What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-11-06 compared with 2023-08-04 · 211 added, 199 removed, 454 unchanged (47% of the section changed)

5 unchanged sentences

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

These forward-looking statements are subject to a number of risks, uncertainties and assumptions including those factors discussed in the "Risk Factors" contained in our Annual Report on Form 10-K for the year ended December 31, 2022 and Quarterly Report on Form 10-Q for the quarter ended March 31, 2023, which are incorporated herein by reference.

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 Reports on Form 10-Q for the quarters ended March 31, 2023 and June 30, 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.

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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.

Citizens operates through its insurance subsidiaries located in the United States, including Puerto Rico, and provides benefits to policyholders located throughout the United States and in 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.

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

The objective of our MD&A is to provide investors with information in order to assess the material changes in our financial condition from December 31, 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.

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 September 30, 2023 and the material changes in our results of operations for the three and nine months ended September 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.

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

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CITIZENS, INC.

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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

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

Because 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 nine months ended September 30, 2023 by 15% 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 nine months ended September 30, 2023 by 3% and 4%, respectively, primarily due to the impact of a higher level of surrenders and matured endowments during the last few years ( i.e ., fewer policies from which to collect renewal premiums).

September 30, 2023 | 10-Q 44

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.

Our net investment income increased for the three and nine months ended September 30, 2023 by 5% and 8%, 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 partnership investments.

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:

In the three and nine months ended September 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.

• Surrenders increased, which we believe is due to the number of our international life policies that are nearing maturity as well as policies that have passed their surrender charge period.

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

June 30, 2023 | 10-Q 43

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CITIZENS, INC.

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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.

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

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

The transfer of the international business was completed on August 31, 2023.

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

Our net income was $2.7 million and $13.7 million for the three and nine months ended September 30, 2023, respectively, compared to net income of $3.4 million and $12.3 million in the prior year periods, respectively.

The increase in net income for the nine months ended September 30, 2023 is primarily driven by the improvements in the fair value of our limited partnership investments, which are recorded as investment related gains (losses) in our financial statements, as well as higher net investment income in the current year period.

These improvements were partially offset by lower renewal year premiums in our life insurance business, lower property insurance premiums due to ceasing this line of business on June 30, 2023, higher general operating expenses and higher insurance benefits paid or provided, which as explained above is primarily due to higher surrenders and matured endowments.

Net revenue in the three months ended September 30, 2023 improved as compared to the three months ended September 30, 2022 for the same reasons as described above, however, net income in the period was negatively impacted by $1.2 million lower property insurance premiums due to no sales in the quarter versus the prior year quarter.

Both current-year periods were negatively impacted by higher policyholder remeasurement losses primarily due to unfavorable surrender experience in the Life Insurance segment.

Our basic net income per share of Class A common stock was $0.06 and $0.28 for the three and nine months ended September 30, 2023, respectively, compared to $0.07 and $0.25 in prior year periods.

Financial Condition at September 30, 2023

• Total assets of $1.6 billion

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• $4.8 billion of direct insurance in force

• Fully diluted income per share of Class A common stock of $0.22

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

September 30, 2023 | 10-Q 46

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

period to period and are not indicative of our operating results.

• Fully diluted income per share of Class A common stock of $0.27

• Book value per share of Class A common stock of $3.08.

From time-to-time, certain events may affect our business in ways that cause current or future results to differ from past results.

In addition to factors described in Part II, Item 1A, "Risk Factors" , the following events may impact our results of operations or financial condition:

The impact of inflation, which has led to market volatility starting in early 2022, has affected the fair value of our equity securities, leading to investment related losses in 2022 and the three and nine months ended September 30, 2023.

Investment related gains and losses can cause significant fluctuations from period to period and are not indicative of our operating results.

We believe that investment related gains and losses, whether realized from dispositions or unrealized from changes in market prices of equity securities, have no bearing in understanding our reported results or in evaluating the economic performance of our business.

These gains and losses have caused, and 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.

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.

RISING INTEREST RATES

Interest rates began to rise significantly in 2022 after being ultra-low for almost a decade, and have continued 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.

Because of this, we reported pre-tax net unrealized losses of $238.0 million on our available-for-sale securities at September 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.

