What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-05-07 compared with 2023-11-06 · 226 added, 285 removed, 380 unchanged (57% of the section changed)

5 unchanged sentences

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

These forward-looking statements are subject to a number of risks, uncertainties and assumptions including those factors discussed in the "Risk Factors" contained in our Annual Report on Form 10-K for the year ended December 31, 2022 and Quarterly Reports on Form 10-Q for the quarters ended March 31, 2023 and June 30, 2023, which are incorporated herein by reference.

The following discussion should be read in conjunction with the consolidated financial statements and accompanying notes included in Part I, Item 1 of this Form 10-Q.

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We are not including any of the information contained on our website as part of, or incorporating it by reference into, this Form 10-Q.

For almost 50 years, we have been fulfilling the needs of our policyholders and their families by providing insurance products that offer both living and death benefits.

Citizens operates through its insurance subsidiaries located in the United States, including Puerto Rico, and provides benefits to policyholders located throughout the United States and in over 75 different countries.

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.

As an insurance provider, we collect premiums on an ongoing basis from our policyholders and invest the majority of the premiums to pay future benefits, including claims and surrenders and policyholder dividends.

As an insurance provider, we collect premiums on an ongoing basis from our policyholders and invest the majority of the premiums to pay future benefits, including claims, surrenders and policyholder dividends.

Accordingly, the Company derives its revenues principally from:

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

The objective of our MD&A is to provide investors with information in order to assess the material changes in our financial condition from December 31, 2022 to September 30, 2023 and the material changes in our results of operations for the three and nine months ended September 30, 2023 as compared to the same periods in 2022.

The objective of our MD&A is to provide investors with information in order to assess the material changes in our financial condition from December 31, 2023 to March 31, 2024 and the material changes in our results of operations for the three months ended March 31, 2024 as compared to the same period in 2023.

We also discuss in the MD&A any trends that we believe may materially affect our future operations or financial condition.

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

September 30, 2023 | 10-Q 43

March 31, 2024 | 10-Q 32

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

Financial Statements - " Significant Accounting Policies " and Note 2.

Accounting Pronouncements in the notes to our consolidated financial statements.

The Factors that Drive our Operating Results

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

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

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, 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 operations in our property insurance business effective June 30, 2023, the premiums charts below only reflect life insurance and accident and health insurance ("A&H") premium results.

Our first year life and A&H premiums increased in the three and nine months ended September 30, 2023 by 15% due primarily to new products available for sale in both segments supported by focused marketing campaigns.

Our renewal life and A&H premium revenues decreased in the three and nine months ended September 30, 2023 by 3% and 4%, respectively, primarily due to the impact of a higher level of surrenders and matured endowments during the last few years ( i.e ., fewer policies from which to collect renewal premiums).

September 30, 2023 | 10-Q 44

In the last 2 years, we have received 9 new state licenses, developed new final expense and living benefit products, and entered into new white label and other distribution agreements, leading to an increase in first year premiums (i.e.

, new sales) of 42% from 2023 to 2024.

Our renewal life and A&H premium revenues in the three months ended March 31, 2024 decreased slightly primarily due to the impact of 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.

March 31, 2024 | 10-Q 33

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

Our net investment income increased for the three and nine months ended September 30, 2023 by 5% and 8%, respectively, compared to the same prior year periods due to a higher average portfolio yield resulting from the higher interest rate environment and investment income from our limited partnership investments.

Our net investment income increased for the three months ended March 31, 2024 by 2% compared to the same prior year period due primarily to investment income from our limited partnership investments and a growing diversified invested asset base.

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

The three main components of this expense are reflected in the graphs above.

In the three and nine months ended September 30, 2023 compared to the prior year periods:

• Death claim benefits decreased due to a lower number of reported death claims.

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

The three largest components of this expense are reflected in the graphs above.

In the three months ended March 31, 2024 compared to the prior year period:

• Death claim benefits increased due to the increase in policies issued over the last few years.

• Surrenders decreased slightly as we continue to focus on retention efforts.

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

September 30, 2023 | 10-Q 45

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

Our general operating expenses for the three months ended March 31, 2024 increased slightly compared to the prior year period as we continue to invest in the growth of our business.

March 31, 2024 | 10-Q 34

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

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

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

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

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

FINANCIAL HIGHLIGHTS

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

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

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

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

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

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

Financial Condition at September 30, 2023

Our net income decreased from $4.9 million in the three months ended March 31, 2023 to $4.5 million in the three months ended March 31, 2024.

Total revenues increased by $1.8 million due primarily to higher life insurance premium revenue, higher investment related gains and losses and higher net investment income.

We also had a $1.5 million reduction in federal income tax expense.

