CITIZENS, INC. 10-Q

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS This section and other parts of this Quarterly Report on Form 10-Q ("Form 10-Q") contain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Forward-looking statements can also be identified by words such as “future,” “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “will,” “would,” “could,” “can,” “may,” and similar terms. Forward-looking statements are not guarantees of future performance and the Company’s actual results may differ significantly from the results discussed in the forward-looking statements. These forward-looking statements are subject to a number of risks, uncertainties and assumptions including those factors discussed in the "Risk Factors" contained in our Annual Report on Form 10-K for the year ended December 31, 2023, which is incorporated herein by reference. The following discussion should be read in conjunction with the consolidated financial statements and accompanying notes included in Part I, Item 1 of this Form 10-Q. The Company assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law. The U.S. Securities and Exchange Commission ("SEC") maintains a website that contains reports, proxy and information statements, and other information regarding issuers, including the Company, that file electronically with the SEC. The public can obtain any documents that the Company files with the SEC at http://www.sec.gov. We also make available, free of charge, through our website (http://www.citizensinc.com), our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Section 16 Reports filed by officers and directors, news releases, and, if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable after we electronically file such reports with, or furnish such reports to, the SEC. We are not including any of the information contained on our website as part of, or incorporating it by reference into, this Form 10-Q. OVERVIEW For 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, surrenders and policyholder dividends. Accordingly, the Company derives its revenues principally from: (1) life insurance premiums earned for insurance coverages provided to insureds in our two operating segments – Life Insurance and Home Service Insurance; and (2) net investment income. In addition to paying and reserving for insurance benefits that we pay to our policyholders, our expenses consist primarily of the costs of selling our insurance products (e.g., commissions, underwriting, marketing expenses), operating expenses and income taxes. Objective of our Management's Discussion and Analysis We refer to our Management’s Discussion and Analysis of Financial Condition and Results of Operations as our “MD&A”. The objective of our MD&A is to provide investors with information in order to assess the material changes in our financial condition from December 31, 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. March 31, 2024 | 10-Q 32 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS The Factors that Drive our Operating Results We see the following as the primary factors that drive our operating results: • Sales ( i.e. , premium revenues) • Investments • Claims and surrenders • Operating expenses Premium revenues and investment income are our two primary sources of income and thus key to our profitability. Premium revenues consist of 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. 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 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS 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 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. 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 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS FINANCIAL HIGHLIGHTS 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 • Total investments of $1.4 billion; fixed maturity securities comprised 88% of total investments • $5.0 billion of direct insurance in force • No debt • 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. 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 We manage our business in two operating segments: Life Insurance and Home Service Insurance. Our insurance operations are the primary focus of the Company, as these operations generate most of our income. See the discussion under Segment Operations below for detailed analysis. The amount of insurance, March 31, 2024 | 10-Q 35 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS number of policies, and average face amounts for ordinary life policies issued during the periods indicated are shown below. Three Months Ended March 31, 2024 2023 Amount of Insurance Issued Number of Policies Issued Average Policy Face Amount Issued Amount of Insurance Issued Number of Policies Issued Average Policy Face Amount Issued Ordinary Life Policies: Life Insurance: 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 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 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS CONSOLIDATED RESULTS OF OPERATIONS A discussion of consolidated results is presented below, followed by a discussion of segment operations and financial results by segment. REVENUES Our revenues are generated primarily by insurance renewal premiums and investment income from invested assets. Three Months Ended March 31, (In thousands) 2024 2023 Revenues: Premiums: Life insurance $ 38,261 36,934 Accident and health insurance 414 358 Property insurance (2) 957 Net investment income 17,487 17,074 Investment related gains (losses), net 963 (288) Other income 589 879 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 March 31, (In thousands) 2024 2023 Premiums: First year $ 5,931 4,206 Renewal 32,742 34,043 Total premiums $ 38,673 38,249 Premium Income. 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 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS Net Investment Income. A summary of our net investment income and annualized net investment income performance are summarized as follows: Three Months Ended March 31, (In thousands, except for %) 2024 2023 Gross investment income: Fixed maturity securities $ 15,137 14,945 Equity securities 75 165 Policy loans 1,456 1,539 Long-term investments 1,224 921 Other investment income 236 124 Total investment income 18,128 17,694 Investment expenses (641) (620) Net investment income $ 17,487 17,074 Net investment income, annualized $ 69,948 68,297 Average invested assets, at amortized cost $ 1,525,102 1,519,149 Annualized yield on average invested assets 4.59 % 4.50 % 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 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. Investment Related Gains (Losses), Net. 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. We did not sell these investments; however, the changes in fair values of our equity securities are reflected as investment related gains or losses in our income statement, in addition to executed transactions that result in a gain or loss. Other Income. Other income consists primarily of supplemental contracts issued to policyholders in our Life Insurance segment upon the surrender or maturity of their original policies. March 31, 2024 | 10-Q 38 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS BENEFITS AND EXPENSES Three Months Ended March 31, (In thousands) 2024 2023 Benefits and expenses: Insurance benefits paid or provided: Claims and surrenders $ 33,113 30,299 Increase (decrease) in future policy benefit reserves 451 (978) Policyholder liability remeasurement (gain) loss 319 880 Policyholders' dividends 1,237 1,108 Total insurance benefits paid or provided 35,120 31,309 Commissions 10,450 9,013 Other general expenses 11,338 11,260 Capitalization of deferred policy acquisition costs (8,331) (6,358) Amortization of deferred policy acquisition costs 4,038 3,814 Amortization of cost of insurance acquired 172 161 Total benefits and expenses $ 52,787 49,199 Payments of claims and surrenders benefits constitute the majority of our expenses. 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 March 31, (In thousands) 2024 2023 Claims and surrenders: Death claim benefits $ 6,858 5,382 Surrender benefits 12,131 12,316 Endowment benefits 1,754 2,109 Matured endowment benefits 10,761 8,765 Property claims (13) 342 A&H and other policy benefits 1,622 1,385 Total claims and surrenders $ 33,113 30,299 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 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS 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. Explanation of other benefits and expenses Increase (Decrease) in Future Policy Benefit Reserves. Future policy benefit reserves reflect the liability established to provide for the payment of policy benefits that we expect to pay in the future and thus generally increase when we have a larger in force block of business due to higher sales and better persistency (i.e., more policies on which we expect to pay future benefits) and decrease when we have lower sales and persistency. In the three 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. 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). Commissions. Commission expenses are a cost of acquiring business, as commissions are the primary compensation paid to our independent consultants and independent agents for selling our products. First year commission rates are higher than renewal commission rates and thus commissions fluctuate directly in relation to first year sales. 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 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: • Life Insurance • Home Service Insurance These segments are reported in accordance with U.S. GAAP. 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. March 31, 2024 | 10-Q 40 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS The following table sets forth income (loss) before federal income taxes by segment during the periods indicated. Three Months Ended March 31, (In thousands) 2024 2023 Income (loss) before federal income tax expense: Segments: Life Insurance $ 5,800 6,372 Home Service Insurance 623 1,333 Total segments 6,423 7,705 Other Non-Insurance Enterprises (1,498) (990) Total income before federal income tax expense $ 4,925 6,715 LIFE INSURANCE Detailed results of operations in the Life Insurance segment for the periods indicated are as follows: Three Months Ended March 31, (In thousands) 2024 2023 Revenues: Premiums $ 27,861 26,207 Net investment income 13,686 13,311 Investment related gains (losses), net 1,086 (437) Other income 506 879 Total revenues 43,139 39,960 Benefits and expenses: Insurance benefits paid or provided: Claims and surrenders 27,364 24,439 Increase (decrease) in future policy benefit reserves (1,193) (1,820) Policyholder liability remeasurement (gain) loss 373 816 Policyholders' dividends 1,231 1,101 Total insurance benefits paid or provided 27,775 24,536 Commissions 6,960 4,759 Other general expenses 6,036 5,459 Capitalization of deferred policy acquisition costs (6,816) (4,360) Amortization of deferred policy acquisition costs 3,358 3,162 Amortization of cost of insurance acquired 26 32 Total benefits and expenses 37,339 33,588 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 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS year period. 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 March 31, (In thousands) 2024 2023 Premiums: First year $ 4,584 2,594 Renewal 23,277 23,613 Total premiums $ 27,861 26,207 Premiums. 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. 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 March 31, (In thousands) 2024 2023 International premiums: Colombia $ 5,983 6,057 Taiwan 4,542 5,302 Venezuela 3,315 3,722 Ecuador 3,044 3,246 Argentina 2,098 2,184 Other Non-U.S. 8,815 8,841 Total international premiums 27,797 29,352 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 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 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 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS Claims and Surrenders. The following table sets forth our primary claims and surrender benefits paid within our Life Insurance segment for the three months ended March 31, 2024 compared to the same period in 2023. Three Months Ended March 31, (In thousands) 2024 2023 Claims and surrenders: Death claim benefits $ 1,998 748 Surrender benefits 11,437 11,628 Endowment benefits 1,753 2,108 Matured endowment benefits 10,615 8,620 A&H and other policy benefits 1,561 1,335 Total claims and surrenders $ 27,364 24,439 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 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 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 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS HOME SERVICE INSURANCE Detailed results of operations for the Home Service Insurance segment for the periods indicated are as follows: Three Months Ended March 31, (In thousands) 2024 2023 Revenues: Premiums $ 10,812 12,042 Net investment income 3,537 3,470 Investment related gains (losses), net (91) 99 Total revenues 14,258 15,611 Benefits and expenses: Insurance benefits paid or provided: Claims and surrenders 5,749 5,860 Increase (decrease) in future policy benefit reserves 1,644 842 Policyholder liability remeasurement (gain) loss (54) 64 Policyholders' dividends 6 7 Total insurance benefits paid or provided 7,345 6,773 Commissions 3,490 4,254 Other general expenses 3,489 4,468 Capitalization of deferred policy acquisition costs (1,515) (1,998) Amortization of deferred policy acquisition costs 680 652 Amortization of cost of insurance acquired 146 129 Total benefits and expenses 13,635 14,278 Income before federal income tax $ 623 1,333 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. Premiums. 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 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS Claims and Surrenders. Payments of claims and surrender benefits, which are the largest portion of our expenses, are summarized as follows: Three Months Ended March 31, (In thousands) 2024 2023 Claims and Surrenders: Death claim benefits $ 4,860 4,634 Surrender benefits 694 688 Endowment benefits 1 1 Matured endowment benefits 146 145 Property claims (13) 342 A&H and other policy benefits 61 50 Total claims and surrenders $ 5,749 5,860 The majority of claims and surrender benefits in our Home Service Insurance segment are death claim benefits. 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 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 March 31, (In thousands) 2024 2023 Loss before federal income tax $ (1,498) (990) This operating unit represents the administrative support functions for the insurance operations. Its revenues are primarily intercompany and have been eliminated in consolidation under U.S. GAAP, which typically results in a loss. Revenue in this operating unit consists primarily of net investment income and investment related gains or losses, while expenses consist of other general expenses related to corporate functions. INVESTMENTS Our investments are an integral part of our business success. Our cash and invested assets at 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. March 31, 2024 | 10-Q 45 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS The following table sets forth the carrying value of our investments by investment category and cash, cash equivalents and the percentage of each to total cash and invested assets. Carrying Value March 31, 2024 December 31, 2023 (In thousands, except for %) Amount % Amount % Cash, cash equivalents and invested assets: Fixed maturity securities: U.S. Treasury and U.S. Government-sponsored enterprises $ 9,570 0.7 % $ 9,715 0.7 % Corporate 789,445 55.4 787,607 55.1 States and political subdivisions (1) 285,055 20.0 287,231 20.1 Mortgage-backed (2) 95,120 6.7 97,294 6.8 Asset-backed 54,858 3.9 57,134 4.0 Total fixed maturity securities 1,234,048 86.7 1,238,981 86.7 Cash and cash equivalents 23,242 1.6 26,997 1.8 Other investments: Policy loans 75,274 5.3 75,359 5.3 Equity securities 5,419 0.4 5,282 0.4 Other long-term investments 85,118 6.0 82,725 5.8 Total cash, cash equivalents and invested assets $ 1,423,101 100.0 % $ 1,429,344 100.0 % (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 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 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 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS The Company's municipal bond portfolio includes third-party guarantees. Detailed below is a presentation by the Nationally Recognized Statistical Rating Organization ("NRSRO") rating of these holdings by funding type as of March 31, 2024. General Obligation Special Revenue Other Total % Based on Amortized Cost (In thousands, except for %) Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost State and political subdivision fixed maturity securities including third-party guarantees: AAA $ 13,911 13,913 6,638 6,890 — — 20,549 20,803 6.6 % AA 43,646 44,104 108,295 124,265 6,312 6,553 158,253 174,922 55.8 A 4,153 4,463 87,901 98,213 4,424 4,395 96,478 107,071 34.2 BBB 531 560 4,824 5,325 1,377 1,450 6,732 7,335 2.3 BB and other 2,974 3,163 69 70 — — 3,043 3,233 1.1 Total $ 65,215 66,203 207,727 234,763 12,113 12,398 285,055 313,364 100.0 % State and political subdivision fixed maturity securities excluding third-party guarantees: AA $ 31,926 32,136 33,583 37,612 3,840 3,820 69,349 73,568 23.5 % A 16,722 17,074 97,287 107,898 5,895 6,128 119,904 131,100 41.8 BBB 2,901 3,176 18,601 20,328 — — 21,502 23,504 7.5 BB and other 13,666 13,817 58,256 68,925 2,378 2,450 74,300 85,192 27.2 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 March 31, 2024. (In thousands, except for %) Fair Value Amortized Cost % of Total Fair Value Education $ 47,253 53,236 16.6 % Utilities 41,576 45,401 14.6 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 March 31, 2024. 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 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS The table below represents the Company's detailed exposure to municipal bonds in Texas at March 31, 2024. General Obligation Special Revenue Other Total (In thousands) Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Texas state and political subdivision fixed maturity securities including third-party guarantees: AAA $ 13,410 13,408 2,569 2,634 — — 15,979 16,042 AA 16,439 16,405 13,411 15,169 — — 29,850 31,574 A — — 17,053 21,896 — — 17,053 21,896 Total $ 29,849 29,813 33,033 39,699 — — 62,882 69,512 Texas state and political subdivision fixed maturity securities excluding third-party guarantees: AA $ 24,646 24,610 4,467 4,981 — — 29,113 29,591 A 4,851 4,850 16,123 18,083 — — 20,974 22,933 BBB — — 3,216 3,415 — — 3,216 3,415 BB and other 352 353 9,227 13,220 — — 9,579 13,573 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 March 31, 2024. General Obligation Special Revenue Other Total (In thousands) Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost California state and political subdivision fixed maturity securities including third-party guarantees: AA $ 2,078 2,062 29,649 35,269 2,472 2,732 34,199 40,063 A 1,288 1,650 7,139 8,686 — — 8,427 10,336 BBB — — 570 570 — — 570 570 Total $ 3,366 3,712 37,358 44,525 2,472 2,732 43,196 50,969 California state and political subdivision fixed maturity securities excluding third-party guarantees: AA $ 460 445 4,513 5,260 — — 4,973 5,705 A 2,906 3,267 15,322 18,718 2,472 2,732 20,700 24,717 BBB — — 3,240 3,505 — — 3,240 3,505 BB and other — — 14,283 17,042 — — 14,283 17,042 Total $ 3,366 3,712 37,358 44,525 2,472 2,732 43,196 50,969 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 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. March 31, 2024 | 10-Q 48 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS LIQUIDITY AND CAPITAL RESOURCES Below are our primary capital resources (based on carrying value of each) as of the periods indicated. (In thousands) 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 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. 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. states of domicile and by the Puerto Rico Office of Commissioner of Insurance, which all subject insurance operations to significant regulatory restrictions. These laws and regulations require, among other things, that our insurance subsidiaries maintain minimum solvency or premium to surplus ratio requirements, which limit the amount of dividends that can be paid to the holding company. 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. At our option, purchases of stock under the SIP can be made from newly issued or treasury stock, rather than in the open market, in which case, we can raise capital by selling our shares. In 2021, we entered into a Credit Facility with Regions Bank. 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 March 31, 2024 | 10-Q 49 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS 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 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. 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 have experienced high levels of surrenders. 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 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 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. Meeting these distributions could require the Company to sell its investments at inopportune times to pay policyholder withdrawals. Alternatively, if the policyholders were to leave the money on deposit with the Company at interest, our profitability could be impacted if the product guaranteed rate is higher than the market rate we are earning on our investments. We currently anticipate that our available operating cash flow and capital resources will be adequate to meet our needs for funds, but we are closely monitoring our policyholder behavior patterns. March 31, 2024 | 10-Q 50 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS 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. 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 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 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 to its insurance subsidiaries could negatively impact the Company's capital resources and liquidity. March 31, 2024 | 10-Q 51 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS 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. Commitments and Contingencies in the notes to our consolidated financial statements herein and in Part II, Item 7, Contractual Obligations and Off-Balance Sheet Arrangements in our Form 10-K . We do not utilize special purpose entities as investment vehicles, nor are there any such entities in which we have an investment that engage in speculative activities of any nature, and we do not use such investments to hedge our investment positions. CRITICAL ACCOUNTING POLICIES We believe that the accounting policies set forth in Part I, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations - "Critical Accounting Policies" and Part IV, Item 15, Note 1. Summary of Significant Accounting Policies of our consolidated financial statements in our Form 10-K continue to describe the significant judgments and estimates used in the preparation of our consolidated financial statements. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As a smaller reporting company, we have elected to comply with certain scaled disclosure reporting obligations and therefore are not required to provide the information required by this Item.