What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-03-14 compared with 2023-03-10 · 361 added, 355 removed, 559 unchanged (56% of the section changed)

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This discussion should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this report.

For over 45 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 more than 70 different countries.

For 55 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 policyholders 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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The objective of our MD&A is to provide investors with a succinct analysis of the Company's financial performance from management's perspective.

We start by discussing the factors that we believe drive our operating results and then we discuss how industry developments and economic circumstances in general (e.g., low interest rates, the COVID-19 pandemic) affected or could affect our financial performance.

After telling you about our industry, we discuss our 2022 financial highlights, the impacts of certain events on our business during 2022, and then we break-down our results of operations in detail so an investor understands the various line items of our profit and loss statements from management’s perspective.

Since our investments are one of two principal sources of revenues, we describe them in detail.

We start by discussing the factors that we believe drive our operating results and then we discuss how industry developments and economic circumstances in general (e.g., interest rate environment) affected or could affect our financial performance.

After telling you about our industry, we discuss in detail our results of operations for the year ended December 31, 2023 so an investor or potential investor understands the various line items of our profit and loss statements from management’s perspective.

Since our investments are one of two principal sources of our revenues, we describe them in detail.

Finally, we discuss our capital resources and liquidity so investors better understand how those resources are utilized and how we are able to meet our cash needs.

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Business - “Strategic Initiatives” and in the MD&A, we describe how we performed on those initiatives and any known trends or uncertainties that might impact our ability to achieve our goals.

Impact of LDTI on Prior Financial Statements

In 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No.

2018-12, Financial Services – Insurance (Topic 944):

Targeted Improvements to the Accounting for Long-Duration Contracts, also known as long-duration targeted improvements, or "LDTI", which impacts all insurers that issue long-duration contracts, such as life insurance.

The goal of LDTI is to improve, simplify and enhance aspects of accounting for long-duration contracts generally issued by life insurance companies.

The changes are intended to result in improvements to our accounting records in the following ways.

• In the new model, cash flow assumptions utilized in determining the liability for future policyholder benefits for certain insurance contracts are required to be updated on at least an annual basis.

This varies from the prior model which only required us to update the assumptions if a triggering event occurred, like if a premium deficiency is recognized.

• The discount rate used in determining the liability for future policyholder benefits has been standardized and is based on upper medium grade (low credit risk) fixed income instruments.

The effect of discount rate changes is recorded immediately through other comprehensive income.

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• Deferred acquisition costs ("DAC") are now amortized on a constant basis over the expected life of the contract, therefore eliminating the prior amortization methods such as proportion to premium (for traditional life), estimated gross profit (for nontraditional life) or estimated gross margin (for participating life).

Additionally, amortization rates are now updated prospectively with DAC being reduced when actual terminations and lapses are greater than expected.

By conducting this change, the interest accretion and impairment assessment have been eliminated.

LDTI became effective on January 1, 2023 and required us to make certain changes to our financial statements requiring retrospective application back to January 1, 2021, which is known as the transition date.

This Form 10-K includes financial statements that reflect the impact of LDTI.

Financial Statements and Supplementary Data and Part IV, Item 15, Note 1 "Significant Accounting Policies" and "Accounting Pronouncements" in the notes to our consolidated financial statements.

As a result of implementing LDTI,

• we have included results for the year ended December 31, 2021 in our consolidated statements of operations and comprehensive income (loss) ("Operating Statement") rather than just the years ended December 31, 2023 and December 31, 2022, as required for a smaller reporting company;

• the discussion of financial results included in this MD&A for the periods ending December 31, 2022 and 2021 may differ, possibly materially, from the discussions included in the MD&A of our previously filed Annual Report on Form 10-K for each respective year.

The implementation of LDTI did not impact our key operating metrics, which are described below in "The Factors that Drive our Operating Results." Accordingly, while we present operating results for the year ended December 31, 2021, we will only discuss the 2021 results or year-to-year comparisons between 2022 and 2021 where they were impacted by the implementation of LDTI.

Discussions of 2021 items and year-to-year comparisons between 2022 and 2021 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Reports on Form 10-K for the fiscal years ended December 31, 2022 (the " 2022 10-K ") and December 31, 2021 (the " 2021 10-K ").

The Factors that Drive our Operating Results

We see the following as the primary factors that drive our operating results:

• Sales (e.g., premium revenues)

• Our investments

• Death claims and surrenders

• Sales (i.e.

, premium revenues)

• Investments

• Claims and surrenders

• Operating expenses

Premium revenues and investment income are our two primary sources of income and thus key to our profitability.

Premium revenues consist of all money deposited by customers into new and existing insurance policies.

We believe sales statistics are meaningful to gaining an understanding of, among other things, the attractiveness of our new products, how expansion of our distribution channels affects our revenue, customer retention and the performance of our business from period-to-period.

Throughout the MD&A and in Item 1 - Business , we describe the actions and initiatives that we are taking to increase sales and improve retention, sales performance in each period and as compared to prior periods, and how we view trends with respect to sales and retention.

Because we ceased

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Premium revenues consist of both new sales (first year premiums) and renewal premiums.

Throughout the MD&A and in Item 1 - Business , we describe the actions and initiatives that are taken to increase sales and improve retention, how we performed in 2022, and how we view trends with respect to sales and retention.

Our Life Insurance segment first year premiums increased by 4% due to the introduction of a new whole life product in our international markets, as well as focused marketing campaigns.

Our Home Service Insurance segment first year premiums declined, which we believe is attributed to inflationary pressures and the cessation of COVID-19 government aid programs in 2022.

Renewal premiums in our Life Insurance segment declined primarily due to impact from a higher level of surrenders during the last few years and from matured endowment benefits, which we expected due to contractual expiration dates.

Our Home Service Insurance renewal premiums increased in 2022 due to the lack of hurricanes in Louisiana in 2022;

Hurricane Ida negatively impacted renewal premiums in this segment in 2021.

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.

First year premiums (i.e , new sales) increased 12% from 2022 to 2023.

In our Life Insurance segment first year premiums increased by 13% from 2022 to 2023 due to the introduction of critical illness and whole life products in 2022 in our international markets, as well as expansion of our white label distribution network in our domestic market.

In our Home Service Insurance segment, first year premiums increased from 2022 to 2023 by 8% due to focused marketing campaigns and higher critical illness premiums, but were lower in 2022 as compared to 2021, which we believe is attributed to inflationary pressures beginning in 2022, which impacted this market more than our international market, as well as COVID-19 government aid programs in 2021 that we believe led to increased sales that year.

Renewal premiums declined primarily from our Life Insurance segment due to the impact from a higher level of surrenders during the last few years (and thus a lower amount of policies paying renewal premiums) and from matured endowment benefits, which we expected due to contractual expiration dates.

Our net investment income increased by $3.8 million from 2022 to 2023 due primarily to investment income from our limited partnership investments, a growing diversified invested asset base and reinvesting matured or called fixed income maturity securities into a higher interest rate environment.

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Payment of policyholder benefits for claims and surrenders is our largest expense and thus also key to our profitability.

In 2022, our death claim benefits decreased compared to 2021 due to a lower number of reported death claims as 2021 period was negatively impacted by COVID-19-related deaths.

Our surrenders decreased by $2.9 million in 2022, which we believe was in large part due to our retention initiatives.

The three largest components of this expense are death claims, surrenders and matured endowments.

Our death claim benefits paid have decreased over the 3-year period ending December 31, 2023 due to a lower number of reported death claims.

We believe death claims in 2021, and to a lesser extent in 2022, were negatively impacted by COVID-19-related deaths.

Our surrenders increased from 2022 to 2023, 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 have increased as expected due to many of our endowment policies reaching their contractual maturity dates.

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

Our general operating expenses increased by $1.8 million in 2022 as compared to 2021 mainly due to our sales convention in 2022, which was cancelled in the prior year due to the COVID-19 pandemic, and by higher home office expenses.

Operating expenses are meaningful to gaining an understanding of how we manage our business, including among other things, salaries, benefits, and spending on growth initiatives.

Our general operating expenses increased by $2.0 million in 2023 as compared to 2022, driven by costs related to strategic growth initiatives, our search for a new CEO, 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.

ECONOMIC AND INSURANCE INDUSTRY DEVELOPMENTS

The following significant trends and developments are currently impacting our business and industry:

Over the last decade, life insurers have faced numerous disruptions as an industry, including profitability challenges driven by low interest rates, a global pandemic, high inflation followed by a rapid rise in interest rates, volatility in equity markets, and geopolitical uncertainty.

These significant trends and developments have and are impacting our business and industry as follows:

• Increase in Interest Rates;

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As the price of energy and food rises, customers will have less discretionary income to spend on insurance products.

As the inflationary environment continues, the industry may see policy lapses rise, especially among lower and middle-income customers.

As the inflationary

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environment continues, the industry may see policy lapses rise, especially among lower and middle-income customers.

• Sustained Low Interest Rate Environment Prior to 2022.

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◦ Products sold during the last several years with lower interest rate guarantees may be surrendered or lapsed, as customers look to invest in higher interest rate products;

◦ Because products may have been priced with assumptions of higher interest rates (and higher interest earned on supporting assets), life insurance companies may have to

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increase reserves, trigger loss recognition events related to policy liabilities, accelerate amortization of DAC or COIA, and potentially impair intangible assets.

◦ Because products may have been priced with assumptions of higher interest rates (and higher interest earned on supporting assets), life insurance companies may have to increase reserves or trigger loss recognition that could accelerate amortization of COIA.

