended June 30, June 30, (In thousands) 2023 2022 2023 2022 Claims and Surrenders: Death claim benefits $ 5,636 5,873 11,018 12,890 Surrender benefits 14,990 11,607 27,306 23,866 Endowment benefits 2,076 2,152 4,185 4,286 Matured endowment benefits 9,062 6,133 17,827 12,267 Property claims 366 163 708 305 A&H and other policy benefits 646 1,169 2,031 1,917 Total claims and surrenders $ 32,776 27,097 63,075 55,531 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 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS Explanation of other benefits and expenses Increase (Decrease) in Future Policy Benefit Reserves. Future policy benefit reserves reflect the liability established to provide for the payment of policy benefits that we expect to pay in the future and thus generally increase when we have a larger in force block of business due to higher sales and better persistency (i.e., more policies on which we expect to pay future benefits) and decrease when we have lower sales and persistency. 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. Commissions. 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. 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. Costs capitalized include certain commissions, policy issuance costs, and underwriting and agency expenses that relate to successful sales efforts for insurance contracts and thus fluctuate primarily with first year sales. Amortization is on a constant level basis for the grouped contracts over the expected term of the related contracts to approximate straight-line amortization. SEGMENT OPERATIONS Our business is comprised of two operating business segments, as detailed below. • Life Insurance • Home Service Insurance These segments are reported in accordance with U.S. GAAP. 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 Six Months Ended June 30, June 30, (In thousands) 2023 2022 2023 2022 Income (loss) before federal income tax expense: Segments: Life Insurance $ 7,473 3,336 13,845 9,200 Home Service Insurance 624 2,002 1,957 4,080 Total segments 8,097 5,338 15,802 13,280 Other Non-Insurance Enterprises (2,053) (1,372) (3,043) (2,136) Total income (loss) before federal income tax expense $ 6,044 3,966 12,759 11,144 June 30, 2023 | 10-Q 49 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS LIFE INSURANCE 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 Revenues: Premiums $ 28,773 29,834 54,980 56,765 Net investment income 13,498 12,347 26,809 24,318 Investment related gains (losses), net 738 (3,984) 301 (4,277) Other income 856 633 1,735 1,721 Total revenues 43,865 38,830 83,825 78,527 Benefits and expenses: Insurance benefits paid or provided: Claims and surrenders 26,968 21,568 51,407 43,026 Increase (decrease) in future policy benefit reserves (1,863) 3,006 (3,683) 4,382 Policyholder liability remeasurement (gain) loss 885 580 1,701 994 Policyholders' dividends 1,255 1,509 2,356 2,859 Total insurance benefits paid or provided 27,245 26,663 51,781 51,261 Commissions 4,765 4,792 9,524 8,598 Other general expenses 5,646 5,358 11,105 11,049 Capitalization of deferred policy acquisition costs (4,457) (4,307) (8,817) (7,613) Amortization of deferred policy acquisition costs 3,167 2,950 6,329 5,970 Amortization of cost of insurance acquired 26 38 58 62 Total benefits and expenses 36,392 35,494 69,980 69,327 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 Six Months Ended June 30, June 30, (In thousands) 2023 2022 2023 2022 Premiums: First year $ 2,805 2,766 5,399 4,753 Renewal 25,968 27,068 49,581 52,012 Total premiums $ 28,773 29,834 54,980 56,765 June 30, 2023 | 10-Q 50 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS Premiums. 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 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 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 Country: Colombia $ 6,281 6,365 12,338 11,896 Taiwan 3,590 4,163 8,892 8,678 Venezuela 3,682 4,204 7,404 7,955 Ecuador 3,157 3,319 6,403 6,094 Argentina 2,396 2,731 4,580 4,438 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 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 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. 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 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS Claims and Surrenders. 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 Claims and Surrenders: Death claim benefits $ 1,391 1,519 2,139 2,509 Surrender benefits 13,982 10,776 25,610 22,413 Endowment benefits 2,073 2,149 4,181 4,278 Matured endowment benefits 8,915 5,981 17,535 11,988 A&H and other policy benefits 607 1,143 1,942 1,838 Total claims and surrenders $ 26,968 21,568 51,407 43,026 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. We expect this trend to continue over the next few years. 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. 