IMPACT OF CEASING OPERATIONS OF OUR PROPERTY INSURANCE BUSINESS

However, because we strive to match our asset duration to our liability duration, as a life insurer, the vast majority of our total investments are invested in longer-term fixed maturity securities and we expect the market values to recover prior to the maturity dates of most of these investments.

Another impact rising interest rates may have on our business is that policyholders may surrender their policies in order to utilize the cash values to seek higher crediting rates through other types of investments.

CEASING OPERATIONS OF OUR PROPERTY INSURANCE BUSINESS

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

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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.

Because we ceased operations at the end of the second quarter, the property insurance premium amounts reflected in our income statements for the nine months ended September 30, 2023 reflect the remaining amount due of $0.7 million under the reinsurance contract for 2023.

Additionally, we did not collect premiums in the third quarter of 2023, as we did in the third quarter of 2022.

Accordingly, property premium revenue is less for the three and nine months ended September 30, 2023 compared to the prior year periods.

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

The cessation of this business is not reported as a discontinued

September 30, 2023 | 10-Q 47

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

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.

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See the discussion under Segment Operations below for detailed analysis.

The amount of insurance,

June 30, 2023 | 10-Q 45

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

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

Six Months Ended June 30, 2023 2022

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

Nine Months Ended September 30, 2023 2022

Issued Number of

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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.

These new products helped drive the 10% increase in total insurance issued in the nine months ended September 30, 2023, from $458.3 million in the first nine months of 2022 to $504.2 million in 2023.

Both of our segments experienced an increase in insurance issued with a higher number of policies issued in our Life Insurance segment and higher policy face amounts issued in our Home Service 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 68% of total insurance issued in this segment for the nine months ended September 30, 2023.

The Life Insurance segment also benefited from our new white label partnerships and final expense products introduced domestically, which accounted for over 18% of the number of policies issued.

September 30, 2023 | 10-Q 48

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

CONSOLIDATED RESULTS OF OPERATIONS

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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,

Three Months Ended Nine Months Ended

September 30, September 30,

(In thousands) 2023 2022 2023 2022

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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

Despite higher first year premium revenues in both segments, life insurance premium revenues decreased in the three and nine months ended September 30, 2023 compared to the same periods in 2022 due to lower renewal premiums.

Accident and health insurance premiums increased for the nine months ended September 30, 2023 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 nine months ended September 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.

September 30, 2023 | 10-Q 49

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,

Three Months Ended Nine Months Ended

September 30, September 30,

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

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Annualized yield on average invested assets 4.53 % 4.30 %

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.

Due to insurance regulations, fixed maturity securities constitute the vast majority, or 87%, of our investment portfolio based on fair value and thus provide the vast majority of our investment income.

Our total investment income increased by 4% and 7% for the three and nine months ended September 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.

Our yield increased 23 basis points to 4.53% in the nine months of 2023 compared to the prior year period due to investing in 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 recorded investment related losses during the three and nine months ended September 30, 2023 of $0.9 million and $0.5 million compared to losses of $5.0 million and $10.6 million during the same prior year periods.

As described above, 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;

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

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CITIZENS, INC.

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BENEFITS AND EXPENSES

Three Months Ended Six Months Ended

June 30, June 30,

Three Months Ended Nine Months Ended

September 30, September 30,

(In thousands) 2023 2022 2023 2022

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Total benefits and expenses $ 54,749 51,354 156,431 149,301

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.

Payments of claims and surrenders benefits constitute the majority of our expenses.

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

Claims and Surrenders.

Three Months Ended Six Months Ended

June 30, June 30,

Three Months Ended Nine Months Ended

September 30, September 30,

(In thousands) 2023 2022 2023 2022

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Total claims and surrenders $ 37,723 30,729 100,798 86,260

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

Death claim benefits decreased for the three and nine months ended September 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 nine months ended September 30, 2023 compared to the same periods in 2022 due to surrenders related to international policies that are nearing maturity as well as policies that have passed their surrender charge period.

While we have implemented retention initiatives over the past few years, we believe that the high interest rates are negatively affecting these efforts, as policyholders surrender their policies to re-invest the cash values in higher interest rate products.