• Impact of COVID-19.

COVID-19 and its related economic conditions have caused a lot of uncertainty in the world in the past three years.

Our industry and our Company are no exception to the negative, uncertain and unpredictable impacts the pandemic has brought.

While the direct impacts of COVID-19 (e.g., deaths) have begun to wane, the scope, duration and magnitude of the direct and indirect effects of COVID-19 are difficult or impossible to anticipate.

As a result, it is not possible to predict its impact on the Company's results in 2023 or beyond.

The positive impact to our industry is that people have a higher awareness for the need for life insurance to protect their families and loved ones.

However, the long-term nature of life insurance products means premiums are not yet capturing the risk that deaths or long-term illness from COVID-19 will likely remain higher than previously estimated.

Additionally, life insurers will need to decide how to underwrite COVID-19 survivors, as the long-term effects of COVID-19 are still unclear.

COVID-19 and its related economic conditions have caused significant uncertainty in the world in the past four years.

Initially, COVID-19 caused global lockdowns.

In response to the pandemic, the U.S.

Federal Reserve lowered interest rates to near zero in order to stimulate the economy.

COVID-19 has since created significant issues, from supply chain disruptions and staffing issues to surging production costs and high demand of products and services due to financial help from the government.

All of these have a role to play in the dramatic rise of inflation.

• Availability of Reinsurance.

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Therefore, it is critical that we embrace these changes for the benefit of our policyholders, agents, employees and stockholders.

FINANCIAL EVENTS THAT MATERIALLY IMPACTED OUR BUSINESS IN 2022 AND 2021

EVENTS THAT IMPACTED 2022 RESULTS

Impact of Inflation and Rising Interest

As discussed above, the impact of inflation, which has led to market volatility and rising interest rates, had a material impact on both our results of operations and balance sheet in 2022.

The market volatility affected the fair value of our equity securities, leading to investment related losses of $10.3 million in 2022, compared to net gains $11.0 million in 2021.

Investment related losses in 2022 (and gains in 2021) derive principally from our investments in equity securities and includes unrealized losses (and gains) from market price changes during the period.

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

EVENTS THAT IMPACTED OUR BUSINESS

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 I, Item 1A, "Risk Factors", the following events may impact our results of operations or financial condition:

Inflation and Market Volatility

As discussed above, the impact of inflation, which has led to market volatility and rising interest rates, had a material impact on both our results of operations and balance sheet in both 2022 and 2023.

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Market volatility has significantly affected the fair value of our equity securities over the past 3 years and led to large swings in our earnings.

Our investment related gains and losses were a gain of $0.8 million in 2023, a loss of $10.3 million in 2022 and a gain of $11.0 million in 2021.

Investment related gains and losses derive principally from our investments in equity securities and include unrealized gains and losses from market price changes in these equities during the period.

As evidenced, investment related gains and losses can cause significant fluctuations from period to period and while they are included in our operating revenue, are not indicative of our operating results.

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

These gains and losses have caused and will continue to cause significant volatility in our periodic earnings.

In addition, interest rates rose significantly in 2022 after being ultra-low for almost a decade.

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

To combat the inflation that began as a result of the COVID-19 pandemic, interest rates rose significantly starting in 2022 after being ultra-low for almost a decade.

In just a 16-month span starting in March 2022, the Federal Open Market Committee of the Federal Reserve lifted their key benchmark rate from near-zero percent to a 22-year high of 5.25% - 5.5%.

Higher interest rates typically reduce the market values of fixed income assets, as the interest payments from existing fixed income assets become less competitive relative to newer higher rate fixed income instruments.

Long duration fixed maturity securities were particularly impacted by the rising rates in 2022.

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 and we reported a pre-tax net unrealized loss of $201.7 million on our available-for-sale securities at December 31,

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The credit ratings and default risk of our fixed maturity securities were not significantly impacted by the rise in interest rates and volatility in 2022 and because we intend to hold the long-term investments to maturity, we do not believe that the current unrealized loss is indicative of our long-term financial strength.

These unrealized losses were the single largest negative impact that led to total stockholders' equity of $1.0 million at December 31, 2022.

Long duration fixed maturity securities, which constitute the vast majority of our investment portfolio as a life insurer because we strive to match our asset duration to our liability duration, were particularly impacted by the rising rates.

Higher interest rates resulted in a pre-tax net unrealized loss of $150.1 million on our available-for-sale securities at December 31, 2023 compared to pre-tax net unrealized loss of $201.7 million at December 31, 2022.

While the 10 year Treasury yield was the same at both periods, the pre-tax unrealized loss was lower at December 31, 2023, as the investment balance includes recent investment purchases with higher interest rates whose fair market values are closer to amortized cost.

The credit ratings and default risk of our fixed maturity securities were not significantly impacted by the rise in interest rates in 2023 and because we intend to hold the long-term investments to maturity, we do not believe that the current unrealized loss is indicative of our long-term financial strength, as we expect the market values to recover prior to the maturity date of most of these investments.

We also believe that the inflationary environment has led to higher surrenders and lapses in 2023 as well as lower sales, as our policyholders conserve cash due to concerns over inflation and rising costs, particularly in our Home Service Insurance segment, where our customer base is primarily middle- and lower-income individuals.

EVENTS THAT IMPACTED 2021 RESULTS

We disclosed the following events in our Annual Report on Form 10-K for the year ended December 31, 2021 and are repeating below so investors can better understand material changes to our financial results between year end 2022 and 2021.

COVID-19 Pandemic

The overall impact of COVID-19 and its related economic conditions on the Company's financial results continue to be highly uncertain and unpredictable.

While the Company has implemented new strategies and processes to mitigate this impact, the scope, duration and magnitude of the direct and indirect effects of COVID-19 are difficult or impossible to anticipate.

As a result, it is not possible to predict its impact on the Company's results in 2023 or beyond.

Currently, some of the most significant factors affecting our business that could cause our future results to differ significantly from our prior results or forward-looking statements include:

• a higher level of claims due to COVID-19 deaths;

• decreased premium revenue due to disruption to our workforce or distribution channel resulting from required isolation, travel limitations and business restrictions;

• higher surrenders and lapses due to cash needs our policyholders may have due to concerns over COVID-19 economic impacts, particularly in our international business;

• volatility in our investment portfolio due to market disruptions caused by COVID-19 related concerns such as inflation.

Federal Income Tax Benefit

The results of operations for the fiscal year ended December 31, 2021 included a significant income tax benefit for the release of most of the uncertain tax position of $43.8 million.

The uncertain tax position from previous years is related to the tax treatment of tax reserves pursuant to Internal Revenue Code ("IRC") Section 807, specifically due to ramifications on the determination of those reserves from our product qualification issues in the past.

The uncertain tax position released during the fourth quarter of 2021 is due to the expiration of the statute of limitations for the year ended December 31, 2017.

Goodwill Impairment

The release of the liability for the uncertain tax position referenced above, increased the carrying value of our Life Insurance segment.

Due to such increase in carrying value and the continued low interest rate environment (which negatively affected the fair value of our net assets by decreasing expected cash flows), we determined that the carrying value of our Life Insurance segment exceeded its implied fair value, resulting in an impairment of goodwill (the excess of the amount paid by us to acquire various life insurance companies over the fair value of their net assets as of the date of acquisition).

Accordingly, as of December 31, 2021, we wrote-off the goodwill and recognized an expense of $12.6 million for 2021.

Ceasing Operations of our Property Insurance Business

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

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

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

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

Additionally, we did not collect premiums in the second half of 2023, as we did in the second half of 2022.

Accordingly, property premium revenue is less for the year ended December 31, 2023 compared to prior years.

The property insurance business operates through SPFIC and represented less than 1% of the Company’s total consolidated assets as of December 31, 2023 and less than 1% of the Company's total consolidated revenues for the year then ended.

The cessation of this business is not reported as a discontinued operation because it is immaterial to our total operations.

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

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2022 HIGHLIGHTS

Due to the impact inflation has had on market volatility and rising interest rates during 2022, we had a net loss of $6.6 million, compared to net income of $36.8 million in 2021.

As an insurance company, we hold significant invested assets in order to pay future policy liabilities.

Changes in the fair value of our limited partnership investments drove investment related losses of $10.3 million in 2022, compared to investment related gains of $11.0 million in 2021.

We did not sell these investments during 2022, but as discussed in Part IV, Item 15, Note 3.

Fair Value Measurements , changes in fair values of our equity securities are reflected as investment related gains or losses, in addition to executed transactions that result in a gain or loss.

As mentioned above, we consider investment related gains and losses, whether realized or unrealized, as non-core and incidental in understanding the quarterly or annual operating results of our insurance business.

In addition to the change in investment related gains and losses, 2021 net income was positively affected by the above-described one-time $43.8 million non-cash tax benefit.

Due to these investment related losses, our net loss per share of Class A common stock was $0.13 for the year ended December 31, 2022.

We had income before federal income tax of $26.2 million in 2023, compared to $27.4 million in 2022.

In 2023, (i) changes in the fair value of our limited partnership investments due to improved stock market conditions in 2023 increased investment related gains and losses by $11.1 million;

and (ii) net investment income improved by $3.8 million due to higher yields on our investment portfolio.

These increases were offset by (i) $6.7 million decrease in premiums due to lower renewal premiums in our life insurance segment and ceasing our property insurance business;

(ii) $6.7 million increase in total insurance benefits paid or provided due to higher claims and surrenders and higher policyholder liability remeasurement loss;

and (iii) $3.0 million of higher commission expense, driven by higher first year sales (which have higher commission payments) and accrual of expense for renewal commissions we may owe to former independent consultants in Venezuela.

Our net income per diluted share of Class A common stock was $0.48 for the year ended December 31, 2023.

Key operating results (comparison of 2023 v.

↑ $3.9 million of net investment income

↓ $6.8 million of total insurance benefits paid or provided, partially offset by

↑ $1.8 million of general operating expenses

↓ $6.7 million of premium revenue

Revenue Highlights

As discussed above, insurance premiums and investment income are our primary sources of revenue and increased by $2.9 million in 2022 compared to 2021.

• Insurance premiums declined slightly in 2022 compared to 2021, totaling $173.7 million and $174.7 million, respectively due to:

◦ 4% growth in first year premiums in our Life Insurance segment was more than offset by lower renewal premiums in this segment due to increases in expiring matured endowments;

◦ our Home Service Insurance segment insurance premiums in 2022 decreased 2% compared to 2021;

◦ our property insurance premiums increased by $1.2 million due to rate increases and the lack of hurricanes in Louisiana in 2022 versus 2021 (Hurricane Ida).

Insurance premiums declined 4% in 2023 compared to 2022, totaling $167.0 million and $173.7 million, respectively due to:

• 13% growth in first year premiums in our Life Insurance segment was more than offset by lower renewal premiums in this segment due to increases in surrenders and expiring matured endowments;

• our property insurance premiums decreased by $4.1 million due to ceasing this business on June 30, 2023.

↑ $3.8 million of net investment income

Net investment income increased 6% in 2023 compared to 2022, totaling $69.3 million and $65.4 million, respectively, from a higher average portfolio yield in 2023 as well as a growing invested asset base.

The average yield on our consolidated investment portfolio was 5% in 2023, a 16 basis point increase from 2022.

Benefits and Expenses Highlights

The primary use of our funds is payment of insurance benefits for claims and surrenders as well as our general operating expenses.

• Total insurance benefits paid or provided decreased by 4% due primarily to lower future policy benefit reserves, which were a result of higher matured endowments in 2022, partially offset by increases to the future policy benefit reserves due to improved first year sales and better persistency in our Life Insurance segment.

• General expenses increased as described above.

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↑ $6.7 million of total insurance benefits paid or provided

Total insurance benefits paid or provided increased by 5% due primarily to higher surrenders and matured endowments in our Life Insurance segment.

↑ $2.0 million of general operating expenses

Operating expenses increased due to costs related to strategic growth initiatives, our search for a new CEO, and costs related to moving our international business from Bermuda to Puerto Rico.

Financial Condition at December 31, 2023

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• $4.9 billion of direct insurance in force.

• Fully diluted income per share of Class A common stock of $0.48

• Book value per share of Class A common stock of $3.47.

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CONSOLIDATED RESULTS OF OPERATIONS

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Life Insurance:

International

$ 399,691,578 4,067 $ 98,277 $ 389,338,420 4,330 $ 89,916

53,356,685 4,541 11,750 1,060,000 4 265,000 (1)

Total Life Insurance

453,048,263 8,608 52,631 390,398,420 4,334 90,078

Home Service Insurance 288,867,758 22,429 12,879 284,320,685 26,845 10,591

Total $ 741,916,021 31,037 $ 674,719,105 31,179

As we have previously discussed, our strategic initiatives include the introduction of new products tailored to our specific markets.

These new products helped drive the increase in total insurance issued of $263.4 million, or 64%, in 2022 compared to 2021.

The growth in insurance issued was a result of both a greater number of policies issued and higher average policy face amounts issued in both segments.

The growth in our Life Insurance segment is attributable to strong sales from our new international whole life product, which accounted for 62% of total insurance issued in this segment in 2022.

We continue focusing on sales promotions and campaigns and prioritizing recruiting new independent contractors and we believe we have seen the impact of these efforts in 2022.

(1) The 2022 average domestic policy face amount issued reflects one policy issued for $1.0 million of life insurance in force, driving up the average policy face amount issued.

In 2023, we issued $741.9 million in new insurance, a 10% increase from 2022.

As we previously disclosed, our strategic initiatives include the introduction of new products tailored to our specific markets and expansion of our distribution channels through white-label partnerships.

These new products and distribution channels helped drive the increase in total insurance issued of $67.2 million.

The number of policies issued almost doubled in our Life Insurance segment.

This growth is attributable to our new white label partnerships and final expense products introduced domestically, which accounted for 53% of the number of policies issued and continued strong sales of our international whole life product introduced in 2022, which accounted for 61% of total insurance issued in this segment in 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 as well as the introduction of our new whole life product in this segment, which has a higher maximum face value than our legacy products.

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

The implementation of LDTI did not impact our revenues;

for a discussion of 2022 to 2021 comparisons, see the 2022 10-K.

Years ended December 31,

(In thousands)

2023 2022 2021

Life insurance $ 164,609 167,586 169,801

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Total revenues $ 240,680 232,524 250,546

Total premiums decreased slightly due to lower Life insurance premiums, which declined slightly, somewhat offset by higher property insurance premiums.

The increase in property insurance premiums resulted from rate increases and lower catastrophic reinsurance premiums in 2022 due to no hurricanes impacting Louisiana.

Total revenues increased in 2023, as we had investment related gains, versus losses in 2022, and higher net investment income.

Years ended December 31,

(In thousands)

2023 2022 2021

First year $ 19,341 17,529 17,766

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Total premiums $ 167,039 173,714 174,728

Our renewal premiums comprised 90% of our total premium revenue in 2022 and 2021.

Renewal premiums declined slightly in 2022 compared to 2021;

we believe the decline in Life Insurance segment renewal premiums is due to the impact from a higher level of surrenders during the last few years and increasing matured endowment benefits.

Our first year premiums declined 1% in 2022 compared to 2021.

We believe this is attributed to inflationary pressures, primarily in our Home Service Insurance segment.

Premium Income.

Despite higher first year premium revenues in both segments, life insurance premium revenues decreased in 2023 compared to 2022 due to lower renewal premiums.

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

Property insurance premiums declined in 2023 as we stopped accepting renewal premiums at the end of May and ceased our operations on June 30, 2023.

Our renewal premiums comprised 88% of our total premium revenue in 2023 and 90% in 2022.

Renewal premiums declined by 5% in 2023 compared to 2022;

as discussed above, the decline in Life Insurance segment renewal premiums is due to the impact from a higher level of surrenders during the last few years and increasing matured endowment benefits.

Our first year premiums increased 10% in 2023 compared to 2022 due to our new product offerings and expanded domestic distribution.

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Net Investment Income.

Our net investment income and investment performance is summarized as follows:

Our net investment income and investment performance are summarized as follows:

Years ended December 31,

(In thousands, except for %)

2023 2022 2021

Gross investment income:

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Other long-term investments 4,509 2,535 809

Other 576 246 54

Total investment income 71,853 68,020 63,886

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Yield on average invested assets 4.56 % 4.40 % 4.24 %

Net investment income increased 6% to $65.4 million in 2022 compared to $61.5 million in 2021 driven by a growing diversified asset base as well as the rising interest rate environment.

Due to insurance regulations, fixed maturity securities constitute the vast majority, or 88%, of our investment portfolio based on fair value and thus provide the vast majority of our investment income.

Our net investment income increased 6% in 2023 compared to in 2022, primarily due to a higher average portfolio yield on our fixed maturity securities in 2023.

Long-term investment income increased as our private equity investment asset base grew.

The annualized yield increased by 16 basis points in 2023 compared to 2022 as a result of the rising interest rate environment.

Investment Related Gains (Losses).

I nvestment related gains and losses are as follows:

Years ended December 31,

(In thousands)

Investment related gains (losses):

Realized investment gains (losses) $ 2,278 2,977

Change in fair value of equity securities (2,665) 376

Change in fair value of limited partnerships (9,667) 7,452

Change in credit loss allowance (237) 186

Investment related gains (losses), net $ (10,291) 10,991

Net investment related losses in 2022 is a primary driver of our net loss in 2022.

A significant portion of these losses are related to the impact from the equity markets on the fair value in our limited partnership investments.

We did not sell these investments during 2022, but as discussed in Part IV, Item 15, Note 3.

Fair Value Measurements , changes in fair values of our equity securities are reflected as investment related gains or losses, in addition to executed transactions that result in a gain or loss.

In 2021, the Company realized a gain of $1.0 million on the sale of its former training facility near Austin, Texas with a gross sale price of $3.8 million.

The facility was owned by Citizens and was held in Other Non-Insurance Enterprises.

We recorded an investment related gain of $0.8 million during 2023, compared to a loss of $10.3 million in 2022.

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.

We did not sell all of these investments;

however, the changes in fair values of our equity securities are reflected as investment related gains or losses in our income statement, in addition to executed transactions that result in a gain or loss.

Other Income .

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

We believe this income has been increasing due to a higher level of matured endowment benefits as well as our retention initiatives.

December 31, 2023 | 10-K 36

3 unchanged sentences

(In thousands)

2023 2022 2021

Benefits and expenses:

1 unchanged sentence

Claims and surrenders $ 135,993 119,935 119,735

Increase in future policy benefit reserves 29,640 36,444

Increase (decrease) in future policy benefit reserves

(5,624) 4,804 9,773

Policyholder liability remeasurement (gain) loss 4,460 2,884 1,434

Policyholders' dividends 5,542 6,013 6,180

7 unchanged sentences

Total benefits and expenses $ 214,506 205,147 220,041

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

Total benefits and expenses paid increased in 2023 as compared to same period in 2022 driven by higher surrenders and matured endowments, higher policyholder liability remeasurement loss due to the higher surrenders and $3.0 million of higher commissions, driven by higher first year sales (which have higher commissions) and accrual of expense for renewal commissions we may owe to former independent consultants in Venezuela.