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 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 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS HOME SERVICE INSURANCE Detailed results of operations for the Home Service Insurance segment for the periods indicated are as follows: Three Months Ended Six Months Ended June 30, June 30, (In thousands) 2023 2022 2023 2022 Revenues: Premiums $ 10,953 12,390 22,995 24,823 Net investment income 3,450 3,283 6,920 6,527 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 Benefits and expenses: Insurance benefits paid or provided: Claims and surrenders 5,808 5,529 11,668 12,505 Increase (decrease) in future policy benefit reserves 919 724 1,761 (538) Policyholder liability remeasurement (gain) loss 71 87 135 341 Policyholders' dividends 6 6 13 9 Total insurance benefits paid or provided 6,804 6,346 13,577 12,317 Commissions 4,118 4,132 8,372 7,999 Other general expenses 4,299 3,515 8,767 7,865 Capitalization of deferred policy acquisition costs (2,087) (1,877) (4,085) (3,352) Amortization of deferred policy acquisition costs 507 518 1,159 1,057 Amortization of cost of insurance acquired 127 113 256 218 Total benefits and expenses 13,768 12,747 28,046 26,104 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. Premiums. 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 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS Claims and Surrenders. 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 Six Months Ended June 30, June 30, (In thousands) 2023 2022 2023 2022 Claims and Surrenders: Death claim benefits $ 4,245 4,354 8,879 10,381 Surrender benefits 1,008 831 1,696 1,453 Endowment benefits 3 3 4 8 Matured endowment benefits 147 152 292 279 Property claims 366 163 708 305 A&H and other policy benefits 39 26 89 79 Total claims and surrenders $ 5,808 5,529 11,668 12,505 The majority of claims and surrender benefits in our Home Service Insurance segment relate to death claim benefits. 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 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 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) This operating unit represents the administrative support entities to the insurance operations. Its revenues are primarily intercompany and have been eliminated in consolidation under U.S. GAAP, which typically results in a segment loss. Revenue in this operating unit consists primarily of net investment income and investment related gains or losses, while expenses consist of other general expenses related to corporate functions. INVESTMENTS Our investments are an integral part of our business success. 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. June 30, 2023 | 10-Q 54 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS 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 June 30, 2023 December 31, 2022 (In thousands, except for %) Amount % Amount % Cash, Cash Equivalents and Invested Assets Fixed maturity securities: U.S. Treasury and U.S. Government-sponsored enterprises $ 9,453 0.7 % $ 13,278 1.0 % Corporate 744,105 53.4 715,645 52.5 States and political subdivisions (1) 301,807 21.6 307,358 22.5 Mortgage-backed (2) 100,550 7.2 99,995 7.3 Asset-backed 50,468 3.6 43,242 3.2 Foreign governments 100 — 101 — Total fixed maturity securities 1,206,483 86.5 1,179,619 86.5 Short-term investments 249 — 1,241 0.1 Cash and cash equivalents 20,914 1.6 22,973 1.7 Other investments: Policy loans 77,944 5.6 78,773 5.8 Equity securities 11,710 0.8 11,590 0.8 Other long-term investments 77,262 5.5 69,558 5.1 Total cash, cash equivalents and invested assets $ 1,394,562 100.0 % $ 1,363,754 100.0 % (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 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 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 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS 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 June 30, 2023. General Obligation Special Revenue Other Total % Based on Amortized Cost (In thousands, except for %) Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost State and political subdivision fixed maturity securities including third-party guarantees AAA $ 14,007 13,940 6,708 6,897 — — 20,715 20,837 6.3 % AA 48,188 48,599 113,351 129,900 10,529 11,086 172,068 189,585 57.2 A 5,871 6,251 84,219 94,590 4,416 4,401 94,506 105,242 31.7 BBB 617 655 8,285 9,494 1,369 1,450 10,271 11,599 3.5 BB and other 2,983 3,179 1,264 1,266 — — 4,247 4,445 1.3 Total $ 71,666 72,624 213,827 242,147 16,314 16,937 301,807 331,708 100.0 % State and political subdivision fixed maturity securities excluding third-party guarantees AA $ 33,850 34,096 37,118 41,142 6,484 6,500 77,452 81,738 24.6 % A 16,635 17,174 120,166 137,393 6,876 7,132 143,677 161,699 48.7 BBB 2,548 2,558 24,275 27,500 1,585 1,855 28,408 31,913 9.6 BB and other 18,633 18,796 32,268 36,112 1,369 1,450 52,270 56,358 17.1 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 June 30, 2023. (In thousands, except for %) Fair Value Amortized Cost % of Total Fair Value Education $ 47,105 53,191 15.6 % Utilities 44,910 48,556 14.9 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 June 30, 2023. 