September 30, 2023 | 10-Q 51

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

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

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

Explanation of other benefits and expenses

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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.

In the three and nine months ended September 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 and surrenders.

Policyholder Liability Remeasurement (Gain) Loss.

Most of our products are long-duration contracts that provide a specified, fixed amount of insurance benefit in exchange for a fixed premium.

When a policy is initially issued, we establish a "net premium ratio" ("NPR") using assumptions regarding expected premiums and policyholder benefit liabilities.

On a quarterly basis, we review actual versus expected experience in such quarter, which is reported as a policyholder liability remeasurement gain (if better performance than assumptions) or loss (if lower performance than assumptions).

Additionally, in the third quarter of each year, we update our cash flow assumptions to recalculate the NPR, with the impact on the liability for future policy benefits recognized as a policyholder liability remeasurement on a retrospective catch up basis.

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.

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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.

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

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

Capitalization and Amortization of Deferred Policy Acquisition Costs.

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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.

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CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

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,

Three Months Ended Nine Months Ended

September 30, September 30,

(In thousands) 2023 2022 2023 2022

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Total income (loss) before federal income tax expense $ 4,641 4,822 17,400 15,966

June 30, 2023 | 10-Q 49

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 .

Net income in our Life Insurance segment before federal income tax of $6.6 million and $20.4 million in the three and nine months ended September 30, 2023, respectively, increased from $5.1 million and $14.3 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,

Three Months Ended Nine Months Ended

September 30, September 30,

(In thousands) 2023 2022 2023 2022

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Income (loss) before federal income tax $ 6,550 5,072 20,395 14,272

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.

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CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

The main drivers of the year-over-year increases in income before federal income tax in the 2023 periods are higher net investment income and lower investment related losses.

These increases were partially offset by lower renewal premiums, higher surrenders benefits paid and higher policyholder liability remeasurement losses due to the higher levels of surrenders.

Life Insurance segment premium breakout is detailed below.

Three Months Ended Six Months Ended

June 30, June 30,

Three Months Ended Nine Months Ended

September 30, September 30,

(In thousands) 2023 2022 2023 2022

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Total premiums $ 31,148 31,696 86,128 88,461

June 30, 2023 | 10-Q 50

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

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

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

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

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

First year premiums increased 21% and 17% for three and nine months ended September 30, 2023, respectively, compared to the same periods in 2022, due to sales of new products and expanded domestic distribution.

Our total premiums for three and nine months ended September 30, 2023 decreased 2% 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 nine months ended September 30, 2023 as compared to the same periods in 2022.

As described above, this decline is due to high surrenders and matured endowments over the last several years.

International Life Insurance Premiums.

Life insurance premiums are generated largely from our international policyholders from over 75 different countries across the globe.

Life insurance premiums are generated largely from our international policyholders living in 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,

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

Three Months Ended Nine Months Ended

September 30, September 30,

(In thousands) 2023 2022 2023 2022

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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.

Our domestic in-force life insurance business consists primarily of closed blocks of business from various insurance companies we have acquired over the years.

As discussed, we have recently re-launched our domestic life insurance business through CICA Life Insurance Company of America by expanding our licenses to new states, developing new final expense and living benefit products, entering into new white label and other distribution agreements and obtaining a B+ A.M.

Because the majority of this business still consists of closed blocks of business, premiums in our domestic Life Insurance segment were lower in the three and nine months ended September 30, 2023 compared to the same prior year periods despite growth in our newly relaunched business.

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CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

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.

Our net investment income increased by 7% and 9% for the three and nine months ended September 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;

1 unchanged sentence

Investment Related Gains (Losses), Net.

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

June 30, 2023 | 10-Q 51

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

We recorded investment related losses of $0.4 million and $0.1 million during the three and nine months ended September 30, 2023, respectively, compared to investment related losses of $4.4 million and $8.6 million during the same prior year periods, respectively, resulting from the change in estimated fair market value for our limited partnership investments.

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,

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

Three Months Ended Nine Months Ended

September 30, September 30,

(In thousands) 2023 2022 2023 2022

6 unchanged sentences

Total claims and surrenders $ 32,419 24,742 83,826 67,768

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.