This was more than offset by total benefits and expenses, which increased by $3.6 million due primarily to $3.5 million of higher death claims and matured endowment benefits paid.

We also incurred $1.4 million in higher commissions paid due to the large increase in first year sales, which have a higher commission rate than renewal sales.

Our basic net income per share of Class A common stock was $0.09 for the three months ended March 31, 2024, respectively, compared to $0.10 in prior year period.

Financial Condition at March 31, 2024

• Total assets of $1.7 billion

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• $5.0 billion of direct insurance in force

September 30, 2023 | 10-Q 46

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

• Fully diluted income per share of Class A common stock of $0.09

• Book value per share of Class A common stock of $3.94

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

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

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

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

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

We could experience higher surrenders and lapses and fewer sales as our policyholders conserve cash due to concerns over inflation and rising costs, particularly in our Home Service Insurance segment, whose customer base is primarily middle- and lower-income individuals.

RISING INTEREST RATES

Interest rates began to rise significantly in 2022 after being ultra-low for almost a decade, and have continued to rise in 2023.

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

Because of this, we reported pre-tax net unrealized losses of $238.0 million on our available-for-sale securities at September 30, 2023.

This compares to pre-tax net unrealized losses of $201.7 million at December 31, 2022, with the year-over-year change primarily driven by market interest rates.

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

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

CEASING OPERATIONS OF OUR PROPERTY INSURANCE BUSINESS

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

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

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

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

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

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

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

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

The cessation of this business is not reported as a discontinued

September 30, 2023 | 10-Q 47

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

operation because it is immaterial to our total operations.

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

See Part II, Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations - Events that Impacted Our Business" in our Annual Report on 10-K for the period ended December 31, 2023 for a discussion of certain events that have impacted and continue to impact our business, including inflation and market volatility, rising interest rates and ceasing operations of our property insurance business.

OUR OPERATING SEGMENTS

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See the discussion under Segment Operations below for detailed analysis.

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

Nine Months Ended September 30, 2023 2022

The amount of insurance,

March 31, 2024 | 10-Q 35

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

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

Three Months Ended March 31, 2024 2023

Issued Number of

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Life Insurance:

International $ 96,140,734 920 $ 104,501 $ 83,414,534 863 $ 96,656

Domestic 111,718,773 9,476 11,790 477,500 39 12,244

Total Life Insurance 207,859,507 10,396 19,994 83,892,034 902 93,007

Home Service Insurance 66,600,824 5,128 12,988 86,437,227 6,524 13,249

Total $ 274,460,331 15,524 $ 170,329,261 7,426

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

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

Both of our segments experienced an increase in insurance issued with a higher number of policies issued in our Life Insurance segment and higher policy face amounts issued in our Home Service Insurance segment.

The growth in our Life Insurance segment is attributable to strong sales from the international whole life product introduced in 2022, which accounted for 68% of total insurance issued in this segment for the nine months ended September 30, 2023.

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

September 30, 2023 | 10-Q 48

As we previously disclosed, our strategic initiatives include the introduction of new products tailored to our specific markets and expansion of our distribution channels both domestically and internationally.

These new products and distribution channels helped drive the 61% increase in total insurance issued in the three months ended March 31, 2024, from $170.3 million in the first three months of 2023 to $274.5 million in 2024.

The growth in our Life Insurance segment is primarily attributable to strong sales of our new domestic final expense products, which accounted for the majority of the insurance issued through March 31, 2024.

The Life Insurance segment also benefited from sales from the international whole life product which accounted for 67% of total insurance issued internationally in this segment for the three months ended March 31, 2024.

Insurance issued in our Home Service Insurance segment decreased for the three months ended March 31, 2024 compared to prior year period as we continue to make changes to our agents' compensation structures to improve the quality of sales in this segment and believe the impact of inflation has affected new sales since the customer demographic is primarily middle- and lower-income individuals.

March 31, 2024 | 10-Q 36

CITIZENS, INC.

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

Three Months Ended Nine Months Ended

September 30, September 30,

Three Months Ended

(In thousands) 2024 2023

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Total revenues $ 57,712 55,914

Total revenues increased in March 31, 2024, as we had higher life insurance premiums, investment related gains, compared to losses in the same period in 2023, and higher net investment income.

The Company stopped accepting renewal premiums for property insurance at the end of May and ceased our operations on June 30, 2023.

Three Months Ended

(In thousands)

First year $ 5,931 4,206

Renewal 32,742 34,043

Total premiums $ 38,673 38,249

Premium Income.

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

Accident and health insurance premiums increased for the nine months ended September 30, 2023 due to sales of our new critical illness products that were launched in late 2022.