Claims and Surrenders.

Payments of death claims, surrender benefits and matured endowment benefits are our primary uses of cash.

The implementation of LDTI did not impact our reporting for Claims and Surrenders;

for a discussion of 2022 to 2021 comparisons, see the 2022 10-K.

Years ended December 31,

(In thousands)

2023 2022 2021

Claims and surrenders:

7 unchanged sentences

Total claims and surrenders $ 135,993 119,935 119,735

• Death claim benefits decreased 13% in 2023 compared to 2022 due primarily to a lower volume of reported death claims.

• Surrender benefits increased 17% in 2023 compared to 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.

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• Death claim benefits decreased 18% in 2022 compared to 2021.

We believe that 2021 was negatively impacted by COVID-19 related deaths, which reduced significantly in 2022.

Mortality experience and COVID-19 impacts continue to be closely monitored by the Company.

• Surrender benefits decreased 6% in 2022 compared to 2021.

The decrease in surrender benefits is primarily within our Life Insurance segment.

Surrender benefits, which had been increasing prior to 2021 due to international policies that had been in force for an extended period and had little or no associated surrender charges, have been decreasing the past two years.

We have focused our efforts on retaining policyholders and believe we have begun to see positive benefits from these efforts starting in the second half of 2021, particularly in our international business.

We believe the impact of inflation and curtailment of COVID-19 relief government aid in 2022 negatively impacted retention in our Home Service Insurance segment.

Surrender benefits represented approximately 1% of total direct life insurance in force of $4.8 billion as of December 31, 2022.

• Many of our endowment policies are reaching their contractual maturity dates and thus matured endowment benefits are increasing.

We anticipated the $11.2 million increase in 2022 based upon the contractual maturity dates and expect continued increases in matured endowment benefits over the next few years as these contracts expire.

• Property claim expenses decreased 63% in 2022 compared to 2021 due to no hurricanes impacting Louisiana in 2022.

Increase in Future Policy Benefit Reserves.

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

In 2022, despite issuing more insurance and increasing our in force block of business, policy benefit reserves decreased 19% compared to 2021 due to the impact of reserves released from higher matured endowment benefits.

We anticipated the $10.4 million increase in 2023 based upon the contractual maturity dates and expect continued increases in matured endowment benefits over the next few years as more of these contracts expire.

Increase (Decrease) in Future Policy Benefit Reserves.

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

LDTI impacted our reported reserves for 2022 and 2021, as LDTI is intended to improve the timeliness of recognizing changes in the liability for future benefits and standardize the rate used to discount future cash flows.

Reserves decreased by $5.0 million from 2021 to 2022 and another $10.4 million from 2022 to 2023 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).

The loss increased from 2021 to 2022 and again to 2023 due to unfavorable surrender experience.

Commission expenses are a cost of acquiring business, as commissions are the primary compensation paid to our independent consultants and independent agents for selling our products.

First year commission rates are higher than renewal commission rates.

Commissions fluctuate directly in relation to sales and thus the increase in commissions in 2022 as compared to 2021 was due to higher sales in our Life Insurance segment in 2022.

Commissions fluctuate directly in relation to sales and thus the increase in commissions over the 3-year period ending December 31, 2023 was due to higher first year sales in each period as compared to the prior period.

Additionally, commission expense in 2023 was higher due to a $1.3 million accrual of expense for renewal commissions we may owe to former independent consultants in Venezuela.

Other General Expenses.

Total general expenses increased $1.8 million, or 4%, in 2022 compared to 2021 due primarily to expenses related to our sales convention, which we did not hold in 2021 due to COVID-19, as well as severance costs related to moving our international business from Bermuda to Puerto Rico.

Total general expenses increased $2.0 million, or 4%, in 2023 compared to 2022.

The increase was primarily driven by costs related to strategic growth initiatives, a search for a new CEO and costs related to moving our international business from Bermuda to Puerto Rico.

We continue to work on managing controllable operating expenses while investing in growth initiatives.

2 unchanged sentences

These costs vary based upon amounts or premiums received related to new and renewal business.

Capitalized DAC was $24.9 million and $22.7 million in 2022 and 2021, respectively.

Increases in capitalized amounts are in line with the increases in new sales activity.

Capitalized DAC increased each year during the 3-year period ended December 31, 2023, which is in line with the increases in new sales activity.

Significantly lower amounts are capitalized related to renewal business in correlation with the lower commissions paid on that business compared to first year business, which has higher commission rates.

1 unchanged sentence

Amortization of DAC totaled $15.5 million and $14.4 million in 2023 and 2022, respectively.

Amortization of DAC is impacted by new business, persistency and the level of surrenders.

The increase in amortization is a result of less favorable persistency in the Home Service Insurance segment and sales.

LTDI also changed the manner in which we amortize DAC and thus reported amounts for 2022 and 2021 have changed.

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

Goodwill Impairment.

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CITIZENS, INC.

Federal Income Tax.

Federal income tax benefits of $0.4 million in 2022 and $43.5 million in 2021 resulted in effective tax rates of 6% and 650%, respectively.

The significant tax benefit in 2021 is the release of the uncertain tax position of $43.8 million related to the expiration of the statute of limitations for the year ended December 31, 2017.

Differences between our effective tax rate and the statutory tax rate result from income and expense items that are treated differently for financial reporting and tax purposes.

Refer to Note 9.

Income Taxes in the notes to our consolidated financial statements for further discussion.

SEGMENT OPERATIONS

5 unchanged sentences

The Company's Other Non-Insurance enterprises include non-insurance operations such as IT and corporate-support functions, which are included in the table presented below to properly reconcile the segment information with the consolidated financial statements of the Company.

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

Years ended December 31,

(In thousands)

Loss before federal income taxes:

2023 2022 2021

Income before federal income taxes:

Life Insurance $ 28,621 25,423 31,902

2 unchanged sentences

Other Non-Insurance Enterprises (5,460) (4,609) (5,570)

Total loss before federal income taxes $ (7,067) (6,688)

Total income before federal income taxes $ 26,174 27,377 30,505

December 31, 2023 | 10-K 39

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dollar-denominated amounts to non-U.S.

residents in more than 70 countries through almost 1,000 active independent marketing consultants as of December 31, 2022.

residents in over 75 countries through over 1,000 active independent marketing consultants as of December 31, 2023.

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

Years ended December 31,

(In thousands)

2023 2022 2021

Life insurance $ 121,424 124,156 125,558

3 unchanged sentences

Other income 3,605 3,668 3,362

Total revenue 170,175 185,812

Total revenues 180,403 170,175 185,812

Benefits and expenses:

1 unchanged sentence

Claims and surrenders 113,428 95,576 91,390

Increase in future policy benefit reserves 23,938 29,407

Increase (decrease) in future policy benefit reserves

(10,931) 3,894 7,822

Policyholder liability remeasurement (gain) loss 4,153 1,728 829

Policyholders' dividends 5,512 5,990 6,140

8 unchanged sentences

Income (loss) before federal income taxes $ 28,621 25,423 31,902

In our Life Insurance segment we reported a loss before federal income tax of $0.7 million in 2022 as compared to income of $0.9 million in 2021.

As in our consolidated operations, the current year reflected investment related losses which can cause significant fluctuations from period to period and are not indicative of our operating results.

The change in investment related gains (losses) between periods were somewhat offset by higher net investment income, lower death claim benefits and the goodwill impairment that impacted 2021.

In our Life Insurance segment we reported income before federal income tax of $28.6 million in 2023, as compared to $25.4 million in 2022 and $31.9 million in 2021.

As in our consolidated operations, investment related gains and losses caused significant fluctuations from period to period and are not indicative of our operating results.

Key operating measures resulted in year-over-year revenue gains in each of the 3-year periods reflected above due to increases in net investment income in each year, and year-over-year benefit and expense increases in each of the 3-year periods due primarily to increases in surrenders and matured endowments and higher commissions, driven by higher first year sales (which have higher commissions) and accrual of expense for renewal commissions we may owe to former independent consultants in Venezuela.

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CITIZENS, INC.

Life Insurance segment premium breakout is detailed below.

Since LDTI did not impact reported revenue results, comparisons between the 2022 and 2021 years are not discussed below.

See the 2022 10-K for such discussion.

Years ended December 31,

(In thousands)

2023 2022 2021

First year $ 13,479 11,892 11,420

Renewal 108,666 112,761 114,638

Total premium $ 124,653 126,058

Over 90% of our Life Insurance premium revenue in both 2022 and 2021 was generated by renewal premiums.

While first year premiums increased by 4% in 2022 as compared to 2021, overall premium revenue decreased slightly in 2022 compared to 2021 as renewal premiums declined by 2%.

Renewal premiums have been declining

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over the last several years, due in part to the continued decline in production in Venezuela from one of our top distributors leaving our Company.

As we discuss in Item 3 - Legal Proceedings , we believe these distributors are illegally competing with us and stealing our trade secrets and business.

We began to stem the decline of renewal premiums in 2021, which we believe is due in part to our retention efforts that we also discuss in Part I.

Item 1, Business - Strategic Initiatives.

We believe that the increase in first year premiums is the result of actions we have taken over the past two years in executing on our strategic initiatives to issue new products and improve distribution through focused sales promotions and campaigns.

In 2022, we introduced a new whole life product tailored to our specific markets and for the first time, whole life sales became a significant percentage of our international new business sales, making up 47% of our total 2022 sales.

Total premiums

$ 122,145 124,653 126,058

First year premiums increased $1.6 million in 2023 compared to 2022 due to sales of new products and expanded domestic distribution.

Our total premiums for 2023 decreased $2.5 million compared to 2022 as renewal premiums declined.

We derive most of our premium revenue in the Life Insurance segment from renewal premiums, which decreased 4% in 2023 as compared to 2022.

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

International Premiums.

The following table sets forth, for our top five producing countries, our direct premiums from our international life insurance business for the periods indicated.

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 direct premiums collected from our top five producing countries of our international life insurance business for the periods indicated.

Years ended December 31,

(In thousands, except for %)

2023 2022 2021

Colombia $ 25,453 21.2 % $ 25,181 20.6 % $ 24,829 20.2 %

6 unchanged sentences

Total $ 120,211 100.0 % $ 122,261 100.0 % $ 122,805 100.0 %

The five countries listed above represented the majority of the new and renewal premiums in both 2022 and 2021.

Colombia and Argentina experienced growth in 2022 as compared to 2021, which we believe was driven by previously mentioned sales campaigns and the introduction of our new whole life product as well as our retention initiatives.

Taiwan, Venezuela and Ecuador experienced declines in 2022 as compared to 2021, which is due to the overall decline in our renewal business as well as items discussed above.

Domestic Premiums.

Domestic premiums in our Life Insurance segment were $4.6 million in 2022, compared to $5.0 million in 2021.

The majority of the premium recorded in 2021 and 2022 is related to blocks of business of insurance companies we have acquired over the years as we ceased selling ordinary life in 2017.

We currently offer credit life, credit disability, critical illness and final expense products domestically.

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CITIZENS, INC.

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 Domestic 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 2023 compared to 2022 despite growth in our newly relaunched business.

Net Investment Income.

Net investment income in our Life Insurance segment increased 7% in 2022 compared to 2021 due to a growing diversified invested asset base and reinvestment into a higher interest rate environment.

Our net investment income increased 7% in 2023 compared to 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.

T he investment related losses in 2022 were a result of the change in estimated fair market value for our limited partnerships, as previously discussed.

T he investment related gains and losses in each period were a result of the change in estimated fair market value for our limited partnerships, as previously discussed.

Claims and Surrenders.

The following table sets forth our primary claims and surrender benefits within our Life Insurance segment.

LDTI did not impact claims and surrender benefit expenses;

for a discussion of 2022 to 2021 comparison see the 2022 10-K.

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CITIZENS, INC.

Years ended December 31,

(In thousands)

2023 2022 2021

Claims and surrenders:

7 unchanged sentences

The majority of our claims and surrender benefits in our Life Insurance segment were related to payment of surrender benefits and matured endowment benefits.

Policy surrenders decreased 8% in 2022 as compared to 2021 and matured endowment benefits increased by 57% in 2022 as compared to 2021.

Policy surrenders decreased the past couple of years as we have instituted new programs seeking to curb surrenders.

Policy surrenders and matured endowment benefits increased in 2023 as compared to 2022.

Many of our endowment policies are reaching their contractual maturity dates and thus matured endowment benefits are increasing.

The other key component of claims and surrender benefits is death claim benefits, which decreased 25% in 2022 compared to 2021 due to a lower volume of reported claims, including COVID-19 related deaths.

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

Policy surrenders increased 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 in 2023 compared to 2022.

Mortality experience is closely monitored by the Company as a key performance indicator and these amounts were within expected levels.

Increase in future policy benefit reserves.

The change in future policy benefit reserves decreased 19% in 2022 compared to 2021 as a result of reserves released from higher matured endowment benefits offsetting increases in insurance issued and better persistency.

In addition, the change in future policy reserves for 2021 was lower due to

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an $0.8 million adjustment for the conversion of a small block of policies to our new actuarial valuation system for our Life Insurance segment during the second quarter of 2021.

Increase (Decrease) in Future Policy Benefit Reserves.

The change in future policy benefit reserves decreased in each of the 3-year periods ending December 31, 2023 as a result of reserves released from higher matured endowment and surrender benefits, which decrease was partially offset by increases in insurance issued and increases in our in force block of business.

Policyholder Liability Remeasurement (Gain) Loss.

The policyholder liability remeasurement loss increased from 2021 to 2022 and again to 2023 due to unfavorable surrender experience.

Other General Expenses.

General expenses increased in 2022 compared to 2021 due primarily to expenses associated with our home office and expenses related to our convention and severance costs related to the move of our international business from Bermuda to Puerto Rico.

We did not have a convention in 2021 due to the COVID-19 pandemic.

General expenses increased by 3% in this segment in 2023 compared to 2022 due primarily to expenses related to costs associated with the re-launch of our domestic life insurance business which is a strategic growth initiative.

HOME SERVICE INSURANCE

Our Home Service Insurance products consist primarily of small face amount ordinary whole life and pre-need policies, which are designed to fund final expenses for the insured, primarily consisting of funeral and burial costs.

In June 2021, we added a new whole life product to this market that has higher allowable face values;

and in the fourth quarter of 2021, we added a new critical illness insurance product.

Our Home Service Insurance segment also sells property insurance policies covering dwellings and contents with maximum coverage of $30,000 per dwelling.

In 2021, we added a new whole life product to this market that has higher allowable face values and a new critical illness insurance product.

In June 2023, we stopped selling property insurance.

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CITIZENS, INC.

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

Years ended December 31,

(In thousands)

2023 2022 2021

Life insurance $ 43,185 43,430 44,243

4 unchanged sentences

Other income 17 1 7

Total revenue 61,417 62,519

Total revenues 59,265 61,417 62,519

Benefits and expenses:

2 unchanged sentences

Increase in future policy benefit reserves 5,307 910 1,951

Policyholder liability remeasurement (gain) loss 307 1,156 605

Policyholders' dividends 30 23 40

7 unchanged sentences

Income (loss) before federal income taxes $ 3,013 6,563 4,173

In our Home Service segment our net loss before income tax decreased by $0.3 million in 2022 due primarily to lower death claims benefits and fewer hurricane property claims partially offset by investment related losses due to the changes in the fair value of our equity securities, higher other general operating expenses and increased amortization of deferred policy acquisition costs.

Total Home Service Insurance segment premium revenue increased slightly in 2022 compared to 2021.

Our first year life insurance premiums declined in 2022 compared to 2021.

We believe our premium revenue is impacted by lower persistency due to inflationary pressures.

Our total number of issued policies within our Home Service segment is up approximately 20% in 2022 compared to 2021.

Property insurance premiums increased in 2022

In our Home Service Insurance segment, our net income before federal income taxes decreased by $3.6 million from 2022 to 2023 due primarily to the impact of ceasing our property insurance operations as of June 30, 2023, described above, and higher future policy benefit reserves.

Net income before federal income taxes increased from 2021 to 2022 due primarily to lower death claims benefits and fewer hurricane property claims partially offset by investment related losses due to the changes in the fair value of our equity securities and higher other general operating expenses in 2022.

Total premium revenue declined in 2023 compared to 2022 due primarily to the impact of ceasing our property insurance operations as of June 30, 2023 and slightly lower life renewal premiums due to lower persistency.

Our first year premiums increased 4% in 2023 compared to 2022.

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compared to 2021 due to the impact of higher catastrophic reinsurance reinstatement premiums in 2021 related to the impact of Hurricane Ida.

Claims and Surrenders.

2 unchanged sentences

(In thousands)

2023 2022 2021

Claims and surrenders:

7 unchanged sentences

Total claims and surrenders $ 22,565 24,359 28,345

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

Death claim benefits decreased 15% in 2022 compared to 2021 due to a lower volume of reported claims, including COVID-19 related deaths.

Mortality experience is closely monitored by the Company and can fluctuate based on reported claims as a key performance indicator.

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

Death claim benefits decreased 10% in 2023 compared to 2022 due to a lower volume of reported claims.

We believe death claims in 2021, and to a lesser extent in 2022 were impacted by COVID-19.

Mortality experience is closely monitored by the Company and can fluctuate.

Surrender benefits increased in 2023 compared to 2022.

We believe the impact of inflation and curtailment of COVID-19 relief government aid in 2022 is negatively impacting persistency.

Property claims decreased in 2022 compared to 2021.

The Company was impacted by Hurricane Ida in 2021.

We have a reinsurance agreement that covers catastrophic events such as hurricanes.

This 2021 agreement contains a maximum coverage of $11.0 million per event and a retention level of $0.5 million per event.

With no hurricane activity in 2022, our property claims decreased in 2022 compared to 2021.

Increase in Future Policy Benefit Reserves.

The change in future policy benefit reserves decreased 19.0% in 2022 compared to 2021 due to lower persistency as discussed above.

Future policy benefit reserves increased in 2023 compared to 2022 due to lower death claims.

Other General Expenses.

Other general expenses increased in 2022 compared to 2021 due primarily from higher expenses related to our convention and 2021 included a released tax compliance best estimate liability of $1.8 million partially offset by lower employee health benefit costs.

Amortization of Deferred Policy Acquisition Costs.

Amortization is impacted by persistency, surrenders, and new sales production and thus it may fluctuate from period to period depending on these factors.

Amortization has increased in 2022, compared to 2021 from changes in persistency and higher surrenders as discussed above.

OTHER NON-INSURANCE ENTERPRISES

Other general expenses increased slightly in 2023 compared to 2022 due primarily due to higher employee health benefit costs.

NON-INSURANCE ENTERPRISES

Years ended December 31,

(In thousands)

2023 2022 2021

Income (loss) before federal income tax $ (5,460) (4,609) (5,570)

This operating unit represents the administrative support entities to the insurance operations whose revenues are primarily intercompany and have been eliminated in consolidation under U.S.

GAAP, which typically results in a segment loss.

Revenue in this operating unit consists primarily of net investment income and investment related gains or losses, while expenses consist of other general expenses.

The loss reported for 2022 declined as other general expenses decreased in 2022 by not incurring fees in the current year related to the change in control of the

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.

The loss reported for 2023 increased as other general expenses increased for reasons discussed above.

Our investments are an integral part of our business success, as we invest the majority of premiums collected to pay for future benefits and rely on net investment income for our ongoing operations.

The administration of our investment portfolio is handled by our management and a third-party investment manager, pursuant to Board-approved investment guidelines.

As a primary goal of state insurance regulation is to ensure the solvency of an insurance company, state insurance statutes strictly regulate the types of investments that may be made by insurance companies.

The majority of investments are required to be in qualified state, municipal, federal and foreign government obligations and high quality corporate bonds.

To a lesser extent, we may invest in preferred and common stock, limited partnerships and mortgage loans.

In executing investing activities our management and third-party investment manager are incorporating environmental, social and governance factors into their respective

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Company nor consulting fees paid to our former CEO as we did in 2021.

The Company also sold its former training facility located near Austin, Texas during 2021, resulting in a gain on the sale of $1.0 million.

Our investments play a significant role in the success of our business, as we invest the majority of premiums collected to pay for future benefits and rely on net investment income for our ongoing operations.

The administration of our investment portfolio is handled by our management and a third-party investment manager, pursuant to Board-approved investment guidelines.

State insurance statutes prescribe the quality and percentage of the various types of investments that may be made by insurance companies and generally permit investment in qualified state, municipal, federal and foreign government obligations, high quality corporate bonds, preferred and common stock, mortgage loans and real estate within certain specified percentages.

Our investment guidelines comply with the applicable statutes and thus fixed maturity securities comprise a majority of our investment portfolio.

The assets are intended to mature in accordance with the average maturity of the insurance products and to provide the cash flow for our insurance company subsidiaries to meet their respective policyholder obligations and operating expenses.

In executing investing activities our management and third-party investment manager are incorporating environmental, social and governance factors into their respective investment processes as appropriate.

investment processes as appropriate.

These factors include investing in opportunities to help mitigate climate change by pursuing relevant investments across asset classes.

Our cash and invested assets at December 31, 2023 were $1.4 billion, of which 87% was invested in fixed maturity securities, all of which are classified as available-for-sale.

We closely monitor the duration of our fixed maturity investments, and investment purchases and sales are executed with the objective of having adequate funds available to satisfy our insurance obligations.

The following table shows the carrying value of our investments by investment category and cash along with the percentage of each to total invested assets.

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The carrying value of the Company’s fixed maturity securities investment portfolio at December 31, 2023 was $1.24 billion compared to $1.18 billion at December 31, 2022.

As discussed above, this decline reflects the impact of interest rate sensitivity on the fair value of our fixed maturity securities.

As discussed above, this increase primarily reflects the impact of interest rate sensitivity on the fair value of our fixed maturity securities.

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

Cash and cash equivalents increased as of December 31, 2023 compared to December 31, 2022 and fluctuates from period-to-period primarily due to the timing of operating and investing activities.

Equity securities decreased as of December 31, 2023 compared to December 31, 2022 as we reduced our mutual fund exposure to take advantage of higher fixed maturity yields.

Other long-term investments increased to $82.7 million as of December 31, 2023, as compared to $69.6 million as of December 31, 2022 due to additional funding of our limited partnership investments.

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Cash and cash equivalents decreased as of December 31, 2022 compared to December 31, 2021 due to timing of cash inflows and investments of cash into marketable securities.

In 2022, as fixed maturity securities matured or were called, we utilized the cash to invest into higher yielding bonds as interest rates were rising.

Other long-term investments increased to $69.6 million as of December 31, 2022, as compared to $57.4 million as of December 31, 2021, primarily due to investments of $13.3 million in limited partnerships.

At December 31, 2022, investments in fixed maturity and equity securities were 87% of our total cash and invested assets.

All of our fixed maturity securities were classified as available-for-sale at December 31, 2022 and 2021.

We had no fixed maturity securities that were classified as trading securities at December 31, 2022 or 2021.

The following table shows annualized investment yields by segment and on a consolidated basis as of December 31 for each year presented.

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2022 4.40 % 4.48 % 4.40 %

Yields on investment assets vary between segment operations due to different portfolio mixes and durations in the segments.

2021 4.26 % 4.37 % 4.24 %

Yields on invested assets vary between segment operations due to different portfolio mixes and durations in each segment's portfolio.

The consolidated yields include our other non-insurance enterprises.

The annualized yield increased across our segments in 2023 compared to 2022 resulting primarily from the rising interest rate environment.

The sustained low interest rate environment of the past several years for fixed maturity assets, which account for the majority of our investment portfolio, has required us to reinvest a portion of our portfolio at lower interest rates.

Diversification of our investment portfolio into limited partnership investments helped offset a challenging investment environment for fixed maturity securities.

However, insurance regulations limit the amount we can invest in these alternative investments.

Credit quality is an important feature of our investment guidelines for our fixed maturity securities.

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Value Amortized Cost % of Total Fair Value

Utilities $ 49,818 54,414 16.2 %

Education $ 47,659 53,244 16.6 %

Utilities 42,576 46,035 14.8 %

Transportation 34,068 40,724 11.9 %

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A — — 17,225 21,896 — — 17,225 21,896

BBB — — 1,740 1,821 — — 1,740 1,821

BB and other — — 501 502 — — 501 502

Total $ 29,911 29,821 33,348 39,703 — — 63,259 69,524

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The Company did not record any credit valuation allowances on fixed maturity securities in 2023 or 2022.

Gross unrealized losses on AFS fixed maturity securities amounted to $158.7 million as of December 31, 2023 and $205.3 million as of December 31, 2022.

This decrease in gross unrealized losses during 2023 was a result of the increase in average market interest rates at the end of 2023 as compared to 2022.

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Gross unrealized losses on AFS fixed maturity securities amounted to $205.3 million as of December 31, 2022 and $3.0 million as of December 31, 2021.

This increase in gross unrealized losses during 2022 was a result of the increase in average market interest rates compared to 2021.

Information on both unrealized and realized gains and losses by category is set forth in Note 2.

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(In thousands)

2023 2022 2021

Direct premiums $ 170,557 176,973 178,806

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(In millions)

2023 2022 2021

Direct written life insurance in force $ 4,922 4,797 4,628

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Net life insurance in force $ 4,306 4,257 4,166

Our property insurance company, SPFIC, currently carries first and second event catastrophe reinsurance coverage of $11.0 million per event and a retention level of $1.4 million per event.

Thus, SPFIC is responsible for the first $0.8 million of incurred claims and any claims in excess of $11.0 million per event.

In addition, SPFIC shares responsibility with our reinsurers for up to an additional $0.6 million of incurred claims should total incurred claims reach $11.0 million per event.

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Our property insurance company, SPFIC, carried first and second event catastrophe reinsurance coverage of $11.0 million per event and a retention level of $2.4 million per event until it ceased operations on June 30, 2023.

Thus, SPFIC was responsible for the first $1.0 million of incurred claims and any claims in excess of $11.0 million per event.

In addition, SPFIC shared responsibility with our reinsurers for up to an additional $1.4 million of incurred claims should total incurred claims reach $11.0 million per event.

LIQUIDITY AND CAPITAL RESOURCES

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

In the year ended December 31, 2022, our operations provided $56.9 million in net cash.

We manage our insurance operations as described herein in order to ensure that we have stable and reliable sources of cash flows to meet our obligations.

In the year ended December 31, 2023, our operations provided $22.1 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 flows to meet our

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We currently anticipate meeting our short-term and long-term cash needs with cash generated by our insurance operations and from our invested assets.

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PARENT COMPANY LIQUIDITY AND CAPITAL RESOURCES

Citizens is a holding company and has had minimal operations of its own.

Citizens is a holding company and has minimal operations of its own.

Our assets consist of the capital stock of our subsidiaries, cash and investments.

Our liquidity requirements are met primarily from two sources:

cash generated from our operating subsidiaries and our invested assets.

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

The ability to make payments to the holding company is limited by applicable laws and regulations of Bermuda (and as of January 1, 2023, Puerto Rico), and U.S.

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

cash we receive from our operating subsidiaries and our invested assets.

We can obtain cash from our insurance subsidiaries in two ways - (1) from dividends, and (2) from fees received for providing administrative services under our service agreements.

The ability to receive dividends from our insurance subsidiaries is limited by applicable laws and regulations of Puerto Rico and our U.S.

states of domicile (Colorado, Louisiana and Mississippi), which subject insurance operations to significant regulatory restrictions.

As discussed in Part I, Item 1, Business and Part I.

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

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

In addition to the above-mentioned sources of cash, we offer a Stock Investment Plan ("SIP"), whereby investors, policyholders, independent contractors and agents, employees and directors can directly purchase our stock.

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

In addition to the above-mentioned sources of cash, we offer a Stock Investment Plan ("SIP"), where investors, policyholders, independent contractors and agents, employees and directors can directly purchase our stock.