During the three and nine months ended September 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.

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

Surrender benefits increased for the three and nine months ended September 30, 2023 compared to the same periods in 2022, partially due to surrenders related to international policies that are nearing maturity as well as policies that have passed their surrender charge period.

Death claims benefits decreased for the three and nine months ended September 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

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 nine months ended September 30, 2023 compared to the same periods in 2022.

September 30, 2023 | 10-Q 55

CITIZENS, INC.

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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,

Three Months Ended Nine Months Ended

September 30, September 30,

(In thousands) 2023 2022 2023 2022

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Income (loss) before federal income tax $ (443) 950 1,514 5,030

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

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

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

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

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

June 30, 2023 | 10-Q 53

In our Home Service Insurance segment, we reported loss before federal income tax of $0.4 million and income of $1.5 million in the three and nine months ended September 30, 2023, respectively, as compared to income of $1.0 million and $5.0 million in the prior year periods.

In both the three and nine month periods ended September 30, 2023, the decreases were primarily driven by lower premiums due to the impact of ceasing our property insurance operations as of June 30, 2023 described above and higher future policy benefit reserves.

In the current year nine-month period, the decrease was also driven by higher other general expenses due to higher employee health benefit costs, partially offset by the improvement in investment related losses due to the improvements in the fair value of our equity securities.

Total premium revenue declined by 11% and 8% in the three and nine months ended September 30, 2023, respectively, compared to the same periods in 2022 due primarily to the impact of ceasing our property insurance operations as of June 30, 2023.

Our first year premiums increased 6% in the nine months ended September 30, 2023 compared to the same period in 2022.

September 30, 2023 | 10-Q 56

CITIZENS, INC.

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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,

Payments of claims and surrender benefits, which are the largest portion of our expenses, are summarized as follows:

Three Months Ended Nine Months Ended

September 30, September 30,

(In thousands) 2023 2022 2023 2022

7 unchanged sentences

Total claims and surrenders $ 5,304 5,987 16,972 18,492

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.

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

Death claim benefits decreased 15% in the three and nine months ended September 30, 2023 compared to the same three and nine months in 2022 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.

General expenses increased in the nine months ended September 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,

Three Months Ended Nine Months Ended

September 30, September 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.

Income (loss) before federal income tax

$ (1,466) (1,200) (4,509) (3,336)

This operating unit represents the administrative support functions for 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.

GAAP, which typically results in a 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.

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.

Our cash and invested assets at September 30, 2023 were $1.3 billion, of which 86% 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

September 30, 2023 | 10-Q 57

CITIZENS, INC.

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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

Carrying Value September 30, 2023 December 31, 2022

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

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Total cash, cash equivalents and invested assets $ 1,334,241 100.0 % $ 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.

(1) Includes $117.6 million and $133.2 million of securities guaranteed by third parties at September 30, 2023 and December 31, 2022, respectively.

(2) Includes $91.6 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.

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

The carrying value of the Company’s fixed maturity securities investment portfolio at September 30, 2023 was $1.15 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 September 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 September 30, 2023 from December 31, 2022 and fluctuates from period-to-period primarily due to the timing of operating and investing activities.

Other long-term investments increased by $10.2 million as of September 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

The Company’s fixed maturity securities investment portfolio at September 30, 2023 and December 31, 2022 included $284.0 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).

September 30, 2023 | 10-Q 58

CITIZENS, INC.

1 unchanged sentence

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

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

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

General Obligation Special Revenue Other Total % Based on Amortized

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Total $ 64,483 66,154 203,594 242,229 15,879 16,931 283,956 325,314 100.0 %

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

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Transportation 35,198 44,503 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

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

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

September 30, 2023 | 10-Q 59

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

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

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

General Obligation Special Revenue Other Total

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A — — 16,059 21,896 — — 16,059 21,896

BB and other — — 500 500 — — 500 500

Total $ 29,835 29,830 31,669 40,355 — — 61,504 70,185

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Total $ 29,835 29,830 31,669 40,355 — — 61,504 70,185

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

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

General Obligation Special Revenue Other Total

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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.