Property insurance premiums were negatively impacted for the three and nine months ended September 30, 2023 compared to the same periods in 2022 as we stopped accepting renewal premiums at the end of May and ceased our operations on June 30, 2023.

September 30, 2023 | 10-Q 49

Total premiums increased in the three months ended March 31, 2024 compared to the same period in 2023 due to strong first year premium growth primarily in our Life Insurance segment.

The increase in first year premiums is partially offset by lower renewal year premiums as we stopped accepting renewal premiums in our property insurance business at the end of May 2023, and a decline in Life Insurance segment renewal year premiums.

March 31, 2024 | 10-Q 37

CITIZENS, INC.

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A summary of our net investment income and annualized net investment income performance are summarized as follows:

Three Months Ended Nine Months Ended

September 30, September 30,

Three Months Ended

(In thousands, except for %) 2024 2023

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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 total investment income increased by 4% and 7% for the three and nine months ended September 30, 2023, respectively, compared to the same periods in 2022, primarily due to a higher average portfolio yield on our fixed maturity securities in the current period.

Our total investment income increased by 2% for the three months ended March 31, 2024 compared to the same period in 2023, primarily due to a higher average portfolio yield on our fixed maturity securities in the current period.

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

Our yield increased 23 basis points to 4.53% in the nine months of 2023 compared to the prior year period due to investing in the rising interest rate environment.

Investment Related Gains (Losses), Net.

We recorded investment related losses during the three and nine months ended September 30, 2023 of $0.9 million and $0.5 million compared to losses of $5.0 million and $10.6 million during the same prior year periods.

We recorded investment related gains during the three months ended March 31, 2024 of $1.0 million compared to losses of $0.3 million during the same prior year period.

As described above, the gains and losses are primarily related to the fair value change of our limited partnership and equity securities investments, mostly in our Life Insurance segment, due to the volatility in equity markets over the past year.

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

September 30, 2023 | 10-Q 50

March 31, 2024 | 10-Q 38

CITIZENS, INC.

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BENEFITS AND EXPENSES

Three Months Ended Nine Months Ended

September 30, September 30,

Three Months Ended

(In thousands) 2024 2023

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

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

Total benefits and expenses increased in the three months ended March 31, 2024 as compared to same period in 2023 driven by higher death claims and matured endowments.

Claims and Surrenders.

Three Months Ended Nine Months Ended

September 30, September 30,

Three Months Ended

(In thousands) 2024 2023

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Total claims and surrenders $ 33,113 30,299

Death claim benefits decreased for the three and nine months ended September 30, 2023 compared to the same periods in 2022 due primarily to a lower volume of reported death claims.

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

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

September 30, 2023 | 10-Q 51

Death claim benefits increased for the three months ended March 31, 2024 compared to the same period in 2023 due primarily to a higher volume of reported death claims as a result of the increase in policies issued over the past few years.

Surrender benefits decreased slightly for the three months ended March 31, 2024 compared to the same period in 2023.

Surrenders are primarily related to international policies that are nearing maturity as well as policies that have passed their surrender charge period.

We have implemented retention initiatives over the past few years, which we believe are helping to decrease surrenders, but 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.

March 31, 2024 | 10-Q 39

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

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

Matured endowment benefits increased for the three months ended March 31, 2024 compared to the same period in 2023.

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

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

In the three and nine months ended September 30, 2023, the change in future policy benefit reserves decreased compared to the same prior year periods despite increases in insurance issued and increases in our in force block of business due to the amount of reserves released in connection with the higher matured endowments and surrenders.

In the three months ended March 31, 2024, the change in future policy benefit reserves increased compared to the same prior year period from increases in insurance issued and increases in our in force block of business somewhat offset by the amount of reserves released in connection with the death claims, surrenders and higher matured endowment benefits.

Policyholder Liability Remeasurement (Gain) Loss.

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

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

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

First year commission rates are higher than renewal commission rates and thus commissions fluctuate directly in relation to first year sales.

As discussed above, in the three months ended March 31, 2024, we experienced a 41% increase in first year sales leading to an increase in commission related expenses.

Other General Expenses.

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

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

Capitalization and Amortization of Deferred Policy Acquisition Costs.

Costs capitalized include certain commissions, policy issuance costs, and underwriting and agency expenses that relate to successful sales efforts for insurance contracts and thus fluctuate primarily with first year sales.

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

General expenses increased slightly in the three months ended March 31, 2024, compared to the same period in 2023.

Capitalization of Deferred Policy Acquisition Costs.

We capitalize costs related to successful sales of our insurance products, which include certain commissions, policy issuance costs, and underwriting and agency expenses.

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

Capitalized DAC increased in the three months ended March 31, 2024, 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.