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 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS The table below represents the Company's detailed exposure to municipal bonds in Texas at June 30, 2023. General Obligation Special Revenue Other Total (In thousands) Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Texas state and political subdivision fixed maturity securities including third-party guarantees AAA $ 13,506 13,434 2,612 2,642 — — 16,118 16,076 AA 17,576 17,546 14,034 15,822 — — 31,610 33,368 A — — 17,288 22,189 — — 17,288 22,189 BB and other — — 500 500 — — 500 500 Total $ 31,082 30,980 34,434 41,153 — — 65,516 72,133 Texas state and political subdivision fixed maturity securities excluding third-party guarantees AA $ 25,090 24,989 2,096 2,092 — — 27,186 27,081 A 4,853 4,850 26,625 32,861 — — 31,478 37,711 BBB 1,139 1,141 3,243 3,419 — — 4,382 4,560 BB and other — — 2,470 2,781 — — 2,470 2,781 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 June 30, 2023. General Obligation Special Revenue Other Total (In thousands) Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost California state and political subdivision fixed maturity securities including third-party guarantees AA $ 1,936 2,042 29,617 35,399 2,460 2,731 34,013 40,172 A 1,286 1,650 7,068 8,922 — — 8,354 10,572 BBB — — 865 865 — — 865 865 Total $ 3,222 3,692 37,550 45,186 2,460 2,731 43,232 51,609 California state and political subdivision fixed maturity securities excluding third-party guarantees AA $ 455 445 4,511 5,257 — — 4,966 5,702 A 2,767 3,247 15,346 18,966 2,460 2,731 20,573 24,944 BBB — — 3,657 3,920 — — 3,657 3,920 BB and other — — 14,036 17,043 — — 14,036 17,043 Total $ 3,222 3,692 37,550 45,186 2,460 2,731 43,232 51,609 IMPAIRMENT CONSIDERATIONS RELATED TO INVESTMENTS IN FIXED MATURITY AND EQUITY SECURITIES The Company did not record any credit valuation allowances on fixed maturity securities in either of the three and 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. June 30, 2023 | 10-Q 57 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS LIQUIDITY AND CAPITAL RESOURCES Below are our primary capital resources (based on carrying value of each) as of the periods indicated. (In thousands) June 30, 2023 December 31, 2022 Fixed maturity securities $ 1,206,483 1,179,619 Cash and cash equivalents 20,914 22,973 Liquidity refers to a company's ability to generate sufficient cash flows to meet the needs of its operations. 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. We currently anticipate meeting our short-term and long-term cash needs with cash generated by our insurance operations and from our invested assets. From time-to-time, we may raise capital by selling shares in our SIP (as defined below) and we may also access our Credit Facility if needed (also as described below). PARENT COMPANY LIQUIDITY AND CAPITAL RESOURCES Citizens is a holding company and has minimal operations of its own. Our assets consist of the capital stock of our subsidiaries, cash and investments. Our liquidity requirements are met primarily from two sources: cash generated from our operating subsidiaries and our invested assets. Our ability to obtain cash from our insurance subsidiaries depends primarily upon the availability of statutorily permissible payments, including payments Citizens receives from service agreements with our insurance subsidiaries and dividends from the subsidiaries. The ability to make payments to the holding company is limited by applicable laws and regulations of Bermuda, Puerto Rico and U.S. 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 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. In addition to the above-mentioned sources of cash, we offer a Stock Investment Plan ("SIP"), whereby investors, policyholders, independent contractors and agents, employees and directors can directly purchase our stock. At our option, purchases of stock under the SIP can be made from newly issued or treasury stock, rather than in the open market, in which case, we can raise capital by selling our shares. In 2021, we entered into a Credit Facility with Regions Bank. See Part I, Item 1, Note 7. Commitments and Contingencies in the notes to our consolidated financial statements, herein, for a description of the Credit Facility. The Credit Facility provides additional liquidity to the Company for short-term and longer-term needs. 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 The liquidity requirements of our insurance operations are primarily met by premium revenues, investment income and investment maturities or sales. Primary cash needs relate to payments of policyholder benefits, investment purchases and operating expenses. 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 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. See Contractual Obligations and Off-balance Sheet Arrangements in our Form 10-K and below for a discussion of known and estimated cash needs. Cash flow projections and cash flow tests under various market interest rate scenarios are performed annually to assist in evaluating liquidity needs and adequacy. June 30, 2023 | 10-Q 58 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS Cash from Operating Activities. Cash provided by or used in operating activities is an important liquidity metric because it reflects, during a given period, the amount of cash generated that is available to pay our operating expenses, invest in our business or make strategic acquisitions. In the six months ended June 30, 2023, our operations provided $12.2 million in net cash. Cash from Investing Activities. We have traditionally also had significant cash flows from both scheduled and unscheduled investment security maturities, redemptions, and prepayments. These cash flows, for the most part, are reinvested in fixed income securities and to a lesser extent limited partnerships or other alternative investments. Net cash outflows from investing activities totaled $11.9 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. We purchased $27.6 million in fixed maturity securities and we also used $9.4 million to purchase other long-term investments. 