The Company did not record any credit valuation allowances on fixed maturity securities in either of the three and nine months ended September 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

September 30, 2023 | 10-Q 60

CITIZENS, INC.

3 unchanged sentences

(In thousands)

June 30, 2023 December 31, 2022

September 30, 2023 December 31, 2022

Fixed maturity securities $ 1,151,353 1,179,619

1 unchanged sentence

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

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

In the nine months ended September 30, 2023, our operations generated $15.4 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.

7 unchanged sentences

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

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

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

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

states of domicile and by the Puerto Rico Office of Commissioner of Insurance, which all 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.

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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.

As of September 30, 2023, we have not borrowed any money under the Credit Facility and have no immediate plans to do so.

INSURANCE COMPANY SUBSIDIARY LIQUIDITY AND CAPITAL RESOURCES

2 unchanged sentences

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

We have not had to liquidate a material amount of investments to pay our expenses and we did not do so in the six months ended June 30, 2023.

We have not had to liquidate a material amount of investments to pay our expenses.

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

September 30, 2023 | 10-Q 61

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

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

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.

In the nine months ended September 30, 2023, our operations provided $15.4 million in net cash.

Cash from Investing Activities.

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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.

Net cash outflows from investing activities totaled $18.5 million for the nine months ended September 30, 2023.

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

We purchased $50.1 million in fixed maturity securities and we also used $13.3 million to purchase other long-term investments.

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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.

Our death benefit payments have declined in the nine months ended September 30, 2023 and we believe mortality has normalized to pre-pandemic levels.

However, as previously discussed, surrender benefits have been higher than usual the last several years and have continued to increase in the first nine months of 2023 despite our retention initiatives.

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 withdrawal, but as many of our policies have reached the age where surrender charges have expired or significantly decreased, we are experiencing higher levels of surrenders.

Additionally, we believe that surrenders are increasing due to other reasons, including the loss of one of our biggest distributors in Venezuela, increasing interest rates which may encourage policyholders to seek higher rates of returns in different investment products, post-pandemic beliefs that life insurance may not be as important as it was during the pandemic, and inflationary pressures, which may cause policyholders to want the cash values of their policies due to decreased purchasing power elsewhere.

To the extent that early surrenders are higher than expected, our liquidity could be negatively impacted due to benefit payments as well as lower renewal premiums.

We continue to monitor surrenders and early withdrawals, as well as mortality experience.

Our endowment products have contractual maturity dates and 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 September 30, 2023, will mature in the next five years.

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

1 unchanged sentence

Alternatively, if the policyholders were to leave the money on deposit with the Company at interest, our profitability could be impacted if the product guaranteed rate is higher than the market rate we are earning on our investments.

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

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

RBC considers the type of business written by an insurance company, the quality of its assets, and

September 30, 2023 | 10-Q 62

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

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.

1 unchanged sentence

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

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.

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

CICA PR is a Puerto Rico domiciled company.

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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.

CICA PR began issuing new business as of January 1, 2023 and received the transfer of all of CICA International's in force insurance business as of August 31, 2023.

On that date, Citizens entered into a Keep Well Agreement with CICA PR to replace the Keep Well Agreement that had been in place between Citizens and CICA International (Bermuda).

The Keep Well Agreement requires Citizens to contribute up to $10 million in capital to CICA PR as necessary to ensure that CICA PR maintains at least either (i) 112% of its required ratio of premiums to capital and surplus, or (ii) 200% of the minimum capital and surplus requirement, whichever is higher.

The initial term of the Keep Well Agreement is 12 months.

Since CICA PR's capital exceeds both of the metrics, Citizens is not required to make a capital contribution.

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.

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

Item 1, Note 7.

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Approximately 93% 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

The remaining 7% are attributed to other costs that vary with and are directly related to the

September 30, 2023 | 10-Q 63

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

successful acquisition of new insurance business.

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

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

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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.

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

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

4 unchanged sentences

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.

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

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

4 unchanged sentences

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

September 30, 2023 | 10-Q 64

CITIZENS, INC.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a smaller reporting company, we have elected to comply with certain scaled disclosure reporting obligations and therefore are not required to provide the information required by this Item.

June 30, 2023 | 10-Q 61

CITIZENS, INC.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis