CITIZENS, INC. 10-Q

Item 1. FINANCIAL STATEMENTS CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Balance Sheets (Unaudited) (In thousands) September 30, 2023 December 31, 2022 Assets Investments: Fixed maturity securities available-for-sale, at fair value (amortized cost: $ 1,389,390 and $ 1,381,318 in 2023 and 2022, respectively) $ 1,151,353 1,179,619 Equity securities, at fair value 10,555 11,590 Policy loans 75,750 78,773 Other long-term investments (portion measured at fair value $ 79,535 and $ 66,846 in 2023 and 2022, respectively) 79,798 69,558 Short-term investments — 1,241 Total investments 1,317,456 1,340,781 Cash and cash equivalents 16,785 22,973 Accrued investment income 17,123 17,131 Reinsurance recoverable 3,782 4,560 Deferred policy acquisition costs 171,417 162,927 Cost of insurance acquired 10,182 10,647 Current federal income tax receivable — 601 Property and equipment, net 12,009 12,926 Due premiums 9,661 11,829 Other assets (less allowance for losses of $ 357 and $ 347 in 2023 and 2022, respectively) 6,225 6,328 Total assets $ 1,564,640 1,590,703 See accompanying Notes to Consolidated Financial Statements. September 30, 2023 | 10-Q 2 Table of Contents CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Balance Sheets, Continued (Unaudited) (In thousands, except share amounts) September 30, 2023 December 31, 2022 Liabilities and Stockholders' Equity Liabilities: Policy liabilities: Future policy benefit reserves: Life insurance $ 1,147,601 1,198,647 Accident and health insurance 877 767 Total future policy benefit reserves 1,148,478 1,199,414 Policyholders' funds: Annuities 129,909 121,422 Dividend accumulations 44,102 41,663 Premiums paid in advance 35,453 36,384 Policy claims payable 5,943 9,884 Other policyholders' funds 7,218 7,501 Total policyholders' funds 222,625 216,854 Total policy liabilities 1,371,103 1,416,268 Commissions payable 1,681 1,967 Current federal income tax payable 652 — Deferred federal income tax liability 2,097 3,653 Payable for securities in process of settlement 250 — Other liabilities 36,110 41,025 Total liabilities 1,411,893 1,462,913 Commitments and contingencies ( Note 7 ) Stockholders' Equity: Common stock: Class A, no par value, 100,000,000 shares authorized, 53,880,359 and 53,758,176 shares issued and outstanding in 2023 and 2022, respectively, including shares in treasury of 4,261,005 in 2023 and 3,935,581 in 2022 268,423 268,147 Class B, no par value, 2,000,000 shares authorized, 1,001,714 shares issued and outstanding in 2023 and 2022, including shares in treasury of 1,001,714 in 2023 and 2022 3,184 3,184 Retained earnings 31,332 16,309 Accumulated other comprehensive income (loss) ( 126,667 ) ( 137,044 ) Treasury stock, at cost ( 23,525 ) ( 22,806 ) Total stockholders' equity 152,747 127,790 Total liabilities and stockholders' equity $ 1,564,640 1,590,703 See accompanying Notes to Consolidated Financial Statements. September 30, 2023 | 10-Q 3 Table of Contents CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, (In thousands, except per share amounts) 2023 2022 2023 2022 Revenues: Premiums: Life insurance $ 41,794 42,423 118,020 120,930 Accident and health insurance 296 299 1,201 865 Property insurance ( 64 ) 1,153 780 3,668 Net investment income 17,372 16,604 51,687 47,983 Investment related gains (losses), net ( 892 ) ( 4,991 ) ( 477 ) ( 10,589 ) Other income 884 688 2,620 2,410 Total revenues 59,390 56,176 173,831 165,267 Benefits and Expenses: Insurance benefits paid or provided: Claims and surrenders 37,723 30,729 100,798 86,260 Increase (decrease) in future policy benefit reserves ( 3,880 ) 653 ( 5,802 ) 4,497 Policyholder liability remeasurement (gain) loss 1,024 396 2,860 1,731 Policyholders' dividends 1,414 1,389 3,783 4,257 Total insurance benefits paid or provided 36,281 33,167 101,639 96,745 Commissions 9,444 9,210 27,340 25,807 Other general expenses 11,949 11,559 35,477 32,989 Capitalization of deferred policy acquisition costs ( 7,132 ) ( 6,372 ) ( 20,034 ) ( 17,337 ) Amortization of deferred policy acquisition costs 4,056 3,624 11,544 10,651 Amortization of cost of insurance acquired 151 166 465 446 Total benefits and expenses 54,749 51,354 156,431 149,301 Income (loss) before federal income tax 4,641 4,822 17,400 15,966 Federal income tax expense (benefit) 1,943 1,415 3,704 3,618 Net income (loss) 2,698 3,407 13,696 12,348 Per Share Amounts: Basic earnings (losses) per share of Class A common stock 0.06 0.07 0.28 0.25 Diluted earnings (losses) per share of Class A common stock 0.05 0.06 0.27 0.24 Other Comprehensive Income (Loss): Unrealized gains (losses) on fixed maturity securities: Unrealized holding gains (losses) arising during period ( 59,817 ) ( 88,382 ) ( 36,811 ) ( 340,678 ) Reclassification adjustment for losses (gains) included in net income (loss) 419 43 481 78 Unrealized gains (losses) on fixed maturity securities, net ( 59,398 ) ( 88,339 ) ( 36,330 ) ( 340,600 ) Change in current discount rate for liability for future policy benefits 60,054 73,214 45,825 345,258 Income tax expense (benefit) on other comprehensive income items ( 1,040 ) ( 184 ) ( 882 ) 6,162 Other comprehensive income (loss) 1,696 ( 14,941 ) 10,377 ( 1,504 ) Total comprehensive income (loss) $ 4,394 ( 11,534 ) 24,073 10,844 See accompanying Notes to Consolidated Financial Statements. September 30, 2023 | 10-Q 4 Table of Contents CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Stockholders' Equity (Unaudited) Common Stock Retained Earnings (Accumulated Deficit) Accumulated Other Comprehensive Income (Loss) Treasury Stock Total Stockholders' Equity (In thousands) Class A Class B Balance at December 31, 2022 $ 268,147 3,184 16,309 ( 137,044 ) ( 22,806 ) 127,790 Comprehensive income (loss): Net income (loss) — — 4,872 — — 4,872 Other comprehensive income (loss) — — — 21,579 — 21,579 Total comprehensive income (loss) — — 4,872 21,579 — 26,451 Stock-based compensation 50 — — — — 50 Balance at March 31, 2023 268,197 3,184 21,181 ( 115,465 ) ( 22,806 ) 154,291 Comprehensive income (loss): Net income (loss) — — 6,126 — — 6,126 Other comprehensive income (loss) — — — ( 12,898 ) — ( 12,898 ) Total comprehensive income (loss) — — 6,126 ( 12,898 ) — ( 6,772 ) Acquisition of treasury stock — — — — ( 719 ) ( 719 ) Stock-based compensation 46 — — — — 46 Balance at June 30, 2023 268,243 3,184 27,307 ( 128,363 ) ( 23,525 ) 146,846 Comprehensive income (loss): Net income (loss) — — 2,698 — — 2,698 Other comprehensive income (loss) — — — 1,696 — 1,696 Total comprehensive income (loss) — — 2,698 1,696 — 4,394 Stock-based compensation 180 — — — — 180 Other 1 — — 1,327 — — 1,327 Balance at September 30, 2023 $ 268,423 3,184 31,332 ( 126,667 ) ( 23,525 ) 152,747 1 See Note 10 - Income Taxes for details. See accompanying Notes to Consolidated Financial Statements. September 30, 2023 | 10-Q 5 Table of Contents CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Stockholders' Equity, Continued (Unaudited) Common Stock Retained Earnings (Accumulated Deficit) Accumulated Other Comprehensive Income (Loss) Treasury Stock Total Stockholders' Equity (In thousands) Class A Class B Balance at December 31, 2021 $ 265,561 3,184 ( 9,698 ) ( 138,989 ) ( 20,101 ) 99,957 Comprehensive income (loss): Net income (loss) — — 6,449 — — 6,449 Other comprehensive income (loss) — — — 17,189 — 17,189 Total comprehensive income (loss) — — 6,449 17,189 — 23,638 Issuance of common stock 1,788 — — — — 1,788 Stock-based compensation 93 — — — — 93 Balance at March 31, 2022 267,442 3,184 ( 3,249 ) ( 121,800 ) ( 20,101 ) 125,476 Comprehensive income (loss): Net income (loss) — — 2,492 — — 2,492 Other comprehensive income (loss) — — — ( 3,752 ) — ( 3,752 ) Total comprehensive income (loss) — — 2,492 ( 3,752 ) — ( 1,260 ) Issuance of common stock 455 — — — — 455 Acquisition of treasury stock — — — — ( 1,300 ) ( 1,300 ) Stock-based compensation ( 47 ) — — — — ( 47 ) Balance at June 30, 2022 267,850 3,184 ( 757 ) ( 125,552 ) ( 21,401 ) 123,324 Comprehensive income (loss): Net income (loss) — — 3,407 — — 3,407 Other comprehensive income (loss) — — — ( 14,941 ) — ( 14,941 ) Total comprehensive income (loss) — — 3,407 ( 14,941 ) — ( 11,534 ) Acquisition of treasury stock — — — — ( 883 ) ( 883 ) Stock-based compensation 138 — — — — 138 Balance at September 30, 2022 $ 267,988 3,184 2,650 ( 140,493 ) ( 22,284 ) 111,045 See accompanying Notes to Consolidated Financial Statements. September 30, 2023 | 10-Q 6 Table of Contents CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended September 30, (In thousands) 2023 2022 Cash flows from operating activities: Net income (loss) $ 13,696 12,348 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Investment related (gains) losses on sale of investments and other assets 477 10,589 Net deferred policy acquisition costs ( 8,490 ) ( 6,686 ) Amortization of cost of insurance acquired 465 446 Depreciation 380 413 Amortization of premiums and discounts on investments 3,761 3,456 Stock-based compensation 333 300 Deferred federal income tax expense (benefit) 652 1,623 Change in: Accrued investment income 8 ( 418 ) Reinsurance recoverable 778 2,054 Due premiums 2,168 197 Future policy benefit reserves ( 5,111 ) 3,993 Other policyholders' liabilities 8,156 3,222 Federal income tax payable 1,253 2,754 Commissions payable and other liabilities ( 3,116 ) 6,367 Other, net 34 ( 895 ) Net cash provided by (used in) operating activities 15,444 39,763 Cash flows from investing activities: Purchases of fixed maturity securities, available-for-sale ( 50,077 ) ( 102,348 ) Sales of fixed maturity securities, available-for-sale 13,690 30,348 Maturities and calls of fixed maturity securities, available-for-sale 23,128 37,890 Sales of equity securities 770 — Principal payments on mortgage loans 6 1,097 (Increase) decrease in policy loans, net 3,023 2,222 Sales of other long-term investments 3,793 4,130 Purchases of other long-term investments ( 13,262 ) ( 18,150 ) Purchases of property and equipment ( 292 ) ( 76 ) Maturities of short-term investments 750 — Purchases of short-term investments — ( 1,250 ) Net cash provided by (used in) investing activities ( 18,471 ) ( 46,137 ) See accompanying Notes to Consolidated Financial Statements. September 30, 2023 | 10-Q 7 Table of Contents CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Cash Flows, Continued (Unaudited) Nine Months Ended September 30, (In thousands) 2023 2022 Cash flows from financing activities: Annuity deposits $ 5,443 6,777 Annuity withdrawals ( 7,828 ) ( 6,634 ) Acquisition of treasury stock ( 719 ) ( 2,183 ) Issuance of common stock — 2,244 Other ( 57 ) ( 117 ) Net cash provided by (used in) financing activities ( 3,161 ) 87 Net increase (decrease) in cash and cash equivalents ( 6,188 ) ( 6,287 ) Cash and cash equivalents at beginning of year 22,973 27,294 Cash and cash equivalents at end of period $ 16,785 21,007 SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES: During the nine months ended September 30, 2023 and 2022, various fixed maturity issuers exchanged securities with book values of $ 5.4 million and $ 6.1 million, respectively, for securities of equal value. The Company had $ 0.3 million net unsettled security trades at September 30, 2023 and none at September 30, 2022. The Company recognized $ 36 thousand right-of-use assets in exchange for new operating lease liabilities during the nine months ended September 30, 2023 and $ 0.4 million during the nine months ended September 30, 2022. See accompanying Notes to Consolidated Financial Statements. September 30, 2023 | 10-Q 8 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) (1) FINANCIAL STATEMENTS BASIS OF PRESENTATION AND CONSOLIDATION The consolidated financial statements include the accounts and operations of Citizens, Inc. ("Citizens" or the "Company"), a Colorado corporation, and its wholly-owned subsidiaries, CICA Life Insurance Company of America ("CICA"), CICA Life Ltd. ("CICA International"), CICA Life A.I., a Puerto Rico company ("CICA PR"), Citizens National Life Insurance Company ("CNLIC"), Security Plan Life Insurance Company ("SPLIC"), Security Plan Fire Insurance Company ("SPFIC"), Magnolia Guaranty Life Insurance Company ("MGLIC"), Computing Technology, Inc. ("CTI"), and Nexo Global Services LLC, a Puerto Rico holding company ("Nexo"). All significant inter-company accounts and transactions have been eliminated. Citizens and its wholly-owned subsidiaries are collectively referred to as the "Company," "it," "we," "us" or "our". The consolidated balance sheet as of September 30, 2023, the consolidated statements of operations and comprehensive income (loss) and stockholders' equity for the three and nine months ended September 30, 2023 and September 30, 2022 and the consolidated statements of cash flows for the nine months ended September 30, 2023 and September 30, 2022 have been prepared by the Company without audit and are not subject to audit. In the opinion of management, all normal and recurring adjustments to present fairly the financial position, results of operations, and changes in cash flows at September 30, 2023 and for comparative periods have been made. The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q adopted by the Securities and Exchange Commission ("SEC"). Accordingly, the consolidated financial statements do not include all the information and footnotes required for complete financial statements and should be read in conjunction with the Company’s consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2022 ("Form 10-K"). Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period. Our Life Insurance segment operates through CICA PR and CICA. Until December 31, 2022, our international life insurance business operated through CICA International. Beginning January 1, 2023, all new international policies are issued by CICA PR. These companies provide U.S. dollar-denominated endowment contracts internationally, which are principally accumulation contracts that incorporate an element of life insurance protection and ordinary whole life insurance in U.S. dollar-denominated amounts sold to non-U.S. residents. These contracts are designed to provide a fixed amount of insurance coverage over the life of the insured and may utilize rider benefits to provide additional increasing or decreasing coverage and annuity benefits to enhance accumulations. On August 31, 2023, CICA International transferred all of its insurance in force business to CICA PR. Prior to July 1, 2023, our domestic life insurance business operated through CICA and CNLIC. CICA issues ordinary whole life, life products with living benefits, critical illness, credit life and disability policies throughout the U.S. and CNLIC issued ordinary whole life and critical illness policies through June 30, 2023. CNLIC merged into CICA on July 1, 2023. Our Home Service Insurance segment operates through our subsidiaries SPLIC, MGLIC and SPFIC, and focuses on the life insurance needs of the middle- and lower-income markets, primarily in Louisiana, Mississippi and Arkansas. Our products in this segment consist primarily of small face amount ordinary whole life, industrial life and pre-need policies, which are designed to fund final expenses for the insured, primarily consisting of funeral and burial costs as well as critical illness and property insurance policies, which cover dwelling and contents. As of June 30, 2023, the Company ceased all operations for SPFIC. CTI provides data processing systems and services to the Company. USE OF ESTIMATES The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent September 30, 2023 | 10-Q 9 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include those used in the evaluation of credit allowances on fixed maturity securities, actuarially determined assets and liabilities and assumptions and valuation allowance on deferred tax assets. Certain of these estimates are particularly sensitive to market conditions, and deterioration and/or volatility in the worldwide debt or equity markets could have a material impact on the consolidated financial statements. SIGNIFICANT ACCOUNTING POLICIES For a description of all significant accounting policies, see Part IV, Item 15, Note 1. Summary of Significant Accounting Policies in the notes to our consolidated financial statements included in our Form 10-K , which should be read in conjunction with these accompanying consolidated financial statements. DEFERRED POLICY ACQUISITION COSTS Deferred policy acquisition costs (“DAC”) are costs that are incremental and directly related to the successful acquisition of new or renewal insurance contracts. Such costs include the incremental direct costs of contract acquisition, such as sales commissions; the portion of employees’ total compensation and payroll-related fringe benefits related directly to time spent performing acquisition activities, such as underwriting, issuing, and processing policies for contracts that have actually been acquired; and other costs related directly to acquisition activities that would not have been incurred if the contract had not been acquired. Contracts are grouped by contract type and issue year into cohorts consistent with the grouping used in estimating the associated liability. DAC is amortized on a constant level basis for the grouped contracts over the expected term of the related contracts to approximate straight-line amortization. For the Life Insurance segment, the constant level basis used is policy count in force. For the Home Service Insurance segment, the constant level basis used is face amount in force. The constant level bases used for amortization are projected using mortality and lapse assumptions that are based on the Company’s experience, industry data, and other factors at the end of each reporting period and are consistent with those used for the liability for future policy benefit life reserves. Annually, the Company completes experience studies with respect to mortality and lapse. If those assumptions are updated, the DAC amortization basis is recalculated and the effect of the assumption change will be reflected in the cohort level amortization in future periods. Amortization of DAC is included in the consolidated statements of comprehensive income or loss. The DAC balance on the consolidated balance sheets is reduced for actual experience in excess of expected experience. Changes in future estimates are recognized prospectively over the remaining expected contract term. COST OF INSURANCE ACQUIRED The Company recognizes an intangible asset that arises in the application of U.S. GAAP purchase accounting as the difference between the reported value and the fair value of insurance contract liabilities, or comparable amounts determined in purchased insurance business combinations. This intangible asset is referred to as the Cost of Insurance Acquired (“COIA”), which is amortized on a basis consistent with DAC, such that it is amortized in proportion to policies in force for the Life Insurance segment and face amount in force for the Home Service Insurance segment to approximate straight-line amortization. FUTURE POLICY BENEFITS AND EXPENSES As premium revenue is recognized, a liability for future policy benefits, which is the present value of estimated future policy benefits to be paid to or on behalf of policyholders less the present value of estimated future net premiums to be collected from policyholders, is accrued. The liability is estimated using current assumptions that include discount rate, mortality and lapses. These current assumptions are based on judgements that consider the Company’s historical experience, industry data, and other factors. September 30, 2023 | 10-Q 10 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) Our traditional and limited-payment contracts are grouped into cohorts by contract type and issue year. Our reporting cohorts are (i) Permanent, which summarizes insurance policies with premiums payable over the lifetime of the policy, and (ii) Permanent Limited Pay, which summarizes insurance policies with premiums payable for a limited time after which the policy is fully paid up. Both reporting cohorts include whole life and endowment policies. The liability is adjusted for differences between actual and expected experience. The Company reviews its historical cash flow assumptions quarterly and in the third quarter of the year, the Company reviews its future cash flow assumptions. The net premium ratio used to calculate the liability is updated each quarter based on the current period's actual experience relative to expected experience. The revised net premium ratio is used to derive an updated liability for future policy benefits as of the beginning of the current reporting period, discounted at the locked-in discount rate. This amount is then compared to the carrying amount of the liability as of that same date, before the updating of cash flow assumptions, to determine the current period change in liability estimate. The current period change in the liability is the policyholder liability remeasurement gain or loss and is presented as a separate component of total insurance benefits paid or provided in the consolidated statements of comprehensive income or loss. In subsequent periods, the revised net premiums are used to measure the liability for future policy benefits, subject to future revisions. For traditional and limited-payment contracts, the current discount rate assumption is a yield curve that equals the yield of an upper-medium grade fixed income instrument, based on an A-quality corporate bonds. The Company selects fixed-income instruments that have been A rated by one of the major credit rating agencies, such as Moody’s, Standard & Poor’s, or Fitch. The current discount rate assumption is updated quarterly and used to remeasure the liability at the reporting date, with the resulting change reflected in other comprehensive income. For liability cash flows that are projected beyond the duration of market-observable A credit-rated fixed-income instruments, the Company uses the last market-observable yield level and uses linear interpolation to determine yield assumptions for durations that do not have market observable yields. The locked-in discount rate for policies issued prior to transition equals the rate set at contract issuance. For current year issues, the locked-in discount rate is the average of the current year quarterly discount rates and will change throughout the year as new discount rates are calculated, with the change reflected in net income. DEFERRED PROFIT LIABILITY For limited-payment products, gross premiums received in excess of net premiums are deferred at initial recognition as a deferred profit liability (“DPL”). Gross premiums are measured using assumptions consistent with those used in the measurement of the liability for future policy benefit life reserves, including discount rate, mortality and lapses. The DPL is amortized and recognized in net income within the increase in future policy benefit reserves. The amortization basis for the DPL is the present value of insurance in force for life insurance contracts. Interest is accreted on the balance of the DPL using the locked-in discount rate. The Company reviews and updates its estimates of cash flows for the DPL at the same time as the estimates of cash flows for the liability for future policy benefit life reserves. The DPL is updated each quarter based on the current period's actual experience relative to expected experience with the changes recorded within the increase in future policy benefit reserves in the consolidated statements of comprehensive income or loss. On the consolidated balance sheets, DPL is recorded as a component of the liability for future policy benefits. September 30, 2023 | 10-Q 11 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) (2) ACCOUNTING PRONOUNCEMENTS ACCOUNTING STANDARDS RECENTLY ADOPTED Impacts at Transition Date In August 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") No. 2018-12, Financial Services-Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts. The Company adopted ASU 2018-12 for the liability for future policy benefits, DAC and COIA on a modified retrospective basis such that those balances were adjusted to conform to ASU 2018-12 effective January 1, 2021. The following table summarizes the balance of and changes in the liability for future policy benefits, annuity reserves, DAC and COIA due to the adoption of ASU 2018-12. (In thousands) Life Insurance Home Service Insurance Consolidated Liability for Future Policy Benefits Pre-adoption liability as of 12/31/2020 $ 987,373 255,513 1,242,886 Change in discount rate assumptions 261,823 108,468 370,291 Effect of reserve changes 6 96 102 Post-adoption liability as of 1/1/2021 $ 1,249,202 364,077 1,613,279 Fixed Annuity Liability Pre-adoption liability as of 12/31/2020 $ 60,027 18,277 78,304 Adjustments for the removal of shadow adjustments — 3,426 3,426 Post-adoption liability as of 1/1/2021 $ 60,027 21,703 81,730 Deferred Acquisition Costs Pre-adoption balance as of 12/31/2020 $ 94,771 10,142 104,913 Adjustments for the removal of shadow adjustments 8,270 29,905 38,175 Impact of flooring cohorts at zero 23 12 35 Post adoption balance as of 1/1/2021 $ 103,064 40,059 143,123 Cost of Insurance Acquired Pre-adoption balance as of 12/31/2020 $ 1,734 9,807 11,541 Adjustments for the removal of shadow adjustments — 484 484 Post adoption balance as of 1/1/2021 $ 1,734 10,291 12,025 At transition, the Company recorded a charge of $ 0.1 million to retained earnings, net of tax, primarily from capping net premium ratios for certain policyholder benefit cohorts at 100%, increasing reserves for certain non-premium paying cohorts and flooring certain DAC cohorts at zero. Other comprehensive income ("OCI") was reduced by $ 316.8 million primarily due to the difference in the discount rate used prior to transition and the discount rate at January 1, 2021. The Company also removed shadow adjustments previously recorded in OCI for the impact of unrealized gains and losses on annuity products that previously amortized unearned revenue, DAC and COIA over expected future gross profits. September 30, 2023 | 10-Q 12 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) Impacts to Previously Reported Results Adoption of the standard impacted our previously reported consolidated financial results as follows: (In thousands) As Previously Reported Adoption of New Standard Post Adoption As of December 31, 2022 Consolidated Balance Sheet Deferred policy acquisition costs $ 140,167 22,760 162,927 Cost of insurance acquired 10,260 387 10,647 Deferred tax asset, net 2,414 ( 2,414 ) — Total assets 1,569,970 20,733 1,590,703 Future policy benefit reserves: Life insurance 1,305,506 ( 106,859 ) 1,198,647 Annuities 91,234 ( 91,234 ) — Policyholders' funds: Annuities — 121,422 121,422 Other policyholders' funds 40,497 ( 32,996 ) 7,501 Deferred federal income tax liability — 3,653 3,653 Total liabilities 1,568,927 ( 106,014 ) 1,462,913 Retained earnings (accumulated deficit) ( 52,203 ) 68,512 16,309 Accumulated other comprehensive income (loss) ( 195,279 ) 58,235 ( 137,044 ) Total stockholders' equity 1,043 126,747 127,790 September 30, 2023 | 10-Q 13 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) (In thousands, except per share amounts) As Previously Reported Adoption of New Standard Post Adoption For the Three Months Ended September 30, 2022 Consolidated Statement of Operations Increase (decrease) in future policy benefit reserves $ 7,090 ( 6,437 ) 653 Policyholder liability remeasurement (gain) loss — 396 396 Amortization of deferred policy acquisition costs 7,082 ( 3,458 ) 3,624 Amortization of cost of insurance acquired 276 ( 110 ) 166 Federal income tax expense (benefit) 344 1,071 1,415 Net income (loss) ( 5,131 ) 8,538 3,407 Basic earnings (losses) per share of Class A common stock ( 0.10 ) 0.17 0.07 Diluted earnings (losses) per share of Class A common stock ( 0.10 ) 0.16 0.06 Consolidated Statement of Comprehensive Income (Loss) Unrealized holding gains (losses) arising during period $ ( 89,713 ) 1,331 ( 88,382 ) Change in current discount rate for liability for future policy benefits — 73,214 73,214 Income tax expense (benefit) on other comprehensive income items ( 5,079 ) 4,895 ( 184 ) Other comprehensive income (loss) ( 84,591 ) 69,650 ( 14,941 ) Total comprehensive income (loss) ( 89,722 ) 78,188 ( 11,534 ) For the Nine Months Ended September 30, 2022 Consolidated Statement of Operations Increase (decrease) in future policy benefit reserves $ 23,037 ( 18,540 ) 4,497 Policyholder liability remeasurement (gain) loss — 1,731 1,731 Amortization of deferred policy acquisition costs 18,869 ( 8,218 ) 10,651 Amortization of cost of insurance acquired 775 ( 329 ) 446 Federal income tax expense (benefit) 622 2,996 3,618 Net income (loss) ( 10,012 ) 22,360 12,348 Basic earnings (losses) per share of Class A common stock ( 0.20 ) 0.45 0.25 Diluted earnings (losses) per share of Class A common stock ( 0.20 ) 0.44 0.24 Consolidated Statement of Comprehensive Income (Loss) Unrealized holding gains (losses) arising during period $ ( 343,989 ) 3,311 ( 340,678 ) Change in current discount rate for liability for future policy benefits — 345,258 345,258 Income tax expense (benefit) on other comprehensive income items ( 18,880 ) 25,042 6,162 Other comprehensive income (loss) ( 325,031 ) 323,527 ( 1,504 ) Total comprehensive income (loss) ( 335,043 ) 345,887 10,844 ACCOUNTING STANDARDS NOT YET ADOPTED On June 30, 2022, the FASB issued ASU No. 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions. This standard clarifies that contractual restrictions on equity security sales are not considered part of the security unit of account and, therefore, are not September 30, 2023 | 10-Q 14 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) considered in measuring fair value. In addition, the amendments clarify that an entity cannot, as a separate unit of account, recognize and measure a contractual sale restriction. Disclosures on such restrictions are also required. The amendments are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years, and are required to be applied prospectively, with any adjustments from the adoption recognized in earnings and disclosed. Early adoption is available. Adoption of this standard will have no impact on our consolidated financial statements. No other new accounting pronouncements issued or effective during the year had, or is expected to have, a material impact on our consolidated financial statements. (3) INVESTMENTS The Company invests primarily in fixed maturity securities, which totaled 86.3 % of total cash and invested assets at September 30, 2023, as shown below. Carrying Value (In thousands, except for %) September 30, 2023 December 31, 2022 Amount % Amount % Cash and invested assets: Fixed maturity securities $ 1,151,353 86.3 % 1,179,619 86.5 % Equity securities 10,555 0.8 11,590 0.8 Policy loans 75,750 5.7 78,773 5.8 Other long-term investments 79,798 5.9 69,558 5.1 Short-term investments — — 1,241 0.1 Cash and cash equivalents 16,785 1.3 22,973 1.7 Total cash and invested assets $ 1,334,241 100.0 % 1,363,754 100.0 % September 30, 2023 | 10-Q 15 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) The following tables represent the amortized cost, gross unrealized gains and losses and fair value of fixed maturity securities as of the dates indicated. Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value September 30, 2023 (In thousands) Fixed maturity securities: Available-for-sale: U.S. Treasury securities $ 5,700 241 114 5,827 U.S. Government-sponsored enterprises 3,411 122 3 3,530 States and political subdivisions 325,314 1,607 42,965 283,956 Corporate: Financial 256,108 149 48,576 207,681 Consumer 249,857 545 54,802 195,600 Utilities 121,874 1 28,583 93,292 Energy 76,418 — 13,304 63,114 All other 184,859 236 34,041 151,054 Commercial mortgage-backed 171 — 4 167 Residential mortgage-backed 108,976 3 16,460 92,519 Asset-backed 56,702 417 2,506 54,613 Total fixed maturity securities $ 1,389,390 3,321 241,358 1,151,353 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value December 31, 2022 (In thousands) Fixed maturity securities: Available-for-sale: U.S. Treasury securities $ 9,425 152 9 9,568 U.S. Government-sponsored enterprises 3,434 277 1 3,710 States and political subdivisions 344,208 1,114 37,964 307,358 Corporate: Financial 243,758 512 42,383 201,887 Consumer 247,824 758 47,138 201,444 Utilities 115,738 39 23,790 91,987 Energy 76,065 — 11,395 64,670 All other 184,022 683 29,048 155,657 Commercial mortgage-backed 171 — 2 169 Residential mortgage-backed 110,582 9 10,765 99,826 Asset-backed 45,991 18 2,767 43,242 Foreign governments 100 1 — 101 Total fixed maturity securities $ 1,381,318 3,563 205,262 1,179,619 September 30, 2023 | 10-Q 16 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) Most of the Company's equity securities are diversified stock and bond mutual funds. Fair Value (In thousands) September 30, 2023 December 31, 2022 Equity securities: Stock mutual funds $ 2,034 2,615 Bond mutual funds 4,196 4,337 Common stock 622 857 Non-redeemable preferred stock 8 8 Non-redeemable preferred stock fund 3,695 3,773 Total equity securities $ 10,555 11,590 VALUATION OF INVESTMENTS Available-for-sale ("AFS") fixed maturity securities are reported in the consolidated financial statements at fair value. Equity securities are measured at fair value with the change in fair value recorded through net income (loss). The Company recognized net investment related losses of $ 0.4 million and $ 0.3 million on equity securities held for the three and nine months ended September 30, 2023 and losses of $ 0.9 million and $ 2.9 million for the same periods ended September 30, 2022, respectively. The Company considers several factors in its review and evaluation of individual investments, using the process described in Part IV, Item 15, Note 2. Investments in the notes to the consolidated financial statements of our Form 10-K to determine whether a credit valuation loss exists. For the three and nine months ended September 30, 2023 and 2022, the Company recorded no credit valuation losses on fixed maturity securities. September 30, 2023 | 10-Q 17 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) The following tables present the fair values and gross unrealized losses of fixed maturity securities that are not deemed to have credit losses, aggregated by investment category and length of time that individual securities have been in a continuous loss position at September 30, 2023 and December 31, 2022. September 30, 2023 Less than 12 months Greater than 12 months Total (In thousands, except for # of securities) Fair Value Unrealized Losses # of Securities Fair Value Unrealized Losses # of Securities Fair Value Unrealized Losses # of Securities Fixed maturity securities: Available-for-sale securities: U.S. Treasury securities $ 1,210 105 5 65 9 2 1,275 114 7 U.S. Government-sponsored enterprises 219 3 1 — — — 219 3 1 States and political subdivisions 66,573 2,405 94 157,245 40,560 198 223,818 42,965 292 Corporate: Financial 35,347 2,343 53 164,356 46,233 221 199,703 48,576 274 Consumer 23,441 1,913 33 160,871 52,889 222 184,312 54,802 255 Utilities 14,964 1,173 54 78,285 27,410 138 93,249 28,583 192 Energy 6,103 337 9 57,011 12,967 79 63,114 13,304 88 All Other 16,510 1,091 25 130,532 32,950 169 147,042 34,041 194 Commercial mortgage-backed 167 4 2 — — — 167 4 2 Residential mortgage-backed 1,159 92 20 91,325 16,368 89 92,484 16,460 109 Asset-backed 11,936 666 17 32,756 1,840 40 44,692 2,506 57 Total fixed maturity securities $ 177,629 10,132 313 872,446 231,226 1,158 1,050,075 241,358 1,471 December 31, 2022 Less than 12 months Greater than 12 months Total (In thousands, except for # of securities) Fair Value Unrealized Losses # of Securities Fair Value Unrealized Losses # of Securities Fair Value Unrealized Losses # of Securities Fixed maturity securities: Available-for-sale securities: U.S. Treasury securities $ — — — 64 9 2 64 9 2 U.S. Government-sponsored enterprises 223 1 1 — — — 223 1 1 States and political subdivisions 189,084 30,866 242 14,184 7,098 14 203,268 37,964 256 Corporate: Financial 182,447 39,122 237 6,144 3,261 16 188,591 42,383 253 Consumer 164,224 34,823 220 23,417 12,315 30 187,641 47,138 250 Utilities 73,483 15,959 152 16,413 7,831 18 89,896 23,790 170 Energy 59,053 9,601 75 5,617 1,794 8 64,670 11,395 83 All Other 140,955 25,337 171 7,910 3,711 15 148,865 29,048 186 Commercial mortgage-backed 168 2 2 — — — 168 2 2 Residential mortgage-backed 98,758 10,514 95 759 251 5 99,517 10,765 100 Asset-backed 37,067 2,485 41 4,264 282 9 41,331 2,767 50 Total fixed maturity securities $ 945,462 168,710 1,236 78,772 36,552 117 1,024,234 205,262 1,353 September 30, 2023 | 10-Q 18 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) In each category of our fixed maturity securities described above, we do not intend to sell our investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases. As of September 30, 2023 and December 31, 2022, 99 % of the fair value of our fixed maturity securities portfolio were rated investment grade. While the losses are currently unrealized, we continue to monitor all fixed maturity securities on an on-going basis as future information may become available which could result in an allowance being recorded. While we experience unrealized losses across all corporate sectors, the financial sector includes exposure to regional banks which have been impacted the most by recent economic and interest rate pressures. We have assessed our exposure in this sector and believe our investments have access to sufficient liquidity to meet their debt obligations. These unrealized losses on fixed maturity securities are due to noncredit-related factors, including widening credit spreads and rising interest rates since purchase, which have little bearing on the recoverability of our investments, hence they are not recognized as credit losses. The fair value is expected to recover as the securities approach maturity or if market yields for such investments decline. The amortized cost and fair value of fixed maturity securities at September 30, 2023 by contractual maturity are shown in the table below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date have been reflected based upon final stated maturity. September 30, 2023 Amortized Cost Fair Value (In thousands) Fixed maturity securities: Due in one year or less $ 14,657 14,514 Due after one year through five years 129,118 125,520 Due after five years through ten years 274,759 255,800 Due after ten years 970,856 755,519 Total fixed maturity securities $ 1,389,390 1,151,353 The Company uses the specific identification method of the individual security to determine the cost basis used in the calculation of realized gains and losses related to security sales. Three Months Ended Nine Months Ended September 30, September 30, (In thousands) 2023 2022 2023 2022 Fixed maturity securities, available-for-sale: Proceeds $ 9,446 1,520 13,690 30,348 Gross realized gains $ 38 19 43 120 Gross realized losses $ 436 1 453 103 (4) FAIR VALUE MEASUREMENTS Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We hold AFS fixed maturity securities, which are carried at fair value with changes in fair value reported through other comprehensive income (loss). We also report our equity securities and certain other long-term investments at fair value with changes in fair value reported through the consolidated statements of operations. September 30, 2023 | 10-Q 19 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) Fair value measurements are generally based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our view of market assumptions in the absence of observable market information. We utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. All assets and liabilities carried at fair value are required to be classified and disclosed in one of the following three categories: • Level 1 - Quoted prices for identical instruments in active markets. • Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs or whose significant value drivers are observable. • Level 3 - Instruments whose significant value drivers are unobservable. Level 1 primarily consists of financial instruments whose value is based on quoted market prices such as U.S. Treasury securities and actively traded mutual fund and stock investments. Level 2 includes those financial instruments that are valued by independent pricing services or broker quotes. These pricing models are primarily industry-standard models that consider various inputs, such as interest rates, credit spreads and foreign exchange rates for the underlying financial instruments. All significant inputs are observable or derived from observable information in the marketplace or are supported by observable levels at which transactions are executed in the marketplace. Financial instruments in this category primarily include corporate securities, U.S. Government-sponsored enterprise securities, securities issued by states and political subdivisions and certain mortgage and asset-backed securities. Level 3 is comprised of financial instruments whose fair value is estimated based on non-binding broker prices utilizing significant inputs not based on or corroborated by readily available market information. We have no investments in this category. September 30, 2023 | 10-Q 20 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) The following tables set forth our assets that are measured at fair value on a recurring basis as of the dates indicated. September 30, 2023 Level 1 Level 2 Level 3 Total Fair Value (In thousands) Financial Assets Fixed maturity securities available-for-sale: U.S. Treasury and U.S. Government-sponsored enterprises $ 5,827 3,530 — 9,357 States and political subdivisions — 283,956 — 283,956 Corporate 43 710,698 — 710,741 Commercial mortgage-backed — 167 — 167 Residential mortgage-backed — 92,519 — 92,519 Asset-backed — 54,613 — 54,613 Total fixed maturity securities available-for-sale 5,870 1,145,483 — 1,151,353 Equity securities: Stock mutual funds 2,034 — — 2,034 Bond mutual funds 4,196 — — 4,196 Common stock 622 — — 622 Non-redeemable preferred stock 8 — — 8 Non-redeemable preferred stock fund 3,695 — — 3,695 Total equity securities 10,555 — — 10,555 Other long-term investments (1) — — — 79,535 Total financial assets $ 16,425 1,145,483 — 1,241,443 (1) In accordance with Subtopic 820-10, certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient are not classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the consolidated balance sheets. September 30, 2023 | 10-Q 21 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) December 31, 2022 Level 1 Level 2 Level 3 Total Fair Value (In thousands) Financial Assets Fixed maturity securities available-for-sale: U.S. Treasury and U.S. Government-sponsored enterprises $ 9,567 3,711 — 13,278 States and political subdivisions — 307,358 — 307,358 Corporate 44 715,601 — 715,645 Commercial mortgage-backed — 169 — 169 Residential mortgage-backed — 99,826 — 99,826 Asset-backed — 43,242 — 43,242 Foreign governments — 101 — 101 Total fixed maturity securities available-for-sale 9,611 1,170,008 — 1,179,619 Equity securities: Stock mutual funds 2,615 — — 2,615 Bond mutual funds 4,337 — — 4,337 Common stock 857 — — 857 Non-redeemable preferred stock 8 — — 8 Non-redeemable preferred stock fund 3,773 — — 3,773 Total equity securities 11,590 — — 11,590 Other long-term investments (1) — — — 66,846 Total financial assets $ 21,201 1,170,008 — 1,258,055 (1) In accordance with Subtopic 820-10, certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient are not classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the consolidated balance sheets. FINANCIAL INSTRUMENTS VALUATION FINANCIAL INSTRUMENTS CARRIED AT FAIR VALUE Fixed maturity securities, available-for-sale. At September 30, 2023, fixed maturity securities, valued using a third-party pricing source, totaled $ 1.1 billion for Level 2 assets and comprised 92 % of total reported fair value of our financial assets. The Level 1 and Level 2 valuations are reviewed and updated quarterly through testing by comparisons to separate pricing models, other third-party pricing services, and back tested to recent trades. In addition, we obtain information annually relative to the third-party pricing models and review model parameters for reasonableness. There were no Level 3 assets at September 30, 2023. As of September 30, 2023, there were no material changes to the valuation methods or assumptions used to determine fair values, and no broker or third-party prices were changed from the values received. Equity securities. Our equity securities are classified as Level 1 assets as their fair values are based upon quoted market prices. Limited partnerships. The Company considers the net asset value ("NAV") to represent the value of the investment fund and is measured by the total value of assets minus the total value of liabilities. The following table includes information related to our investments in limited partnerships that calculate NAV per share. For these investments, which are measured at fair value on a recurring basis, we use the NAV per share to measure fair value. The Company recognized net investment related losses of $ 0.1 million and gains of $ 0.2 million and losses of $ 4.2 million and $ 9.4 million on limited partnerships held for the three and nine months ended September 30, 2023 and September 30, 2023 | 10-Q 22 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) September 30, 2022, respectively. These investments are included in other long-term investments on the consolidated balance sheets. September 30, 2023 December 31, 2022 (In thousands, except for years) Fair Value Using NAV Per Share Unfunded Commit- ments Range (In years) Fair Value Using NAV Per Share Unfunded Commit- ments Range (In years) Description Limited partnerships Middle market Investments in privately-originated, performing senior secured debt primarily in North America-based companies $ 35,869 3,452 4 $ 33,234 6,011 5 Global equity fund Investments in common stocks of U.S., international developed and emerging markets with a focus on long-term capital growth 9,383 — 0 9,037 — 0 Late-stage growth Investments in private late-stage, established companies seeking capital to accelerate growth prior to an IPO or sale 19,567 15,629 5 to 7 16,892 18,444 5 to 7 Infrastructure Investments in climate infrastructure assets, focusing on renewable power generation in wind and solar energy 14,716 11,233 10 to 12 7,683 4,107 11 Total limited partnerships $ 79,535 30,314 $ 66,846 28,562 The majority of our limited partnership investments are not redeemable because distributions from the funds will be received when the underlying investments of the funds are liquidated. The life spans indicated above may be shortened or extended at the fund manager's discretion, typically in one or two-year increments. The global equity fund is redeemable monthly. FINANCIAL INSTRUMENTS NOT CARRIED AT FAIR VALUE Estimates of fair values are made at a specific point in time, based on relevant market prices and information about the financial instruments. The estimated fair values of financial instruments presented below are not necessarily indicative of the amounts the Company might realize in actual market transactions. The carrying amount and fair value for the financial assets and liabilities on the consolidated financial statements not otherwise disclosed for the periods indicated were as follows: September 30, 2023 December 31, 2022 (In thousands) Carrying Value Fair Value Carrying Value Fair Value Financial Assets: Policy loans $ 75,750 75,750 78,773 78,773 Residential mortgage loan 43 44 49 50 Cash and cash equivalents 16,785 16,785 22,973 22,973 Financial Liabilities: Annuity - investment contracts 67,224 59,063 67,344 61,701 September 30, 2023 | 10-Q 23 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) Policy loans. Policy loans had a weighted average annual interest rate of 7.7 % at both September 30, 2023 and December 31, 2022 and no specified maturity dates. The aggregate fair value of policy loans approximates the carrying value reflected on the consolidated balance sheets. Policy loans are an integral part of the life insurance policies we have in force, cannot be valued separately and are not marketable. Therefore, the fair value of policy loans approximates the carrying value and policy loans are considered Level 3 assets in the fair value hierarchy. Residential mortgage loan. The mortgage loan is secured principally by a residential property. The interest rate for this loan was 7.0 % at both September 30, 2023 and December 31, 2022. At September 30, 2023, the remaining loan matures in five years . Management estimated the fair value using an annual interest rate of 6.25 % at September 30, 2023. Our mortgage loan is considered a Level 3 asset in the fair value hierarchy and is included in other long-term investments on the consolidated balance sheets. Cash and cash equivalents. The fair value of cash and cash equivalents approximates carrying value and are characterized as Level 1 assets in the fair value hierarchy. Annuity liabilities. The fair value of the Company's liabilities under annuity contract policies, which are considered Level 3 liabilities, was estimated at September 30, 2023 and December 31, 2022 using discounted cash flows based upon spot rates adjusted for various risk adjustments ranging from 4.57 % to 5.01 % and 4.74 % to 5.09 %, respectively. The fair value of liabilities under all insurance contracts are taken into consideration in the overall management of interest rate risk, which seeks to minimize exposure to changing interest rates through the matching of investment maturities with amounts due under insurance contracts. Other long-term investments. Financial instruments included in other long-term investments are classified in various levels of the fair value hierarchy. The following table summarizes the carrying amounts of these investments. Carrying Value (In thousands ) September 30, 2023 December 31, 2022 Other long-term investments: Limited partnerships $ 79,535 69,294 FHLB common stock 199 193 Mortgage loans 43 49 All other investments 21 22 Total other long-term investments $ 79,798 69,558 We carried no limited partnership investments at cost at September 30, 2023 while $ 2.4 million were carried at cost at December 31, 2022. We are a member of the Federal Home Loan Bank ("FHLB") of Dallas and such membership requires members to own stock in the FHLB. Our FHLB stock is carried at amortized cost, which approximates fair value. (5) DEFERRED POLICY ACQUISITION COSTS AND COST OF INSURANCE ACQUIRED DAC The following tables roll forward the DAC asset for the nine months ended September 30, 2023 and 2022 by reporting cohort. Our reporting cohorts are Permanent, which summarizes insurance policies with premiums payable over the lifetime of the policy, and Permanent Limited Pay, which summarizes insurance policies with September 30, 2023 | 10-Q 24 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) premiums payable for a limited time after which the policy is fully paid up. Both reporting cohorts include whole life and endowment policies. Nine Months Ended September 30, 2023 (In thousands) Permanent Permanent Limited Pay Other Business Total Life Insurance: Balance, beginning of year $ 100,926 11,542 1,016 113,484 Capitalizations 11,220 2,385 353 13,958 Amortization expense ( 8,859 ) ( 586 ) ( 197 ) ( 9,642 ) Balance, end of period 103,287 13,341 1,172 117,800 Home Service Insurance: Balance, beginning of year 38,793 9,729 921 49,443 Capitalizations 5,026 865 185 6,076 Amortization expense ( 1,542 ) ( 295 ) ( 65 ) ( 1,902 ) Balance, end of period 42,277 10,299 1,041 53,617 Consolidated: Balance, beginning of year 139,719 21,271 1,937 162,927 Capitalizations 16,246 3,250 538 20,034 Amortization expense ( 10,401 ) ( 881 ) ( 262 ) ( 11,544 ) Balance, end of period $ 145,564 23,640 2,213 171,417 Nine Months Ended September 30, 2022 (In thousands) Permanent Permanent Limited Pay Other Business Total Life Insurance: Balance, beginning of year $ 97,675 9,001 1,026 107,702 Capitalizations 10,043 2,121 41 12,205 Amortization expense ( 8,462 ) ( 476 ) ( 113 ) ( 9,051 ) Balance, end of period 99,256 10,646 954 110,856 Home Service Insurance: Balance, beginning of year 35,137 8,723 856 44,716 Capitalizations 4,049 1,064 19 5,132 Amortization expense ( 1,361 ) ( 271 ) 32 ( 1,600 ) Balance, end of period 37,825 9,516 907 48,248 Consolidated: Balance, beginning of year 132,812 17,724 1,882 152,418 Capitalizations 14,092 3,185 60 17,337 Amortization expense ( 9,823 ) ( 747 ) ( 81 ) ( 10,651 ) Balance, end of period $ 137,081 20,162 1,861 159,104 September 30, 2023 | 10-Q 25 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) DAC capitalization increased for the nine months ended September 30, 2023, compared to the same prior year period mainly from increased commissions from higher first year sales across our business segments. COIA The following tables provide rollforwards of the COIA balances for the nine months ended September 30, 2023 and 2022 by reporting cohort. Our reporting cohorts are Permanent, which summarizes insurance policies with premiums payable over the lifetime of the policy, and Permanent Limited Pay, which summarizes insurance policies with premiums payable for a limited time after which the policy is fully paid up. Both reporting cohorts include whole life and endowment policies. Nine Months Ended September 30, 2023 (In thousands) Permanent Permanent Limited Pay Other Business Total Life Insurance: Balance, beginning of year $ 267 750 444 1,461 Amortization expense ( 14 ) ( 43 ) ( 29 ) ( 86 ) Balance, end of period 253 707 415 1,375 Home Service Insurance: Balance, beginning of year 7,583 176 1,427 9,186 Amortization expense ( 293 ) ( 6 ) ( 80 ) ( 379 ) Balance, end of period 7,290 170 1,347 8,807 Consolidated: Balance, beginning of year 7,850 926 1,871 10,647 Amortization expense ( 307 ) ( 49 ) ( 109 ) ( 465 ) Balance, end of period $ 7,543 877 1,762 10,182 Nine Months Ended September 30, 2022 (In thousands) Permanent Permanent Limited Pay Other Business