Amortization of Deferred Policy Acquisition Costs.

Amortization of DAC increased in the three months ended March 31, 2024, compared to the same period in 2023.

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

SEGMENT OPERATIONS

Our business is comprised of two operating business segments, as detailed below.

Our business is comprised of two operating business segments:

• Life Insurance

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These segments are reported in accordance with U.S.

The Company evaluates profit and loss performance based on net income before federal income taxes for these segments.

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.

September 30, 2023 | 10-Q 52

March 31, 2024 | 10-Q 40

CITIZENS, INC.

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

Three Months Ended Nine Months Ended

September 30, September 30,

Three Months Ended

(In thousands) 2024 2023

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Other Non-Insurance Enterprises (1,498) (990)

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

Total income before federal income tax expense

$ 4,925 6,715

LIFE INSURANCE

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

Detailed results of operations describing the year-over-year net income increases in the Life Insurance segment for the periods indicated are as follows:

Three Months Ended Nine Months Ended

September 30, September 30,

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

Three Months Ended

(In thousands) 2024 2023

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Total benefits and expenses 37,339 33,588

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

September 30, 2023 | 10-Q 53

Income before federal income tax

$ 5,800 6,372

In our Life Insurance segment, income before federal income tax of $5.8 million in the three months ended March 31, 2024 decreased from $6.4 million in the prior year period .

Total revenue increased by $3.2 million from higher premium revenue, investment related gains (losses) and higher net investment income compared to the prior

March 31, 2024 | 10-Q 41

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

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

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

These improvements were more than offset by higher claims and surrenders benefits paid and higher other general expenses supporting our domestic growth strategy.

Life Insurance segment premium breakout is detailed below.

Three Months Ended Nine Months Ended

September 30, September 30,

Three Months Ended

(In thousands) 2024 2023

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Total premiums $ 27,861 26,207

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

Our total premiums for three and nine months ended September 30, 2023 decreased 2% and 3%, respectively, compared to the same periods in 2022 as renewal premiums declined.

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

Our total premiums increased by 6% in the three months ended March 31, 2024 as compared to the same period in 2023 due to the 77% increase in first year premiums.

First year premiums rose significantly due to sales of our new products and expanded domestic distribution.

Renewal premiums decreased slightly in the three months ended March 31, 2024 as compared to the same prior year period.

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

International Life Insurance Premiums.

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

The majority of our international premiums are derived from whole life and endowment products.

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

Three Months Ended Nine Months Ended

September 30, September 30,

While our domestic life insurance business drove the significant increase in first year premiums, life insurance premiums are generated largely from our international policyholders living in over 75 different countries across the globe.

The following table sets forth our premiums by location for the three months ended March 31, 2024 and 2023.

Three Months Ended

(In thousands) 2024 2023

International premiums:

Colombia $ 5,983 6,057

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Other Non-U.S.

Total international premiums

27,797 29,352

Total $ 29,590 29,796 87,582 87,427

Domestic Life Insurance Premiums.

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

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

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

September 30, 2023 | 10-Q 54

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

Domestic premiums 2,322 967

Change in premium accruals (2,258) (4,112)

Total premiums

$ 27,861 26,207

Net Investment Income .

Our net investment income increased by 7% and 9% for the three and nine months ended September 30, 2023, respectively, compared to the same periods in 2022 due to our higher average portfolio yield.

The majority of investment income is derived from fixed maturity securities;

however, long-term investment income continued to increase as our limited partnership asset base grew.

Our net investment income increased by 3% for the three months ended March 31, 2024, compared to the same period in 2023 due to our higher average portfolio yield.

The majority of our investment income is derived from fixed maturity securities;

however, long-term investment income continues to increase as our limited partnership asset base grows.

Investment Related Gains (Losses), Net.

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

We recorded investment related gains of $1.1 million during the three months ended March 31, 2024, compared to investment related losses of $0.4 million during the same prior year period, resulting primarily from the change in estimated fair market value of our limited partnership investments.

March 31, 2024 | 10-Q 42

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

Claims and Surrenders.

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

Three Months Ended Nine Months Ended

September 30, September 30,

The following table sets forth our primary claims and surrender benefits paid within our Life Insurance segment for the three months ended March 31, 2024 compared to the same period in 2023.

Three Months Ended

(In thousands) 2024 2023

6 unchanged sentences

Total claims and surrenders $ 27,364 24,439

During the three and nine months ended September 30, 2023 and 2022, the majority of our claims and surrender benefits in our Life Insurance segment were related to payment of surrender benefits and matured endowment benefits.

During the three months ended March 31, 2024 and 2023, the majority of our claims and surrender benefits in our Life Insurance segment were related to payment of surrender benefits and matured endowment benefits.

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

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

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

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

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

Surrender benefits decreased slightly for the three months ended March 31, 2024 compared to the prior year period.

Death claim benefits increased for the three months ended March 31, 2024, compared to the prior year period as we saw a higher number of reported claims due to the increase in policies issued.

Mortality experience is closely monitored by the Company as a key performance indicator and fluctuates from quarter-to-quarter based on reported claims.

Increase (Decrease) in Future Policy Benefit Reserves.

The change in future policy benefit reserves decreased as a result of reserves released from higher matured endowment and surrender benefits, which was partially offset by increases in insurance issued and normal increases in our in force block of business policy benefit reserves for the three and nine months ended September 30, 2023 compared to the same periods in 2022.

September 30, 2023 | 10-Q 55

The change in future policy benefit reserves decreased for the three months ended March 31, 2024 and 2023 as a result of reserves released from surrenders and higher matured endowment benefits, which was partially offset by increases in insurance issued and normal increases in our in force block of business policy benefit reserves.

March 31, 2024 | 10-Q 43

CITIZENS, INC.

2 unchanged sentences

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

Three Months Ended Nine Months Ended

September 30, September 30,

Three Months Ended

(In thousands) 2024 2023

2 unchanged sentences

Investment related gains (losses), net (91) 99

Other income — — 1 1

Total revenues 14,258 15,611

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Total benefits and expenses 13,635 14,278

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

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

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

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

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

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

September 30, 2023 | 10-Q 56

Income before federal income tax

In our Home Service Insurance segment, we reported income before federal income tax of $0.6 million in the three months ended March 31, 2024, as compared to income of $1.3 million in the prior year period.

The lower income is primarily driven by lower premiums as we ceased our property insurance operations, increases in future policy benefit reserves and investment related losses partially offset by a decrease in other general expenses.

Total premium revenue declined by 10% in the three months ended March 31, 2024, compared to the same prior year period due primarily to the impact of ceasing our property insurance operations as of June 30, 2023.

Our first year premiums declined 16% in the three months ended March 31, 2024 compared to the same prior year period as we continue to make changes to our agents' compensation structures to improve the quality and the persistency of sales in this segment.

March 31, 2024 | 10-Q 44

CITIZENS, INC.

2 unchanged sentences

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

Three Months Ended Nine Months Ended

September 30, September 30,

Three Months Ended

(In thousands) 2024 2023

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

Death claim benefits decreased 15% in the three and nine months ended September 30, 2023 compared to the same three and nine months in 2022 due primarily to a lower volume of reported claims.

Death claim benefits increased 5% in the three months ended March 31, 2024 compared to the same prior year period.

Mortality experience is closely monitored by the Company as a key performance indicator and fluctuates from quarter-to-quarter based on reported claims.

Other General Expenses.

General expenses increased in the nine months ended September 30, 2023 compared to the same periods in 2022, primarily due to higher employee health benefit costs.

General expenses decreased in the three months ended March 31, 2024 compared to the same period in 2023, primarily due to ceasing our property insurance business as discussed above.

OTHER NON-INSURANCE ENTERPRISES

Three Months Ended Nine Months Ended

September 30, September 30,

Three Months Ended

(In thousands)

2023 2022 2023 2022

Income (loss) before federal income tax

Loss before federal income tax

$ (1,498) (990)

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Our investments are an integral part of our business success.

Our cash and invested assets at September 30, 2023 were $1.3 billion, of which 86% was invested in fixed maturity securities, all of which are classified as available-for-sale.

Our cash and invested assets at March 31, 2024 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.

September 30, 2023 | 10-Q 57

March 31, 2024 | 10-Q 45

CITIZENS, INC.

1 unchanged sentence

The following table sets forth the carrying value of our investments by investment category and cash, cash equivalents and the percentage of each to total cash and invested assets.

Carrying Value September 30, 2023 December 31, 2022

Carrying Value March 31, 2024 December 31, 2023

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

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Asset-backed 54,858 3.9 57,134 4.0

Foreign governments — — 101 —

Total fixed maturity securities 1,234,048 86.7 1,238,981 86.7

Short-term investments — — 1,241 0.1

Cash and cash equivalents 23,242 1.6 26,997 1.8

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Total cash, cash equivalents and invested assets $ 1,423,101 100.0 % $ 1,429,344 100.0 %

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

(1) Includes $122.8 million and $124.2 million of securities guaranteed by third parties at March 31, 2024 and December 31, 2023, respectively.

(2) Includes $94.0 million and $96.1 million of U.S.

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

The carrying value of the Company’s fixed maturity securities investment portfolio at September 30, 2023 was $1.15 billion compared to $1.18 billion at December 31, 2022.

The distribution of the credit ratings of our portfolio of fixed maturity securities by carrying value as of September 30, 2023 did not materially change from December 31, 2022 – the weighted average was “A” at both dates.

Cash and cash equivalents decreased as of September 30, 2023 from December 31, 2022 and fluctuates from period-to-period primarily due to the timing of operating and investing activities.

Other long-term investments increased by $10.2 million as of September 30, 2023 from December 31, 2022 due to additional funding of our limited partnership investments.

Government-sponsored enterprises at March 31, 2024 and December 31, 2023, respectively.

The carrying value of the Company’s fixed maturity securities investment portfolio at March 31, 2024 was $1.23 billion compared to $1.24 billion at December 31, 2023.

The distribution of the credit ratings of our portfolio of fixed maturity securities by carrying value as of March 31, 2024 did not materially change from December 31, 2023 – the weighted average was “A” at both dates.

Cash and cash equivalents decreased as of March 31, 2024 from December 31, 2023 and fluctuates from period-to-period primarily due to the timing of operating and investing activities.

Other long-term investments increased by $2.4 million as of March 31, 2024 from December 31, 2023 due to additional funding and increases in the fair market value of our limited partnership investments.

Obligations of States and Political Subdivisions

The Company’s fixed maturity securities investment portfolio at September 30, 2023 and December 31, 2022 included $284.0 million and $307.4 million, respectively, of securities that are obligations of states and political subdivisions, including municipalities (collectively referred to as the municipal bond portfolio).

September 30, 2023 | 10-Q 58

The Company’s fixed maturity securities investment portfolio at March 31, 2024 and December 31, 2023 included $285.1 million and $287.2 million, respectively, of securities that are obligations of states and political subdivisions, including municipalities (collectively referred to as the municipal bond portfolio).

March 31, 2024 | 10-Q 46

CITIZENS, INC.

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

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

Detailed below is a presentation by the Nationally Recognized Statistical Rating Organization ("NRSRO") rating of these holdings by funding type as of March 31, 2024.

General Obligation Special Revenue Other Total % Based on Amortized

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Total $ 65,215 66,203 207,727 234,763 12,113 12,398 285,055 313,364 100.0 %

The table below shows the categories in which the Company held investments in special revenue bonds that were greater than 10% of fair value based upon the Company's total municipal bond portfolio at September 30, 2023.

(In thousands, except for %) Fair

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Transportation 33,955 40,715 11.9

The Company's municipal bond portfolio is spread across many states, however, municipal bonds from Texas and California comprise the most significant concentration of the total municipal bond portfolio as of September 30, 2023.

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

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

September 30, 2023 | 10-Q 59

The Company holds 22% and 15% of its municipal bond portfolio in Texas and California issuers, respectively, as of March 31, 2024.

There were no other states or individual issuer holdings that represented or exceeded 10% of the total municipal bond portfolio as of March 31, 2024.

March 31, 2024 | 10-Q 47

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

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

The table below represents the Company's detailed exposure to municipal bonds in Texas at March 31, 2024.

General Obligation Special Revenue Other Total

15 unchanged sentences

Total $ 29,849 29,813 33,033 39,699 — — 62,882 69,512

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

The table below represents the Company's detailed exposure to municipal bonds in California at March 31, 2024.

General Obligation Special Revenue Other Total

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IMPAIRMENT CONSIDERATIONS RELATED TO INVESTMENTS IN FIXED MATURITY AND EQUITY SECURITIES

The Company did not record any credit valuation allowances on fixed maturity securities in either of the three and nine months ended September 30, 2023 or 2022.

The Company did not record any credit valuation allowances on fixed maturity securities in either of the three months ended March 31, 2024 or 2023.

Information on both unrealized and realized gains and losses by category is set forth in Part I, Item 1, Note 3.

Investments of the notes to our consolidated financial statements herein.

September 30, 2023 | 10-Q 60

March 31, 2024 | 10-Q 48

CITIZENS, INC.

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(In thousands)

September 30, 2023 December 31, 2022

March 31, 2024 December 31, 2023

Fixed maturity securities $ 1,234,048 1,238,981

Cash and cash equivalents 23,242 26,997

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

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

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

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

From time-to-time, we may raise capital by selling shares in our SIP (as defined below) and we may also access our Credit Facility if needed (also as described below).

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

Our liquidity is primarily derived from our cash flow from operations, our cash and cash equivalents, and our portfolio of marketable securities.

We may also derive liquidity by accessing our Credit Facility (described below) or may raise capital by selling shares in our SIP (as defined below) or by other traditional means.

Citizens has no debt as of March 31, 2024.

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 in our business or make strategic acquisitions.

In the three months ended March 31, 2024, our operations provided $6.8 million in net cash.

Cash from Investing Activities.

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

These cash flows, for the most part, are reinvested in new investments.

In the three months ended March 31, 2024, we had net cash outflows from investing activities of $9.5 million as we continue to invest excess funds in this high interest rate environment.

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

87% of our total cash, cash equivalents and investments consist of marketable fixed maturity securities classified as available-for-sale that could be readily converted to cash for liquidity needs.

PARENT COMPANY LIQUIDITY AND CAPITAL RESOURCES

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

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

Our liquidity requirements are met primarily from two sources:

cash generated from our operating subsidiaries and our invested assets.

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

Citizens' assets consist of the capital stock of its subsidiaries, cash and investments.

Citizens' liquidity requirements are met primarily from two sources:

cash generated from its operating subsidiaries and its invested assets.

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

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

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These laws and regulations require, among other things, that our insurance subsidiaries maintain minimum solvency or premium to surplus ratio requirements, which limit the amount of dividends that can be paid to the holding company.

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

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

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In 2021, we entered into a Credit Facility with Regions Bank.

The initial term of the Credit Facility expired on May 5, 2024 and we renewed it on substantially the same terms for an additional three years.

See Part I, Item 1, Note 7.

Commitments and Contingencies in the notes to our consolidated financial statements, herein, for a description of the Credit Facility.

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

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

INSURANCE COMPANY SUBSIDIARY LIQUIDITY AND CAPITAL RESOURCES

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 that we have adequate capital resources to support the liquidity requirements of our insurance operations if the cash flow from our insurance operations is insufficient to meet our cash needs.

See Contractual Obligations and Off-balance Sheet Arrangements in our Form 10-K and below for a discussion of known and estimated cash needs.

September 30, 2023 | 10-Q 61

Commitments and Contingencies in the notes to our consolidated financial statements, herein, for a description of

March 31, 2024 | 10-Q 49

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

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

Cash from Operating Activities.

Cash provided by or used in operating activities is an important liquidity metric because it reflects, during a given period, the amount of cash generated that is available to pay our operating expenses, invest in our business or make strategic acquisitions.

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

Cash from Investing Activities.

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

These cash flows, for the most part, are reinvested in fixed income securities and to a lesser extent limited partnerships or other alternative investments.

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

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

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

86% of our total cash, cash equivalents and investments consist of marketable fixed maturity securities classified as available-for-sale that could be readily converted to cash for liquidity needs.

the Credit Facility.

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

As of March 31, 2024, we have not borrowed any money under the Credit Facility.

INSURANCE COMPANY SUBSIDIARY LIQUIDITY AND CAPITAL RESOURCES

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

Primary cash needs are for payments of policyholder benefits, investment purchases, policy acquisition costs and other operating expenses.

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

As we have discussed, we recently re-launched our domestic business by developing new products and expanding our distribution channels, which has led to an increase in first year premiums (i.e.

, new sales) of 42% from 2023 to 2024.

When selling new policies, we incur upfront policy acquisition costs, such as agent commission payments.

While historically, cash flows from our operations have been sufficient to meet our cash needs, the insurance companies also have the available-for-sale fixed maturity investment portfolio available to create additional cash flows if required.

Two of our insurance subsidiaries are members of the Federal Home Loan Bank (FHLB) of Dallas.

FHLB membership provides the insurance subsidiaries with access to various low-cost collateralized borrowings and funding agreements.

While not the only source of additional liquidity, the FHLB could provide the insurance subsidiaries with an additional source of liquidity, if needed.

We believe that we have adequate capital resources and ability to obtain additional capital if needed to support the short-term and longer-term liquidity requirements of our insurance operations.

See Contractual Obligations and Off-balance Sheet Arrangements in our Form 10-K and below for a discussion of known and estimated cash needs.

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

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.

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

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

In order to mitigate the risk of early policyholder surrenders, we include provisions in our insurance policies, such as surrender charges, that help limit and discourage early withdrawal, but as many of our policies have reached the age where surrender charges have expired or significantly decreased, we are experiencing higher levels of surrenders.

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

Our death benefit payments increased in the three months ended March 31, 2024 which is expected as the amount of insurance issued has increased significantly over the past couple of years.

Surrender benefits, which have been higher than usual the last several years, slightly decreased in the first three months of 2024.

Additionally, we believe that surrenders have been high due to other reasons, including the loss of one of our biggest distributors in Venezuela in 2018, increasing interest rates, which may encourage policyholders to seek higher rates of returns in different investment products, post-pandemic beliefs that life insurance may not be as important as it was during the pandemic, and inflationary pressures, which may cause policyholders to want the cash values of their policies due to decreased purchasing power elsewhere.