87% of our total cash, cash equivalents and investments consist of marketable fixed maturity securities classified as available-for-sale that could be readily converted to cash for liquidity needs. Trends, Demands and Restrictions on our Uses of Cash Because claims and surrenders are our largest expense, a primary liquidity concern is the risk of either (i) an extraordinary level of early policyholder surrenders, or (ii) higher than expected mortality experience. In order to mitigate the risk of early policyholder surrenders, we include provisions in our insurance policies, such as surrender charges, that help limit and discourage early withdrawals. As previously discussed, surrender benefits had been higher than usual the last several years as many of our policies have reached the age where surrender charges have expired and due to other reasons, like the loss of one of our biggest distributors in Venezuela. 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. We continue to monitor surrenders and early withdrawals. Our endowment products provide the policyholder with alternatives once the policy matures - they can choose to take a lump sum payout or leave the money on deposit at interest with the Company. 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. Meeting these distributions could require the Company to sell its investments at inopportune times to pay policyholder withdrawals. Alternatively, if the policyholders were to leave the money on deposit with the Company at interest, our profitability could be impacted if the product guaranteed rate is higher than the market rate we are earning on our investments. We currently anticipate that our available operating cash flow and capital resources will be adequate to meet our needs for funds, but we 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. Our domestic companies are subject to minimum capital requirements set by the NAIC in the form of risk-based capital ("RBC"). RBC considers the type of business written by an insurance company, the quality of its assets, and various other aspects of an insurance company's business to develop a minimum level of capital called "Authorized Control Level Risk-Based Capital". This level of capital is then compared to an adjusted statutory capital that includes capital and surplus as reported under statutory accounting principles, plus certain investment reserves. Should the ratio of adjusted statutory capital to control level RBC fall below 200% for our domestic companies, a series of remedial actions by the affected company would be required. Additionally, we have a parental guarantee between Citizens and CICA, Citizens' wholly-owned subsidiary domiciled in Colorado, to maintain a RBC level above 350%. At June 30, 2023, our domestic insurance subsidiaries were above the required minimum RBC levels. June 30, 2023 | 10-Q 59 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS CICA International is a Bermuda domiciled company. The BMA requires Bermuda insurers to maintain available statutory economic capital and surplus at a level equal to or in excess of the BMA's Enhanced Capital Requirement, which requires a certain Target Capital Level ("TCL"). 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%. Since CICA International’s capital level currently exceeds 120%, Citizens is not currently required to make a capital contribution. Any capital injection that Citizens is required to make under the parental guarantee with CICA or under the Keep Well Agreement with CICA International could negatively impact the Company’s capital resources and liquidity. 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 OIC that includes proposed minimum capital and surplus. CICA PR is required to maintain a minimum of $750,000 in capital and maintain a premium to surplus ratio of 7 to 1. CICA PR began issuing new business as of January 1, 2023 and since higher costs are associated with new business than renewal business (e.g., first year commissions), we expect that Citizens will have to contribute capital to CICA PR in the foreseeable future in order to maintain the required premium to surplus ratio. Like with CICA International, any capital that Citizens is required to contribute could negatively impact the Company's capital resources and liquidity. CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS As of 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. Commitments and Contingencies in the notes to our consolidated financial statements herein and in Part II, Item 7, Contractual Obligations and Off-Balance Sheet Arrangements in our Form 10-K . We do not utilize special purpose entities as investment vehicles, nor are there any such entities in which we have an investment that engage in speculative activities of any nature, and we do not use such investments to hedge our investment positions. CRITICAL ACCOUNTING POLICIES We believe that the accounting policies set forth in Part I, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations - "Critical Accounting Policies" and Part IV, Item 15, Note 1. Summary of Significant Accounting Policies of our consolidated financial statements in our Form 10-K continue to describe the significant judgments and estimates used in the preparation of our consolidated financial statements except as follows. The following items have changed due to adoption of Accounting Standard Update ("ASU") No. 2018-12, Financial Services-Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts. DEFERRED POLICY ACQUISITION COSTS DAC are costs that are incremental and directly related to the successful acquisition of new or renewal insurance contracts. Such costs include the incremental direct costs of contract acquisition, such as sales commissions; the portion of employees’ total compensation and payroll-related fringe benefits related directly to time spent performing acquisition activities, such as underwriting, issuing, and processing policies for contracts that have actually been acquired; and other costs related directly to acquisition activities that would not have been incurred if the contract had not been acquired. Inherent in the capitalization and amortization of DAC are certain management judgements about what acquisition costs are deferred. Approximately 92% of our capitalized DAC are attributed to first year and renewal excess commissions. 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 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS DAC is amortized on a constant level basis over the expected term of the related contracts to approximate straight-line amortization. For the Life Insurance Segment, the constant level basis used is policy count in force. For the Home Service Insurance Segment, the constant level basis used is face amount in force. The constant level bases used for amortization are projected using mortality and lapse assumptions that are based on the Company’s experience, industry data, and other factors at the end of each reporting period and are consistent with those used for the liability for future policy benefit life reserves. Annually, the Company completes experience studies to evaluate mortality and lapse. If those assumptions are updated, the DAC amortization basis is recalculated and the impact of the assumption change will be reflected in the cohort level amortization in future periods. COST OF INSURANCE ACQUIRED The Company recognizes an intangible asset that arises in the application of 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. Inherent in the amortization of COIA are certain management judgements about the ending asset balance and the annual amortization. The key assumptions are based upon interest, mortality and lapses at the time of purchase. A recoverability test that considers, among other things, actual experience and projected future experience is performed at least annually. These annual recoverability tests are based initially on an estimate of the available premium (gross premium less the benefit and expense portion of premium) for the next 50 years using best estimate assumptions related to interest rates, mortality and lapses. Management believes that our COIA is recoverable for the three 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. POLICY LIABILITIES As premium revenue is recognized, a liability for future policy benefits is accrued. The liability for a future policy benefit is the present value of estimated future policy benefits to be paid to or on behalf of policyholders less the present value of estimated future net premiums to be collected from policyholders. The liability is estimated using current assumptions that include investment yields, discount rate, mortality and lapses and withdrawals. These current assumptions are based on judgements that consider the Company’s historical experience, industry data, and other factors. Annually, the Company completes experience studies to evaluate mortality and lapse. The results of these studies are used to update current year best estimate assumptions used in establishing benefit liabilities and DAC. The current discount rate assumption is a yield curve that equals the yield of an upper-medium grade fixed income instrument, based on an A-quality corporate bond. The current discount rate assumption is updated quarterly and used to remeasure the liability at the reporting date, with the resulting change reflected in other comprehensive income. For liability cash flows that are projected beyond the duration of market-observable A credit-rated fixed-income instruments, the Company uses the last market-observable yield level and uses linear interpolation to determine yield assumptions for durations that do not have market observable yields. The locked-in discount rate for policies issued prior to transition equals the rate set at contract issuance. For current year issues, the locked-in discount rate is the average of the current year quarterly discount rates and will change throughout the year as new discount rates are calculated, with the change reflected in net income. Item 3. 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 Table of Contents CITIZENS, INC.