At our option, purchases of stock under the SIP can be made from newly issued or treasury stock, rather than in the open market, in which case, we can raise capital by selling our shares.

On May 5, 2021, we entered into a Credit Facility with Regions Bank.

On May 5, 2021, we entered into a 3-year Credit Facility with Regions Bank.

See Part IV, Item 15, Note 7, Commitments and Contingencies in the notes to our consolidated financial statements, herein, for a description of the Credit Facility.

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

As of December 31, 2022, we have not borrowed any money under the Credit Facility and have no immediate plans to do so.

The Credit Facility may provide additional liquidity to the Company.

As of the date of this Form 10-K, we have not borrowed any money under the Credit Facility.

We intend to renew the Credit Facility in May 2024.

INSURANCE COMPANY SUBSIDIARY LIQUIDITY AND CAPITAL RESOURCES

The liquidity requirements of our insurance operations are primarily met by premium revenues, investment income and investment maturities.

Our primary uses of cash are for payments of policy benefits to policyholders, investment purchases, and operating expenses.

Historically, cash flow from our operations has been sufficient to meet our cash needs and we have not had to liquidate a material amount of investments to pay our expenses and we did not do so in 2022.

Premium revenue was $173.7 million and $174.7 million in the years ended December 31, 2022 and 2021, respectively.

See Contractual Obligations and Off-balance Sheet Arrangements below for a discussion of known and estimated cash needs related to payments of future policy benefits and policy claims.

The liquidity requirements of our insurance operations are primarily met by premium revenues, investment income and investment maturities or sales.

Primary cash needs relate to payments of policyholder benefits, investment purchases, and operating expenses.

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

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

We believe 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 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.

Cash from Operating Activities.

Cash provided by 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

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in our business or make strategic acquisitions.

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.

Cash provided by operating activities was $22.1 million and $56.9 million for the years ended December 31, 2023 and 2022, respectively.

Cash provided by operations was higher in 2022 due to (i) the $8.8 million severance payment to our former CEO in 2021, and (ii) decreased death and surrender benefits in 2022.

Cash from/used in Investing Activities.

Cash provided by operations was higher in 2022 than 2023 primarily due to higher surrender and matured endowment benefits paid in 2023 as well as higher cash used for payment of commissions in 2023 due to increased first year sales.

Cash used in Investing Activities.

We have traditionally also had significant cash flows from both scheduled and unscheduled investment security maturities, redemptions, and prepayments.

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

During 2022, we used a higher amount of cash in investing activities, as we were able to invest at higher interest rates than the past several years, thus increasing our yields.

We purchased $72.8 million of fixed maturity securities and we also used $17.3 million to purchase other long-term investments in 2023.

88% of our investments consist of marketable fixed maturity securities classified as available-for-sale that could be readily converted to cash for liquidity needs.

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Trends, Demands and Restrictions on our Uses of Cash

Because claims and surrenders are our largest expense, a primary liquidity concern is the risk of either (i) an extraordinary level of early policyholder surrenders, or (ii) higher than expected mortality experience.

In order to mitigate the risk of early policyholder surrenders, we include provisions in our insurance policies, such as surrender charges, that help limit and discourage early withdrawals.

As previously discussed, surrender benefits have 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 (see Part I, Item 3.

Legal Proceedings ).

However, policy surrenders decreased 5.6% in 2022 when compared to 2021 as we have instituted new programs seeking to curb surrenders.

Because claims and surrenders are our largest expense, our primary liquidity concerns include significantly higher than expected (i) early policyholder surrenders or (ii) death claims, as well as high levels of matured endowments in a short timeframe.

In order to mitigate the risk of early policyholder surrenders, we include provisions in some of our insurance policies, such as surrender charges, that help limit and discourage early withdrawals.

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

We continue to monitor surrenders and early withdrawals.

We continue to monitor surrenders and early withdrawals and have implemented retention initiatives over the last few years in an effort to prevent early surrenders and preserve cash where policies are surrendered near maturity.

We experienced increased death claim benefits in 2021, primarily due to the COVID-19 pandemic.

Because the pandemic was an unforeseen event that was not priced into our product assumptions, to the extent we continue to experience increased claims and the associated death benefit payouts as a result of the COVID-19 pandemic or any other unforeseen event, our liquidity could be negatively impacted.

Some of our policies include pandemic exclusions, and we carry reinsurance to offset some of these risks.

However, death claim benefits decreased by 13% in 2023 compared to 2022.

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.

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

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

We experienced increased death claim benefits in 2021, primarily due to the COVID-19 pandemic.

Some of our policies include pandemic exclusions, and we carry reinsurance to offset some of these risks.

However, death claim benefits decreased by 17.9% in 2022 compared to 2021.

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

In our CICA Domestic business, we pay advance commissions on some of our insurance products, meaning we pay an agent their commission immediately upon sale of a policy, rather than "as earned", or when premiums are received by us.

Because of this, another liquidity concern is the risk that rapid growth in first year sales of these products could create a significant increase in commission payments, which increases expenses and thus reduces our statutory capital until the commissions are recouped from premiums paid.

CICA Domestic sales have increased significantly since the third quarter of 2023 and continue to grow rapidly.

To mitigate this risk and strain on capital, we may seek options, such as reinsurance or loans at the holding company level (from the Credit Facility or otherwise) that would allow us to reduce the liquidity risk should CICA Domestic's required commission payments exceed current resources.

If we are unable to purchase reinsurance protection in amounts that we consider sufficient or unable to borrow money to contribute capital to CICA Domestic, we could be exposed to cash flow strain.

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.

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Should the ratio of adjusted statutory capital to control level RBC fall below 200% for our domestic companies, a series of remedial actions by the affected company would be required.

Additionally, we have a parental guarantee

Additionally, we have a parental guarantee between Citizens and CICA Domestic, Citizens' wholly-owned subsidiary domiciled in Colorado, to maintain a RBC level above 350%.

At December 31, 2023, our domestic insurance subsidiaries were above the required minimum RBC levels.

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between Citizens and CICA, Citizens' wholly-owned subsidiary domiciled in Colorado, to maintain a RBC level above 350%.

At December 31, 2022, our domestic insurance subsidiaries were above the required minimum RBC levels.

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").

As of December 31, 2022, CICA International was above the TCL threshold.

As the Insurance Act permits, we requested a modification under Section 6C of the Insurance Act to remove the impact of unrealized gains or losses from the Minimum Margin of Solvency (“MMS”) requirement.

On January 19, 2023, the BMA granted CICA International a permitted practice, effective December 31, 2022, pursuant to Section 6C (1) of the Insurance Act to report its fixed income maturity securities at amortized cost in its unconsolidated statutory financial statements.

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 or change in our permitted practice with CICA International could negatively impact the Company's capital resources and liquidity.

CICA PR is a Puerto Rico domiciled company.

For CICA Domestic, commission advances are non-admitted assets, which increases required regulatory capital and reduces the excess capital available.

As discussed above, management is investigating various options in order to reduce both regulatory capital and liquidity risk should the capital required to support this growth exceed current resources.

Citizens may have to contribute capital to CICA Domestic to maintain the required RBC ratio.

CICA International is a Puerto Rico domiciled company.

The Insurance Code does not specifically set forth minimum capital and surplus standards, but rather requires that an insurer submit a business plan for approval to the OIC that includes proposed minimum capital and surplus.

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 International is required to maintain a minimum of $750,000 in capital and maintain a premium to surplus ratio of 7 to 1.

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

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

The Keep Well Agreement requires Citizens to contribute up to $10 million in capital to CICA International as necessary to ensure that CICA International 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 International'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

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Investment commitments $ 27,299 13,149 11,161 2,989 —

Real estate and equipment leases 10,116 1,163 2,432 2,505 4,016

Real estate leases

9,073 1,283 2,489 2,638 2,663

Future policy benefit reserves 1,403,558 56,026 131,253 103,253 1,113,026

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We have reflected the majority of the obligation in the more than five-years category due to the age of the insured, years to policy maturity and our past experience with claims and surrenders.

Real Estate Lease.

The Company entered into a long-term lease agreement with an unrelated party for its home office in Austin, Texas.

Payments under this long-term lease agreement average approximately $112,000 per month.

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The Company does not have off-balance sheet arrangements at December 31, 2023.

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and (2) changes in the estimate, or different estimates that could have been selected, could have a material effect on our consolidated results of operations or financial condition.

While we believe that our estimates, assumptions and judgments are reasonable, they are based on information presently available.

While we believe that our estimates, assumptions and judgments are reasonable, they are based on information presently

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Changes in our assumptions, estimates or assessments as a result of unforeseen events or otherwise could have a material impact on our financial position or results of operations.

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Fixed maturity securities are classified as held-to-maturity and carried at amortized cost when management has the positive intent and the Company has the ability to hold the securities to maturity.

Securities not classified as held-to-maturity are classified as AFS and are carried at fair value, with the unrealized holding gains and losses, net of tax, reported in other comprehensive income (loss) and do not affect earnings until realized.

The Company currently does not hold any fixed maturity securities classified as held-to-maturity.

Fixed maturity securities classified as AFS are carried at fair value, with the unrealized holding gains and losses, net of tax, reported in other comprehensive income (loss) and are not reported in earnings until realized.

Our fixed maturity securities consist primarily of bonds classified as AFS.

The Company monitors all fixed maturity securities on an on-going basis relative to changes in credit ratings, market prices, earnings trends and financial performance, in addition to specific region or industry reviews.

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Any credit losses are presented as an allowance rather than as a write-down of AFS fixed maturity securities.

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DEFERRED POLICY ACQUISITION COSTS

Acquisition costs, consisting of commissions and policy issuance, underwriting and agent convention expenses that are directly related to and vary with the successful production of new business are deferred.

These deferred amounts, referred to as deferred policy acquisition costs ("DAC"), are recorded as an asset on the consolidated balance sheets and amortized to income in a systematic manner, based on related contract revenues or gross profits as appropriate.

Traditional life insurance and accident and health insurance acquisition costs are amortized over the premium-paying period of the related policies using assumptions consistent with those used in computing future policy benefit liabilities.

For universal life type contracts and investment contracts that include significant surrender charges or that yield significant revenues from sources other than the investment contract holders' funds, the deferred contract acquisition cost amortization is matched to the recognition of gross profit.

The effect on the DAC asset that would result from realization of unrealized gains or losses is recognized with an offset to accumulated other comprehensive income in consolidated stockholders' equity.

If an internal replacement of insurance or investment contract modification substantially changes a contract as defined in current accounting guidance, then the DAC is written off immediately through income and any new deferrable costs associated with the new replacement are deferred.

If a contract modification does not substantially change the contract, the DAC amortization on the original contract will continue and any acquisition costs associated with the related modification are immediately expensed.

The ending DAC asset balance is calculated at a seriatim level for policies in force at the end of each reporting period based on the remaining unamortized asset.

The assumptions used to calculate DAC are set when a policy is issued and do not change with changes in actual experience, unless a loss recognition event occurs.

The seriatim method ensures that policies lapsed or surrendered during the reporting period are no longer included in the DAC calculation.

This method limits the amount of deferred costs to its estimated realizable value, provided actual experience is comparable to that contemplated in the locked-in assumptions.

Deferred policy acquisition costs ("DAC") are costs that are incremental and directly related to the successful acquisition of new or renewal insurance contracts.

Such costs include the incremental direct costs of contract acquisition, such as sales commissions;

the portion of employees’ total compensation and payroll-related fringe benefits related directly to time spent performing acquisition activities, such as underwriting, issuing, and processing policies for contracts that have actually been acquired;

and other costs related directly to acquisition activities that would not have been incurred if the contract had not been acquired.

Inherent in the capitalization and amortization of DAC are certain management judgments about what acquisition costs are deferred, the ending asset balance and the annual amortization.

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

DAC is subject to recoverability testing at the time of policy issuance and loss recognition testing on an annual basis, or when an event occurs that might require loss recognition testing.

If loss recognition or impairment is necessary, DAC would be written off to the extent that anticipated future premiums and investment income is insufficient to cover expected future policy benefits and expenses.

Loss recognition testing considers, among other things, actual experience and projected future experience and calculates the available premium (gross premium less the benefit and expense portion of premium) for the next 50 years.

DAC is evaluated for recoverability using best estimate assumptions related to interest rates, mortality and lapses.

Based on the results of DAC recoverability and loss recognition testing, management believes that our DAC for the years ended December 31, 2022 and 2021 is recorded at its estimated realizable value.

However, if mortality increases by more than 125% from our underlying assumptions a loss recognition event could occur in our Home Service Insurance segment.

Likewise, if interest rates decline significantly, a loss recognition event could occur in both of our operating segments.

For DAC related to long-duration traditional insurance contracts, if the assets supporting the liabilities are in a net unrealized gain position at the balance sheet date, loss recognition testing assumptions are updated to exclude such gains from future cash flows by reflecting the impact of reinvestment rates on future yields.

If a future loss is anticipated under this basis, any additional shortfall indicated by loss recognition tests is recognized as a reduction in accumulated other comprehensive income (shadow loss recognition).

Similar to other loss recognition on long-duration insurance contracts, such shortfall is first reflected as a reduction in DAC and secondly as an increase in liabilities for future policy benefits.

The change in these adjustments, net of tax, is included with the change in net unrealized appreciation of investments that is credited or charged directly to other comprehensive income (loss).

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

For the Life Insurance segment, the constant level basis used is policy count in force.

For the Home Service Insurance segment, the constant level basis used is face amount in force.

The constant level bases used for amortization are projected using mortality and lapse assumptions that are based on the Company’s

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COST OF INSURANCE ACQUIRED

Cost of Insurance Acquired ("COIA") is established when we purchase a block of insurance.

COIA is amortized over the emerging profit of the related policies using the same assumptions as were used in computing liabilities for future policy benefits.

Inherent in the amortization of COIA are certain management judgments about the ending asset balance and the annual amortization.

The key assumptions used are based upon interest, mortality and lapses at the time of purchase.

A recoverability test that considers, among other things, actual experience and projected future experience is performed at least annually.

These annual recoverability tests are based initially on an estimate of the available premium (gross premium less the benefit and expense portion of premium) for the next 50 years using best estimate assumptions related to interest rates, mortality and lapses.

Management believes that our COIA is recoverable for the years ended December 31, 2022 and 2021.

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

experience, industry data, and other factors at the end of each reporting period and are consistent with those used for the liability for future policy benefit life reserves.

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

If those assumptions are updated, the DAC amortization basis is recalculated and the impact of the assumption change will be reflected in the cohort level amortization in future periods.

POLICY LIABILITIES

Future policy benefit reserves have been computed using the net level premium method with assumptions as to investment yields, dividends on participating business, mortality, lapses and withdrawals based upon our experience.

The preparation of consolidated financial statements requires management to make estimates and assumptions that affect the reported amount of policy liabilities and the increase in future policy benefit reserves.

Management's judgments and estimates for future policy benefit reserves provide for possible adverse deviation.

We continue to use the original assumptions (including a provision for the risk of adverse deviation) in subsequent periods to determine the changes in the liability for future policy benefits (the "lock-in concept”) unless a premium deficiency exists.

Management monitors these assumptions and has determined that a premium deficiency did not exist as of December 31, 2022.

Management believes that our policy liabilities and increase in future policy benefit reserves as of the years ended December 31, 2022 and 2021 are based upon assumptions, including a provision for the risk of adverse deviation, that do not warrant revision.

Annually, the Company completes experience studies with respect to mortality, lapse, interest and expenses.

The results of these studies are used for current year reserve adequacy testing, which includes loss recognition and establishing benefit liabilities and DAC for the following year's new issues.

As premium revenue is recognized, a liability for future policy benefits is accrued.

The liability for a future policy benefit is the present value of estimated future policy benefits to be paid to or on behalf of policyholders less the present value of estimated future net premiums to be collected from policyholders.

The liability is estimated using current assumptions that include investment yields, discount rate, mortality, lapses and withdrawals.

These current assumptions are based on judgements that consider the Company’s historical experience, industry data, and other factors.

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

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

The current discount rate assumption is a yield curve that equals the yield of an upper-medium grade fixed income instrument, based on A-quality corporate bonds.

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 the LDTI transition date 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.

TAX ACCOUNTING

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The effect on deferred tax assets and liabilities of a change in tax rates is recognized in net income in the period in which the change is enacted.

CICA International, a wholly-owned subsidiary of Citizens, is considered a controlled foreign corporation for U.S.

CICA International and CICA Bermuda, wholly-owned subsidiaries of Citizens, are considered controlled foreign corporations for U.S.

federal tax purposes.

As a result, the insurance activity of CICA International is subject to Subpart F of the IRC and is included in Citizens taxable income on its U.S.

As a result, the insurance activity of CICA International and CICA Bermuda are subject to Subpart F of the Internal Revenue Code and are included in Citizens taxable income on its U.S.

federal income tax return.

Due to the 0% enacted tax rate in Bermuda there are no deferred taxes recorded for CICA International's temporary differences.

Due to the 0% enacted tax rate in Bermuda there are no deferred taxes recorded for CICA Bermuda's temporary differences.

CICA International 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.

As required by U.S.

GAAP, we evaluated the recoverability of deferred tax assets and the establishment of a valuation allowance, if necessary, to reduce the deferred tax asset to an amount that is more likely than not to be realized.

For the year ended December 31, 2022, changes in market conditions including rising interest rates, resulted in deferred tax assets related to the net unrealized capital losses in our investment portfolio.

When assessing the need for a valuation allowance on the unrealized capital loss deferred tax assets, we assert a tax planning strategy to hold a majority of the underlying securities to recovery or maturity.

For the years ended December 31, 2023 and 2022, changes in market conditions including rising interest rates, resulted in deferred tax assets related to the net unrealized capital losses in our investment portfolio.

When assessing the need for a valuation allowance on the unrealized capital loss deferred tax assets, we asserted a tax planning strategy to hold a majority of the underlying securities to recovery or maturity.

Our ability to assert such a tax planning strategy is dependent upon factors such as our asset/liability matching process, overall investment strategy, projected future product sales and expected liquidity needs.

In the event these estimates differ from our prior estimates due to the receipt of new information, we may be required to significantly change the income tax expense recorded in the consolidated financial statements.

This includes a further significant decline in the value of

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assets incorporated into our tax planning strategies which could lead to an increase in our valuation allowance on deferred tax assets having an adverse effect on current and future results.

This includes a further significant decline in the value of assets incorporated into our tax planning strategies which could lead to an increase in our valuation allowance on deferred tax assets having an adverse effect on current and future results.

RECENT ACCOUNTING PRONOUNCEMENTS

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Summary of Significant Accounting Policies in the notes to our consolidated financial statements.

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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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Item 7. Management’s Discussion and Analysis