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

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

We continue to monitor surrenders and early withdrawals and focus on our retention initiatives.

Our endowment products have contractual maturity dates and provide the policyholder with alternatives once the policy matures - they can choose to take a lump sum payout or leave the money on deposit at interest with the Company.

Approximately 18% of the endowments in force, totaling approximately 6% of our in force business as of September 30, 2023, will mature in the next five years.

Approximately 18% of the endowments in force, totaling approximately 6% of our in force business as of March 31, 2024, will mature in the next five years.

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

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

As discussed above, we are subject to regulatory capital requirements that could affect the Company’s ability to access capital from our insurance operations or cause the Company to have to put additional cash in our wholly-owned subsidiaries.

Our domestic companies are subject to minimum capital requirements set by the NAIC in the form of risk-based capital ("RBC").

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

September 30, 2023 | 10-Q 62

March 31, 2024 | 10-Q 50

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

various other aspects of an insurance company's business to develop a minimum level of capital called "Authorized Control Level Risk-Based Capital".

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.

Our domestic companies are subject to minimum capital requirements set by the NAIC in the form of risk-based capital ("RBC").

RBC considers the type of business written by an insurance company, the quality of its assets, and various other aspects of an insurance company's business to develop a minimum level of capital called "Authorized Control Level Risk-Based Capital".

This level of capital is then compared to an adjusted statutory capital that includes capital and surplus as reported under statutory accounting principles, plus certain investment reserves.

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

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

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

CICA PR is a Puerto Rico domiciled company.

Additionally, we have a Capital Maintenance Agreement between Citizens and CICA Domestic, Citizens' wholly-owned subsidiary domiciled in Colorado, that would require Citizens to contribute capital to CICA Domestic in order to maintain a RBC level above 350%.

At March 31, 2024, our domestic insurance subsidiaries were above the required minimum RBC levels and CICA Domestic was above 350%.

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

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

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

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

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

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

Any capital that Citizens is required to contribute could negatively impact the Company's capital resources and liquidity.

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 to its insurance subsidiaries could negatively impact the Company's capital resources and liquidity.

March 31, 2024 | 10-Q 51

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS

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

As of March 31, 2024, we have no additional contractual obligations or off-balance sheet arrangements other than those described in Part I.

Item 1, Note 7.

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We believe that the accounting policies set forth in Part I, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations - "Critical Accounting Policies" and Part IV, Item 15, Note 1.

Summary of Significant Accounting Policies of our consolidated financial statements in our Form 10-K continue to describe the significant judgments and estimates used in the preparation of our consolidated financial statements except as follows.

The following items have changed due to adoption of Accounting Standard Update ("ASU") No.

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

Targeted Improvements to the Accounting for Long-Duration Contracts.

DEFERRED POLICY ACQUISITION COSTS

DAC are costs that are incremental and directly related to the successful acquisition of new or renewal insurance contracts.

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

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

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

Inherent in the capitalization and amortization of DAC are certain management judgements about what acquisition costs are deferred.

Approximately 93% of our capitalized DAC are attributed to first year and renewal excess commissions.

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

September 30, 2023 | 10-Q 63

CITIZENS, INC.

MANAGEMENT'S DISCUSSION & ANALYSIS

successful acquisition of new insurance business.

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

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

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

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

The constant level bases used for amortization are projected using mortality and lapse assumptions that are based on the Company’s experience, industry data, and other factors at the end of each reporting period and are consistent with those used for the liability for future policy benefit life reserves.

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

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

COST OF INSURANCE ACQUIRED

The Company recognizes an intangible asset that arises in the application of U.S.

GAAP purchase accounting as the difference between the reported value and the fair value of insurance contract liabilities, or comparable amounts determined in purchased insurance business combinations.

This intangible asset is referred to as the Cost of Insurance Acquired (“COIA”), which is amortized on a basis consistent with DAC, such that it is amortized in proportion to policies in force for the Life Insurance segment and face amount in force for the Home Service Insurance segment to approximate straight-line amortization.

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

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

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

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

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

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

POLICY LIABILITIES

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

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

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

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

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

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

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

The current discount rate assumption is updated quarterly and used to remeasure the liability at the reporting date, with the resulting change reflected in other comprehensive income.

For liability cash flows that are projected beyond the duration of market-observable A credit-rated fixed-income instruments, the Company uses the last market-observable yield level and uses linear interpolation to determine yield assumptions for durations that do not have market observable yields.

The locked-in discount rate for policies issued prior to transition equals the rate set at contract issuance.

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

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CITIZENS, INC.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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Item 2. Management’s Discussion and Analysis