Total Life Insurance: Balance, beginning of year $ 287 812 485 1,584 Amortization expense ( 15 ) ( 47 ) ( 32 ) ( 94 ) Balance, end of period 272 765 453 1,490 Home Service Insurance: Balance, beginning of year 7,989 184 1,511 9,684 Amortization expense ( 306 ) ( 6 ) ( 40 ) ( 352 ) Balance, end of period 7,683 178 1,471 9,332 Consolidated: Balance, beginning of year 8,276 996 1,996 11,268 Amortization expense ( 321 ) ( 53 ) ( 72 ) ( 446 ) Balance, end of period $ 7,955 943 1,924 10,822 September 30, 2023 | 10-Q 26 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) (6) POLICYHOLDERS’ LIABILITIES LIABILITY FOR FUTURE POLICY BENEFITS The following tables summarize balances of and changes in the liability for future policy benefits for our reporting cohorts: Permanent, which summarizes insurance policies with premiums payable over the lifetime of the policy, and Permanent Limited Pay, which summarizes insurance policies with premiums payable for a limited time after which the policy is fully paid up. Both reporting cohorts include whole life and endowment policies. September 30, 2023 (In thousands) Life Insurance Home Service Insurance Permanent Permanent Limited Pay Total Permanent Permanent Limited Pay Total Present Value of Expected Net Premiums Balance, beginning of year $ 235,228 10,209 245,437 93,508 13,255 106,763 Beginning balance at original discount rate 247,601 10,682 258,283 100,225 14,394 114,619 Effect of changes in cash flow assumptions ( 210 ) 38 ( 172 ) ( 343 ) 85 ( 258 ) Effects of actual variances from expected experience 4,156 1,059 5,215 ( 5,631 ) ( 4,477 ) ( 10,108 ) Adjusted beginning of year balance 251,547 11,779 263,326 94,251 10,002 104,253 Issuances 20,918 2,608 23,526 13,854 3,107 16,961 Interest accrual 6,897 248 7,145 3,019 348 3,367 Net premiums collected ( 31,480 ) ( 2,004 ) ( 33,484 ) ( 8,909 ) 2,019 ( 6,890 ) Derecognition and other 567 240 807 475 113 588 Ending balance at original discount rate 248,449 12,871 261,320 102,690 15,589 118,279 Effect of changes in discount rates ( 16,380 ) ( 501 ) ( 16,881 ) ( 9,438 ) ( 1,397 ) ( 10,835 ) Balance, end of period $ 232,069 12,370 244,439 93,252 14,192 107,444 Present Value of Expected Future Policy Benefits Balance, beginning of year $ 947,415 195,612 1,143,027 200,351 116,356 316,707 Beginning balance at original discount rate 996,169 208,051 1,204,220 214,188 121,908 336,096 Effect of changes in cash flow assumptions ( 389 ) ( 702 ) ( 1,091 ) ( 257 ) 331 74 Effects of actual variances from expected experience 6,338 3,489 9,827 ( 5,472 ) ( 1,337 ) ( 6,809 ) Adjusted beginning of year balance 1,002,118 210,838 1,212,956 208,459 120,902 329,361 Issuances 21,360 2,798 24,158 13,854 3,115 16,969 Interest accrual 32,470 6,288 38,758 6,987 4,242 11,229 Benefit payments ( 63,211 ) ( 16,732 ) ( 79,943 ) ( 12,246 ) ( 4,707 ) ( 16,953 ) Derecognition and other 97 42 139 464 109 573 Ending balance at original discount rate 992,834 203,234 1,196,068 217,518 123,661 341,179 Effect of changes in discount rates ( 78,072 ) ( 18,778 ) ( 96,850 ) ( 23,934 ) ( 12,670 ) ( 36,604 ) Balance, end of period $ 914,762 184,456 1,099,218 193,584 110,991 304,575 Net liability for future policy benefits $ 682,693 172,086 854,779 100,332 96,799 197,131 September 30, 2023 | 10-Q 27 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) The Life Insurance segment impact of updating actual experience for the current period contributed to an increase in liabilities primarily due to higher benefits than expected. The Home Service Insurance segment impact of updating actual experience for the current period contributed to an increase in liabilities due to higher premiums collected than expected. September 30, 2022 (In thousands) Life Insurance Home Service Insurance Permanent Permanent Limited Pay Total Permanent Permanent Limited Pay Total Present Value of Expected Net Premiums Balance, beginning of year $ 269,528 4,939 274,467 104,556 10,196 114,752 Beginning balance at original discount rate 246,386 5,093 251,479 90,012 9,532 99,544 Effect of changes in cash flow assumptions ( 3,662 ) 237 ( 3,425 ) 4,253 1,214 5,467 Effects of actual variances from expected experience 1,705 401 2,106 ( 299 ) ( 5,603 ) ( 5,902 ) Adjusted beginning of year balance 244,429 5,731 250,160 93,966 5,143 99,109 Issuances 25,049 2,757 27,806 13,886 4,041 17,927 Interest accrual 6,259 32 6,291 2,553 166 2,719 Net premiums collected ( 29,835 ) 455 ( 29,380 ) ( 8,331 ) 5,156 ( 3,175 ) Derecognition and other 445 90 535 ( 655 ) 117 ( 538 ) Ending balance at original discount rate 246,347 9,065 255,412 101,419 14,623 116,042 Effect of changes in discount rates ( 15,999 ) ( 653 ) ( 16,652 ) ( 8,386 ) ( 1,629 ) ( 10,015 ) Balance, end of period $ 230,348 8,412 238,760 93,033 12,994 106,027 Present Value of Expected Future Policy Benefits Balance, beginning of year $ 1,168,282 240,679 1,408,961 266,206 161,715 427,921 Beginning balance at original discount rate 990,921 207,105 1,198,026 205,340 117,425 322,765 Effect of changes in cash flow assumptions ( 3,916 ) 374 ( 3,542 ) 4,822 1,765 6,587 Effects of actual variances from expected experience 2,127 3,392 5,519 158 7 165 Adjusted beginning of year balance 989,132 210,871 1,200,003 210,320 119,197 329,517 Issuances 25,567 2,835 28,402 13,900 4,038 17,938 Interest accrual 31,922 6,358 38,280 6,539 4,076 10,615 Benefit payments ( 51,604 ) ( 12,483 ) ( 64,087 ) ( 15,058 ) ( 5,277 ) ( 20,335 ) Derecognition and other ( 30 ) 12 ( 18 ) ( 669 ) 110 ( 559 ) Ending balance at original discount rate 994,987 207,593 1,202,580 215,032 122,144 337,176 Effect of changes in discount rates ( 60,876 ) ( 13,695 ) ( 74,571 ) ( 14,624 ) ( 4,985 ) ( 19,609 ) Balance, end of period $ 934,111 193,898 1,128,009 200,408 117,159 317,567 Net liability for future policy benefits $ 703,763 185,486 889,249 107,375 104,165 211,540 Plus: Flooring impact 2 — 2 — — — Net liability for future policy benefits, after flooring impact $ 703,765 185,486 889,251 107,375 104,165 211,540 September 30, 2023 | 10-Q 28 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) The Life Insurance segment impact of updating actual experience for the current period contributed to an increase in liabilities primarily due to higher benefits paid than expected. The Home Service Insurance segment impact of updating actual experience for the current period contributed to an increase in liabilities due to higher premiums collected than expected. Net premiums collected is defined as the transactional gross premiums collected in the current period times the net premium ratio. Issuances are calculated as the present value, using the locked-in discount rate, of the expected net premiums or the expected future policy benefits related to new policies issued during the nine months ended September 30, 2023 and 2022. Interest accrual is the interest earned on the beginning present value of either the expected net premiums or the expected future policy benefits using the locked-in discount rate. Benefit payments are the transactional benefits (death, lapse, surrenders and maturities) paid in the current period. Derecognition refers to a subset of the issuances or the present value of future premiums released on new issues that lapsed during the nine months ended September 30, 2023 and 2022 as well as other reconciling items. The effects of actual variances from expected experience lines are primarily impacted by the actual policy cash flows during the period compared to that which was expected in the reserve assumptions. If the net of the two lines is a positive number, the implication is an unfavorable result with policy cash flows less favorable than assumed while a negative number implies a favorable result compared to assumptions. Our policy experience will vary from actual experience in any one period, either favorably or unfavorably. The following table reconciles the net liability for future policy benefits shown above to the liability for future policy benefits reported in the consolidated balance sheets. September 30, 2023 September 30, 2022 (In thousands) Life Insurance Home Service Insurance Consolidated Life Insurance Home Service Insurance Consolidated Life Insurance Permanent $ 682,693 100,332 783,025 703,765 107,375 811,140 Permanent limited pay 172,086 96,799 268,885 185,486 104,165 289,651 Deferred profit liability 27,616 26,138 53,754 23,749 23,727 47,476 Other 28,011 13,926 41,937 28,558 13,677 42,235 Total life insurance 910,406 237,195 1,147,601 941,558 248,944 1,190,502 Accident & Health Other 596 281 877 498 231 729 Total future policy benefit reserves $ 911,002 237,476 1,148,478 942,056 249,175 1,191,231 September 30, 2023 | 10-Q 29 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) The following table provides the amount of undiscounted and discounted expected gross premiums and expected future benefit payments for long-term duration contracts. September 30, 2023 September 30, 2022 (In thousands) Life Insurance Home Service Insurance Life Insurance Home Service Insurance Undiscounted: Permanent Expected future gross premiums $ 604,059 459,405 614,123 465,752 Expected future benefit payments 1,483,068 484,239 1,471,197 472,958 Permanent Limited Pay Expected future gross premiums 47,868 77,544 48,132 74,126 Expected future benefit payments 325,964 320,563 322,184 316,178 Discounted: Permanent Expected future gross premiums $ 453,277 261,271 471,719 272,158 Expected future benefit payments 914,762 193,584 934,111 200,408 Permanent Limited Pay Expected future gross premiums 42,133 51,091 42,441 52,036 Expected future benefit payments 184,456 110,991 193,898 117,159 September 30, 2023 | 10-Q 30 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) The following tables summarize the amount of revenue and interest related to long-term duration contracts recognized in the consolidated statement of operations: Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 (In thousands) Gross Premiums Interest Expense Gross Premiums Interest Expense Gross Premiums Interest Expense Gross Premiums Interest Expense Life Insurance Segment: Life Insurance Permanent $ 23,654 8,471 23,751 8,537 68,619 25,573 68,826 25,663 Permanent Limited Pay 3,555 2,308 3,399 2,291 11,333 6,811 10,391 6,946 Other 4,279 — 4,944 — 7,094 — 10,214 — Less: Reinsurance 392 — 501 — 1,452 — 1,254 — Total, net of reinsurance 31,096 10,779 31,593 10,828 85,594 32,384 88,177 32,609 Accident & Health Other 53 — 104 — 537 — 287 — Less: Reinsurance 1 — 1 — 3 — 3 — Total, net of reinsurance 52 — 103 — 534 — 284 — Total $ 31,148 10,779 31,696 10,828 86,128 32,384 88,461 32,609 Home Service Insurance Segment: Life Insurance Permanent $ 8,372 1,322 8,331 1,319 25,012 3,968 25,079 3,986 Permanent Limited Pay 2,154 1,599 2,136 1,568 6,425 4,777 6,279 4,688 Other 178 — 367 — 1,012 — 1,418 — Less: Reinsurance 6 — 4 — 23 — 23 — Total, net of reinsurance 10,698 2,921 10,830 2,887 32,426 8,745 32,753 8,674 Accident & Health Other 244 — 196 — 667 — 581 — Total $ 10,942 2,921 11,026 2,887 33,093 8,745 33,334 8,674 The following table provides the weighted-average durations of the liability for future policy benefits. September 30, 2023 September 30, 2022 (In years) Life Insurance Home Service Insurance Life Insurance Home Service Insurance Permanent Duration at original discount rate 7.8 15.7 7.9 15.3 Duration at current discount rate 8.2 15.6 8.6 15.4 Permanent Limited Pay Duration at original discount rate 7.9 14.3 7.5 14.3 Duration at current discount rate 7.6 14.4 7.6 15.3 September 30, 2023 | 10-Q 31 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) The following table provides the weighted-average interest rates for the liability for future policy benefits. September 30, 2023 September 30, 2022 Life Insurance Home Service Insurance Life Insurance Home Service Insurance Permanent Interest rate at original discount rate 4.92 % 4.98 % 4.95 % 5.02 % Interest rate at current discount rate 5.62 % 5.71 % 5.23 % 5.18 % Permanent Limited Pay Interest rate at original discount rate 4.29 % 5.05 % 4.31 % 5.06 % Interest rate at current discount rate 5.60 % 5.71 % 5.17 % 5.17 % LIABILITY FOR POLICYHOLDERS’ ACCOUNT BALANCES The following table presents the policyholders' account balances by range of guaranteed minimum crediting rates and the related range of the difference, in basis points, between rates being credited and the respective guaranteed minimums. At Guaranteed Minimum 1 Basis Point-50 Basis Points Above 51 Basis Points-150 Basis Points Above Greater Than 150 Basis Points Above Total September 30, 2023 (In thousands) Range of Guaranteed Minimum Crediting Rates 0.00 % - 1.49 % $ 746 — 1,138 37,233 39,117 1.50 % - 2.99 % 30,256 675 63 — 30,994 3.00 % - 4.49 % 104,304 10 — — 104,314 Greater or equal to 4.50 % 31,374 — — — 31,374 Total $ 166,680 685 1,201 37,233 205,799 At Guaranteed Minimum 1 Basis Point-50 Basis Points Above 51 Basis Points-150 Basis Points Above Greater Than 150 Basis Points Above Total September 30, 2022 (In thousands) Range of Guaranteed Minimum Crediting Rates 0.00 % - 1.49 % $ 702 — 827 40,055 41,584 1.50 % - 2.99 % 22,370 603 30 — 23,003 3.00 % - 4.49 % 96,932 10 — — 96,942 Greater or equal to 4.50 % 31,762 — — — 31,762 Total $ 151,766 613 857 40,055 193,291 September 30, 2023 | 10-Q 32 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) The following tables summarize balances of and changes in policyholders' account balances. September 30, 2023 (In thousands, except for %) Supplemental Contracts Without Life Contingencies Fixed Annuity Dividend Accumulations Premiums Paid in Advance Balance, beginning of year $ 32,995 86,807 41,663 34,603 Issuances 16,086 2,160 474 3,200 Premiums received 85 3,273 4,210 659 Interest credited 1,103 1,988 993 948 Other 1 — — — Less: Surrenders and withdrawals — 7,647 3,238 6,098 Benefit payments 8,466 — — — Balance, end of period $ 41,804 86,581 44,102 33,312 Weighted-average crediting rates 4.01 % 3.57 % 3.05 % 2.96 % Cash surrender value $ 41,804 86,581 44,102 33,312 September 30, 2022 (In thousands, except for %) Supplemental Contracts Without Life Contingencies Fixed Annuity Dividend Accumulations Premiums Paid in Advance Balance, beginning of year $ 23,950 83,917 37,760 38,875 Issuances 8,787 2,343 435 1,860 Premiums received 57 3,810 4,044 538 Interest credited 769 1,966 897 750 Other 2 — — — Less: Surrenders and withdrawals — 5,903 2,653 6,047 Benefit payments 2,866 — — — Balance, end of period $ 30,699 86,133 40,483 35,976 Weighted-average crediting rates 4.08 % 3.60 % 3.07 % 3.05 % Cash surrender value $ 30,699 86,133 40,483 35,976 September 30, 2023 | 10-Q 33 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) The following table reconciles policyholders' account balances shown above to the policyholders' account balances liability in the consolidated balance sheets. As of September 30, (In thousands) 2023 2022 Annuities: Supplemental contracts without life contingencies $ 41,804 30,699 Fixed annuity 86,581 86,133 Unearned revenue reserve 1,524 1,619 Other — 1 Total annuities $ 129,909 118,452 Premiums Paid in Advance: Premiums paid in advance $ 33,312 35,976 Other 2,141 2,461 Total premiums paid in advance $ 35,453 38,437 (7) COMMITMENTS AND CONTINGENCIES LITIGATION AND REGULATORY ACTIONS From time to time, we are subject to legal and regulatory actions relating to our business. We may incur defense costs, including attorneys' fees, and other direct litigation costs associated with defending claims. If we suffer an adverse judgment as a result of litigation claims, it could have a material adverse effect on our business, results of operations and financial condition. CONTRACTUAL OBLIGATIONS As of September 30, 2023, CICA International is committed to fund investments up to $ 30.3 million related to limited partnerships previously described. CREDIT FACILITY On May 5, 2021 , the Company entered into a $ 20 million senior secured revolving credit facility (the “Credit Facility”) with Regions Bank ("Regions"). The Credit Facility has a three-year term, maturing on May 5, 2024 , and allows the Company to borrow up to $ 20 million for working capital purposes, capital expenditures and other corporate purposes. Revolving loans may be requested by the Company in aggregate minimum principal amounts of $ 0.5 million per loan. At the Company's election, the revolving loans may either bear a base rate, which is 1.75 % plus a base rate (a fluctuating rate per annum) equal to the greatest of (a) Regions' prime rate, (b) the federal funds rate plus 0.50 %, or (c) 0.75 %. The Company is required to pay Regions an annual commitment fee of 0.375 % of the unused portion of the Credit Facility in quarterly installments, which the Company expenses as it is incurred. Obligations under the Credit Facility are secured by substantially all of the assets of the Company other than the equity interests in all of the regulated insurance subsidiaries, real estate owned by the Company, and other limited exceptions. The Credit Facility contains customary events of default and financial, affirmative and negative covenants, including but not limited to restrictions on indebtedness, liens, investments, asset dispositions and restricted payments. As of September 30, 2023, the Company had no t borrowed any funds against the Credit Facility and was not in violation of any covenants. September 30, 2023 | 10-Q 34 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) (8) STOCKHOLDERS' EQUITY AND RESTRICTIONS STOCK Our Restated and Amended Articles of Incorporation authorize the issuance of 127,000,000 shares, of which 100,000,000 shares shall be Class A common stock, 2,000,000 shares shall be Class B common stock, and 25,000,000 shall be preferred stock. Both authorized classes of common stock are equal in all respects, except (a) each share of Class A common stock is entitled to receive twice the cash dividends paid on a per share basis to the Class B common stock, if any; and (b) the holders of the Class B common stock have the exclusive right to elect a simple majority of the Board of Directors of Citizens. In April 2021, we repurchased all of the outstanding Class B common stock, which is now classified as treasury stock. As a result, all of the directors are elected by the holders of the Class A common stock. Citizens has never issued any preferred stock. A summary of the change in number of shares of Class A and Class B common stock and treasury stock issued is as follows: Nine Months Ended September 30, 2023 2022 (In thousands) Common Stock Treasury Common Stock Treasury Class A Class B Stock Class A Class B Stock Balance at beginning of year 53,758 1,002 4,937 53,170 1,002 4,138 Stock issued under stock investment plan — — — 475 — — Stock issued for compensation 122 — — 90 — — Acquisition of Class A shares — — 325 — — 615 Other share issuance — — — 22 — — Balance at end of period 53,880 1,002 5,262 53,757 1,002 4,753 EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings (loss) per share. Three Months Ended September 30, 2023 2022 (In thousands, except per share amounts) Basic and diluted earnings (loss) per share: Numerator: Net income (loss) $ 2,698 3,407 Net income (loss) allocated to Class A common stock $ 2,698 3,407 Denominator: Weighted average shares of Class A outstanding - basic 49,615 50,075 Weighted average shares of Class A outstanding - diluted 50,522 50,799 Basic earnings (loss) per share of Class A common stock $ 0.06 0.07 Diluted earnings (loss) per share of Class A common stock $ 0.05 0.06 September 30, 2023 | 10-Q 35 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) Nine Months Ended September 30, 2023 2022 (In thousands, except per share amounts) Basic and diluted earnings (loss) per share: Numerator: Net income (loss) $ 13,696 12,348 Net income (loss) allocated to Class A common stock $ 13,696 12,348 Denominator: Weighted average shares of Class A outstanding - basic 49,739 50,203 Weighted average shares of Class A outstanding - diluted 50,647 50,927 Basic earnings (loss) per share of Class A common stock $ 0.28 0.25 Diluted earnings (loss) per share of Class A common stock 0.27 0.24 CAPITAL AND SURPLUS Each of our regulated insurance subsidiaries is required to meet stipulated regulatory capital requirements. These include capital requirements imposed by the U.S. National Association of Insurance Commissioners ("NAIC") and the Bermuda Monetary Authority ("BMA"). All domestic insurance subsidiaries exceeded the minimum capital requirements at September 30, 2023. CICA PR is a Puerto Rico domiciled company. The Insurance Code of Puerto Rico does not specifically set forth minimum capital and surplus standards, but rather requires that an insurer submit a business plan for approval to the Office of the Commissioner of Insurance ("OIC") that includes proposed minimum capital and surplus. CICA PR is required to maintain a minimum of $750,000 in capital and maintain a premium to surplus ratio of 7 to 1 . CICA PR began issuing new business as of January 1, 2023 and 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. (9) SEGMENT INFORMATION The Company has two reportable segments: Life Insurance and Home Service Insurance. Our Life Insurance segment issues endowment contracts, which are principally accumulation contracts that incorporate an element of life insurance protection and ordinary whole life insurance, to non-U.S. residents through CICA PR. These contracts are designed to provide a fixed amount of insurance coverage over the life of the insured and may utilize rider benefits to provide additional coverage and annuity benefits to enhance accumulations. CICA issues ordinary whole life, life products with living benefits, critical illness and credit life and disability policies throughout the U.S. Our Home Service Insurance segment operates through our subsidiaries SPLIC, MGLIC and SPFIC, and focuses on the life insurance needs of the middle- and lower-income markets, primarily in Louisiana, Mississippi and Arkansas. Our policies are sold and serviced through funeral homes and independent agents who sell policies, collect premiums and service policyholders. Our Home Service Insurance segment also sold property insurance policies in Louisiana and Arkansas until operations were ceased effective June 30, 2023. September 30, 2023 | 10-Q 36 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) The Life Insurance and Home Service Insurance portions of the Company constitute separate businesses. In addition to the Life Insurance and Home Service Insurance businesses, the Company also operates other non-insurance portions of the Company ("Other Non-Insurance Enterprises"), which primarily include the Company’s IT and corporate-support functions. The accounting policies of the reportable segments and Other Non-Insurance Enterprises are presented in accordance with U.S. GAAP and are the same as those described in the summary of significant accounting policies in our Form 10-K . The Company evaluates profit and loss performance based on U.S. GAAP net income (loss) before federal income taxes for its two reportable segments. The Company's Other Non-Insurance Enterprises is the only reportable difference between segments and consolidated operations. Life Insurance Home Service Insurance Other Non-Insurance Enterprises Consolidated Three Months Ended September 30, 2023 (In thousands) Revenues: Premiums $ 31,148 10,878 — 42,026 Net investment income 13,661 3,459 252 17,372 Investment related gains (losses), net ( 424 ) ( 370 ) ( 98 ) ( 892 ) Other income 884 — — 884 Total revenues 45,269 13,967 154 59,390 Benefits and expenses: Insurance benefits paid or provided: Claims and surrenders 32,419 5,304 — 37,723 Increase (decrease) in future policy benefit reserves ( 5,587 ) 1,707 — ( 3,880 ) Policyholder liability remeasurement (gain) loss 840 184 — 1,024 Policyholders' dividends 1,405 9 — 1,414 Total insurance benefits paid or provided 29,077 7,204 — 36,281 Commissions 5,406 4,038 — 9,444 Other general expenses 6,036 4,293 1,620 11,949 Capitalization of deferred policy acquisition costs ( 5,141 ) ( 1,991 ) — ( 7,132 ) Amortization of deferred policy acquisition costs 3,313 743 — 4,056 Amortization of cost of insurance acquired 28 123 — 151 Total benefits and expenses 38,719 14,410 1,620 54,749 Income (loss) before federal income tax $ 6,550 ( 443 ) ( 1,466 ) 4,641 September 30, 2023 | 10-Q 37 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) Life Insurance Home Service Insurance Other Non-Insurance Enterprises Consolidated Nine Months Ended September 30, 2023 (In thousands) Revenues: Premiums $ 86,128 33,873 — 120,001 Net investment income 40,470 10,379 838 51,687 Investment related gains (losses), net ( 123 ) ( 283 ) ( 71 ) ( 477 ) Other income 2,619 1 — 2,620 Total revenues 129,094 43,970 767 173,831 Benefits and expenses: Insurance benefits paid or provided: Claims and surrenders 83,826 16,972 — 100,798 Increase (decrease) in future policy benefit reserves ( 9,270 ) 3,468 — ( 5,802 ) Policyholder liability remeasurement (gain) loss 2,541 319 — 2,860 Policyholders' dividends 3,761 22 — 3,783 Total insurance benefits paid or provided 80,858 20,781 — 101,639 Commissions 14,930 12,410 — 27,340 Other general expenses 17,141 13,060 5,276 35,477 Capitalization of deferred policy acquisition costs ( 13,958 ) ( 6,076 ) — ( 20,034 ) Amortization of deferred policy acquisition costs 9,642 1,902 — 11,544 Amortization of cost of insurance acquired 86 379 — 465 Total benefits and expenses 108,699 42,456 5,276 156,431 Income (loss) before federal income tax $ 20,395 1,514 ( 4,509 ) 17,400 September 30, 2023 | 10-Q 38 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) Life Insurance Home Service Insurance Other Non-Insurance Enterprises Consolidated Three Months Ended September 30, 2022 (In thousands) Revenues: Premiums $ 31,696 12,179 — 43,875 Net investment income 12,806 3,527 271 16,604 Investment related gains (losses), net ( 4,367 ) ( 462 ) ( 162 ) ( 4,991 ) Other income 682 — 6 688 Total revenues 40,817 15,244 115 56,176 Benefits and expenses: Insurance benefits paid or provided: Claims and surrenders 24,742 5,987 — 30,729 Increase (decrease) in future policy benefit reserves 426 227 — 653 Policyholder liability remeasurement (gain) loss ( 445 ) 841 — 396 Policyholders' dividends 1,382 7 — 1,389 Total insurance benefits paid or provided 26,105 7,062 — 33,167 Commissions 5,103 4,107 — 9,210 Other general expenses 6,016 4,228 1,315 11,559 Capitalization of deferred policy acquisition costs ( 4,592 ) ( 1,780 ) — ( 6,372 ) Amortization of deferred policy acquisition costs 3,081 543 — 3,624 Amortization of cost of insurance acquired 32 134 — 166 Total benefits and expenses 35,745 14,294 1,315 51,354 Income (loss) before federal income tax $ 5,072 950 ( 1,200 ) 4,822 September 30, 2023 | 10-Q 39 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) Life Insurance Home Service Insurance Other Non-Insurance Enterprises Consolidated Nine Months Ended September 30, 2022 (In thousands) Revenues: Premiums $ 88,461 37,002 — 125,463 Net investment income 37,124 10,054 805 47,983 Investment related gains (losses), net ( 8,644 ) ( 1,629 ) ( 316 ) ( 10,589 ) Other income 2,403 1 6 2,410 Total revenues 119,344 45,428 495 165,267 Benefits and expenses: Insurance benefits paid or provided: Claims and surrenders 67,768 18,492 — 86,260 Increase (decrease) in future policy benefit reserves 4,808 ( 311 ) — 4,497 Policyholder liability remeasurement (gain) loss 549 1,182 — 1,731 Policyholders' dividends 4,241 16 — 4,257 Total insurance benefits paid or provided 77,366 19,379 — 96,745 Commissions 13,701 12,106 — 25,807 Other general expenses 17,065 12,093 3,831 32,989 Capitalization of deferred policy acquisition costs ( 12,205 ) ( 5,132 ) — ( 17,337 ) Amortization of deferred policy acquisition costs 9,051 1,600 — 10,651 Amortization of cost of insurance acquired 94 352 — 446 Total benefits and expenses 105,072 40,398 3,831 149,301 Income (loss) before federal income tax $ 14,272 5,030 ( 3,336 ) 15,966 September 30, 2023 | 10-Q 40 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) (10) INCOME TAXES The effective tax rate is the ratio of tax expense (benefit) over pre-tax income (loss). The effective tax rate was 41.9 % and 21.3 % for the three and nine months ended September 30, 2023, compared to 29.3 % and 22.7 % for the same periods in 2022, respectively. CICA International and CICA PR are considered controlled foreign corporations for federal tax purposes. As a result, the insurance activity of CICA International and CICA PR are subject to Subpart F of the Internal Revenue Code and are included in Citizens’ taxable income. Due to the 0 % enacted tax rate in Bermuda, there are no deferred taxes recorded for CICA International's temporary differences. CICA PR has applied for a tax exemption decree from the Government of Puerto Rico which will freeze the income tax rate at 4% on any taxable earnings in excess of $1.2 million. The effective tax rate varies from the prevailing corporate federal income tax rate of 21.0% mainly due to the impact of Subpart F and uncertain tax positions. As a result of the August 31, 2023 transfer of CICA International's in force business to CICA PR, the Company's consolidated deferred federal income tax liability was reduced by $ 4.3 million due to the difference in the tax rates in the jurisdictions in which the companies operate. Since the transfer was between companies under common control, the $ 4.3 million reduction in the deferred federal income tax liability was recorded as a credit to equity, $ 1.3 million of which increased retained earnings and $ 3.0 million of which reduced accumulated other comprehensive income (loss), based on the nature of the tax components. At September 30, 2023, we determined it was more likely than not that a portion of our capital deferred tax assets would not be realized in their entirety. The Company recorded a valuation allowance of $ 6.2 million through Other Comprehensive Income (Loss). September 30, 2023 | 10-Q 41 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) (11) OTHER COMPREHENSIVE INCOME (LOSS) The changes in the components of other comprehensive income (loss) are reported net of the effects of income taxes of 21% for entities domiciled in the United States and 4 % for entities domiciled in Puerto Rico for the three and nine months ended September 30, 2023 and 2022, as indicated below. Three Months Ended September 30, 2023 2022 (In thousands) Amount Tax Effect Total Amount Tax Effect Total Unrealized gains (losses): Unrealized holding gains (losses) arising during the period $ ( 59,817 ) 8,717 ( 51,100 ) ( 88,382 ) 398 ( 87,984 ) Reclassification adjustment for losses (gains) included in net income (loss) 419 ( 88 ) 331 43 ( 9 ) 34 Unrealized holding gains (losses), net ( 59,398 ) 8,629 ( 50,769 ) ( 88,339 ) 389 ( 87,950 ) Change in current discount rate for liability for future policy benefits 60,054 ( 7,589 ) 52,465 73,214 ( 205 ) 73,009 Other comprehensive income (loss) $ 656 1,040 1,696 ( 15,125 ) 184 ( 14,941 ) Nine Months Ended September 30, 2023 2022 (In thousands) Amount Tax Effect Total Amount Tax Effect Total Unrealized gains (losses): Unrealized holding gains (losses) arising during the period $ ( 36,811 ) 7,548 ( 29,263 ) ( 340,678 ) 13,790 ( 326,888 ) Reclassification adjustment for losses (gains) included in net income (loss) 481 ( 101 ) 380 78 ( 16 ) 62 Unrealized holding gains (losses), net ( 36,330 ) 7,447 ( 28,883 ) ( 340,600 ) 13,774 ( 326,826 ) Change in current discount rate for liability for future policy benefits 45,825 ( 6,565 ) 39,260 345,258 ( 19,936 ) 325,322 Other comprehensive income (loss) $ 9,495 882 10,377 4,658 ( 6,162 ) ( 1,504 ) (12) RELATED PARTY TRANSACTIONS The Company has various routine related party transactions in conjunction with our holding company structure, such as a management service agreement related to costs incurred, a tax sharing agreement between entities, and inter-company dividends and capital contributions. There were no changes related to these relationships during the nine months ended September 30, 2023 except as described in Note 1 . Financial Statements under Basis of Presentation and Consolidation. See our Form 10-K for a comprehensive discussion of related party transactions. (13) SUBSEQUENT EVENTS The Company has evaluated the impact of subsequent events as defined by the accounting guidance through the date this report was issued and determined that no other significant subsequent events need to be recognized or disclosed at this time. September 30, 2023 | 10-Q 42 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS