CITIZENS, INC. 10-Q

Item 1. FINANCIAL STATEMENTS CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Balance Sheets (In thousands) June 30, 2024 December 31, 2023 (Unaudited) Assets: Investments: Fixed maturity securities available-for-sale, at fair value (amortized cost: $ 1,390,487 and $ 1,389,038 in 2024 and 2023, respectively) $ 1,213,403 1,238,981 Equity securities, at fair value 5,336 5,282 Policy loans 73,462 75,359 Other long-term investments (portion measured at fair value $ 91,875 and $ 82,460 in 2024 and 2023, respectively) 92,141 82,725 Total investments 1,384,342 1,402,347 Cash and cash equivalents 26,344 26,997 Accrued investment income 17,589 17,360 Reinsurance recoverable 5,217 3,991 Deferred policy acquisition costs 186,331 175,768 Cost of insurance acquired 9,719 10,043 Current federal income tax receivable 1,002 1,546 Property and equipment, net 11,075 11,809 Due premiums 10,946 11,264 Other assets (less allowance for losses of $ 405 and $ 408 in 2024 and 2023, respectively) 9,908 7,803 Total assets $ 1,662,473 1,668,928 See accompanying Notes to Consolidated Financial Statements. June 30, 2024 | 10-Q 2 Table of Contents CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Balance Sheets, Continued (In thousands, except share amounts) June 30, 2024 December 31, 2023 (Unaudited) Liabilities and Stockholders' Equity: Liabilities: Policy liabilities: Future policy benefit reserves: Life insurance $ 1,189,593 1,229,253 Accident and health insurance 995 889 Total future policy benefit reserves 1,190,588 1,230,142 Policyholders' funds: Annuities 141,603 133,216 Dividend accumulations 46,644 44,960 Premiums paid in advance 32,737 32,446 Policy claims payable 7,719 6,637 Other policyholders' funds 7,066 7,363 Total policyholders' funds 235,769 224,622 Total policy liabilities 1,426,357 1,454,764 Commissions payable 3,131 3,445 Deferred federal income tax liability 2,418 1,102 Payable for securities in process of settlement 787 — Other liabilities 38,311 37,488 Total liabilities 1,471,004 1,496,799 Commitments and contingencies ( Note s 7 and 8 ) Stockholders' Equity: Common stock: Class A, no par value, 100,000,000 shares authorized, 54,045,725 and 53,882,661 shares issued and outstanding in 2024 and 2023, respectively, including shares in treasury of 4,327,810 in 2024 and 2023 269,283 268,675 Class B, no par value, 2,000,000 shares authorized, 1,001,714 shares issued and outstanding in 2024 and 2023, including shares in treasury of 1,001,714 in 2024 and 2023 3,184 3,184 Retained earnings 50,651 42,150 Accumulated other comprehensive income (loss) ( 107,924 ) ( 118,155 ) Treasury stock, at cost ( 23,725 ) ( 23,725 ) Total stockholders' equity 191,469 172,129 Total liabilities and stockholders' equity $ 1,662,473 1,668,928 See accompanying Notes to Consolidated Financial Statements. June 30, 2024 | 10-Q 3 Table of Contents CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited) Three Months Ended Six Months Ended June 30, June 30, (In thousands, except per share amounts) 2024 2023 2024 2023 Revenues: Premiums: Life insurance $ 42,101 39,292 80,362 76,226 Accident and health insurance 458 547 872 905 Property insurance — ( 113 ) ( 2 ) 844 Net investment income 17,540 17,241 35,027 34,315 Investment related gains (losses), net ( 253 ) 703 710 415 Other income 2,238 857 2,827 1,736 Total revenues 62,084 58,527 119,796 114,441 Benefits and Expenses: Insurance benefits paid or provided: Claims and surrenders 34,530 32,776 67,643 63,075 Increase (decrease) in future policy benefit reserves ( 1,052 ) ( 944 ) ( 601 ) ( 1,922 ) Policyholder liability remeasurement (gain) loss 1,360 956 1,679 1,836 Policyholders' dividends 1,191 1,261 2,428 2,369 Total insurance benefits paid or provided 36,029 34,049 71,149 65,358 Commissions 12,232 8,883 22,682 17,896 Other general expenses 16,639 12,268 27,977 23,528 Capitalization of deferred policy acquisition costs ( 10,543 ) ( 6,544 ) ( 18,874 ) ( 12,902 ) Amortization of deferred policy acquisition costs 4,273 3,674 8,311 7,488 Amortization of cost of insurance acquired 152 153 324 314 Total benefits and expenses 58,782 52,483 111,569 101,682 Income before federal income tax 3,302 6,044 8,227 12,759 Federal income tax expense (benefit) ( 657 ) ( 82 ) ( 274 ) 1,761 Net income 3,959 6,126 8,501 10,998 Per Share Amounts: Basic and diluted earnings per share of Class A common stock 0.08 0.12 0.17 0.22 Other Comprehensive Income (Loss): Unrealized gains (losses) on fixed maturity securities: Unrealized holding gains (losses) arising during period ( 14,258 ) ( 20,430 ) ( 27,674 ) 23,006 Reclassification adjustment for losses (gains) included in net income 199 24 647 62 Unrealized gains (losses) on fixed maturity securities, net ( 14,059 ) ( 20,406 ) ( 27,027 ) 23,068 Change in current discount rate for liability for future policy benefits 5,522 6,251 39,517 ( 14,229 ) Income tax expense (benefit) on other comprehensive income items ( 383 ) ( 1,257 ) 2,259 158 Other comprehensive income (loss) ( 8,154 ) ( 12,898 ) 10,231 8,681 Total comprehensive income (loss) $ ( 4,195 ) ( 6,772 ) 18,732 19,679 See accompanying Notes to Consolidated Financial Statements. June 30, 2024 | 10-Q 4 Table of Contents CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Stockholders' Equity (Unaudited) Common Stock Retained Earnings Accumulated Other Comprehensive Income (Loss) Treasury Stock Total Stockholders' Equity (In thousands) Class A Class B Balance at December 31, 2023 $ 268,675 3,184 42,150 ( 118,155 ) ( 23,725 ) 172,129 Comprehensive income (loss): Net income — — 4,542 — — 4,542 Other comprehensive income (loss) — — — 18,385 — 18,385 Total comprehensive income (loss) — — 4,542 18,385 — 22,927 Stock-based compensation 127 — — — — 127 Balance at March 31, 2024 268,802 3,184 46,692 ( 99,770 ) ( 23,725 ) 195,183 Comprehensive income (loss): Net income — — 3,959 — — 3,959 Other comprehensive income (loss) — — — ( 8,154 ) — ( 8,154 ) Total comprehensive income (loss) — — 3,959 ( 8,154 ) — ( 4,195 ) Stock-based compensation 481 — — — — 481 Balance at June 30, 2024 $ 269,283 3,184 50,651 ( 107,924 ) ( 23,725 ) 191,469 Balance at December 31, 2022 $ 268,147 3,184 16,309 ( 137,044 ) ( 22,806 ) 127,790 Comprehensive income (loss): Net income — — 4,872 — — 4,872 Other comprehensive income (loss) — — — 21,579 — 21,579 Total comprehensive income (loss) — — 4,872 21,579 — 26,451 Stock-based compensation 50 — — — — 50 Balance at March 31, 2023 268,197 3,184 21,181 ( 115,465 ) ( 22,806 ) 154,291 Comprehensive income (loss): Net income — — 6,126 — — 6,126 Other comprehensive income (loss) — — — ( 12,898 ) — ( 12,898 ) Total comprehensive income (loss) — — 6,126 ( 12,898 ) — ( 6,772 ) Acquisition of treasury stock — — — — ( 719 ) ( 719 ) Stock-based compensation 46 — — — — 46 Balance at June 30, 2023 $ 268,243 3,184 27,307 ( 128,363 ) ( 23,525 ) 146,846 See accompanying Notes to Consolidated Financial Statements. June 30, 2024 | 10-Q 5 Table of Contents CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited) Six Months Ended June 30, (In thousands) 2024 2023 Cash flows from operating activities: Net income $ 8,501 10,998 Adjustments to reconcile net income to net cash provided by operating activities: Investment related (gains) losses on sale of investments and other assets, net ( 710 ) ( 415 ) Net deferred policy acquisition costs ( 10,563 ) ( 5,414 ) Amortization of cost of insurance acquired 324 314 Depreciation 291 248 Amortization of premiums and discounts on investments 2,516 2,468 Stock-based compensation 640 146 Deferred federal income tax expense (benefit) ( 944 ) 924 Change in: Accrued investment income ( 229 ) 77 Reinsurance recoverable ( 1,226 ) 515 Due premiums 318 2,585 Future policy benefit reserves ( 36 ) ( 1,397 ) Other policyholders' liabilities 12,942 5,848 Federal income tax payable 543 ( 961 ) Commissions payable and other liabilities 1,147 ( 3,383 ) Other, net ( 2,138 ) ( 355 ) Net cash provided by operating activities 11,376 12,198 Cash flows from investing activities: Purchases of fixed maturity securities, available-for-sale ( 35,650 ) ( 27,637 ) Sales of fixed maturity securities, available-for-sale 4,659 4,244 Maturities and calls of fixed maturity securities, available-for-sale 27,197 17,104 Principal payments on mortgage loans 5 4 (Increase) decrease in policy loans, net 1,897 829 Sales of other long-term investments 130 2,538 Purchases of other long-term investments ( 8,250 ) ( 9,409 ) Purchases of property and equipment ( 189 ) ( 84 ) Maturities of short-term investments — 500 Net cash used in investing activities ( 10,201 ) ( 11,911 ) See accompanying Notes to Consolidated Financial Statements. June 30, 2024 | 10-Q 6 Table of Contents CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Cash Flows, Continued (Unaudited) Six Months Ended June 30, (In thousands) 2024 2023 Cash flows from financing activities: Annuity deposits $ 3,222 3,813 Annuity withdrawals ( 5,017 ) ( 5,390 ) Acquisition of treasury stock — ( 719 ) Other ( 33 ) ( 50 ) Net cash used in financing activities ( 1,828 ) ( 2,346 ) Net decrease in cash and cash equivalents ( 653 ) ( 2,059 ) Cash and cash equivalents at beginning of year 26,997 22,973 Cash and cash equivalents at end of period $ 26,344 20,914 SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES: During the six months ended June 30, 2023, various fixed maturity issuers exchanged securities with book values of $ 5.4 million for securities of equal value while $ 3.7 million were exchanged during the six months ended June 30, 2024. The Company had $ 0.8 million of net unsettled security trades at June 30, 2024 and none at June 30, 2023. See accompanying Notes to Consolidated Financial Statements. June 30, 2024 | 10-Q 7 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) (1) FINANCIAL STATEMENTS BASIS OF PRESENTATION AND CONSOLIDATION The consolidated financial statements include the accounts and operations of Citizens, Inc. ("Citizens" or the "Company"), a Colorado corporation, and its wholly-owned subsidiaries, CICA Life Insurance Company of America ("CICA Domestic"), CICA Life Ltd. ("CICA Bermuda"), CICA Life A.I., a Puerto Rico company ("CICA International"), Security Plan Life Insurance Company ("SPLIC"), Security Plan Fire Insurance Company ("SPFIC"), Magnolia Guaranty Life Insurance Company ("MGLIC"), Computing Technology, Inc. ("CTI"), Nexo Enrollment Services LLC, a Puerto Rico service company ("NES") and Nexo Global Services LLC, a Puerto Rico holding company ("Nexo"). All significant inter-company accounts and transactions have been eliminated. Citizens and its wholly-owned subsidiaries are collectively referred to as the "Company," "it," "we," "us" or "our". The consolidated balance sheet as of June 30, 2024, the consolidated statements of operations and comprehensive income (loss) and stockholders' equity for the three and six months ended June 30, 2024 and June 30, 2023 and the consolidated statements of cash flows for the six months ended June 30, 2024 and June 30, 2023 have been prepared by the Company without audit and are not subject to audit. In the opinion of management, all normal and recurring adjustments to present fairly the financial position, results of operations, and changes in cash flows at June 30, 2024 and for comparative periods have been made. The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q adopted by the Securities and Exchange Commission ("SEC"). Accordingly, the consolidated financial statements do not include all the information and footnotes required for complete financial statements and should be read in conjunction with the Company’s consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2023 ("Form 10-K"). Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period. Our Life Insurance segment operates through CICA International and CICA Domestic. Until December 31, 2022, our international life insurance business operated through CICA Bermuda. Beginning January 1, 2023, all new international policies are issued by CICA International. These companies provide U.S. dollar-denominated endowment contracts internationally, which are principally accumulation contracts that incorporate an element of life insurance protection and ordinary whole life insurance in U.S. dollar-denominated amounts sold to non-U.S. residents. These contracts are designed to provide a fixed amount of insurance coverage over the life of the insured and may utilize rider benefits to provide additional increasing or decreasing coverage and annuity benefits to enhance accumulations. On August 31, 2023, CICA Bermuda transferred all of its insurance in force business to CICA International. Prior to July 1, 2023, our domestic life insurance business operated through CICA Domestic and Citizens National Life Insurance Company ("CNLIC"). CNLIC merged into CICA Domestic on July 1, 2023. CICA Domestic issues ordinary whole life, final expense, life products with living benefits, critical illness, and credit life and disability policies throughout the U.S. Our Home Service Insurance segment operates through our subsidiaries SPLIC, MGLIC and SPFIC, and focuses on the life insurance needs of the middle- and lower-income markets, primarily in Louisiana, Mississippi and Arkansas. Our products in this segment consist primarily of small face amount ordinary whole life, industrial life and pre-need policies, which are designed to fund final expenses for the insured, primarily consisting of funeral and burial costs as well as critical illness and property insurance policies, which cover dwelling and contents. As of June 30, 2023, the Company ceased all operations for SPFIC. CTI provides data processing systems and services to the Company. NES provides services to policyholders of CICA International. June 30, 2024 | 10-Q 8 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) USE OF ESTIMATES The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from these estimates. Significant estimates include those used in the evaluation of credit losses on fixed maturity securities, valuation allowances on deferred tax assets, actuarially determined assets and liabilities and assumptions and contingencies related to litigation and regulatory matters. Certain of these estimates are particularly sensitive to market conditions, and deterioration and/or volatility in the worldwide debt or equity markets could have a material impact on the consolidated financial statements. SIGNIFICANT ACCOUNTING POLICIES For a description of all significant accounting policies, see Part IV, Item 15, Note 1. Summary of Significant Accounting Policies in the notes to our consolidated financial statements included in our Form 10-K , which should be read in conjunction with these accompanying consolidated financial statements. (2) ACCOUNTING PRONOUNCEMENTS ACCOUNTING STANDARDS NOT YET ADOPTED On November 27, 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures . This amendment expands a public entity's segment disclosures by requiring disclosure of significant segment expenses that are regularly provided to the chief operating decision maker, clarifying when an entity may report one or more additional measures to assess segment performance, requiring enhanced interim disclosures, providing new disclosure requirements for entities with a single reportable segment, and requiring other new disclosures. The amendments are effective for fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024. Early adoption is available. As the ASU only requires additional disclosures about the Company's operating segments, the impact to the consolidated financial statements will be minimal. On December 14, 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which is intended to enhance the transparency, decision usefulness and effectiveness of income tax disclosures. The amendments in this ASU require a public entity to disclose a tabular tax rate reconciliation, using both percentages and currency, with specific categories. A public entity is also required to provide a qualitative description of the state and local jurisdictions that make up the majority of the effect of the state and local income tax category and the net amount of income taxes paid, disaggregated by federal, state and foreign taxes and also disaggregated by individual jurisdictions. The amendments also remove certain disclosures that are no longer considered cost beneficial. The amendments are effective prospectively for annual periods beginning after December 15, 2024 and early adoption and retrospective application are permitted. The Company is currently evaluating the impact of adopting this pronouncement on the consolidated financial statements. No other new accounting pronouncements issued or effective during the year had, or is expected to have, a material impact on our consolidated financial statements. June 30, 2024 | 10-Q 9 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) (3) INVESTMENTS The Company invests primarily in fixed maturity securities, which totaled 86.0 % of total cash and invested assets at June 30, 2024, as shown below. Carrying Value (In thousands, except for %) June 30, 2024 December 31, 2023 Amount % Amount % Cash and invested assets: Fixed maturity securities $ 1,213,403 86.0 % 1,238,981 86.7 % Equity securities 5,336 0.4 5,282 0.4 Policy loans 73,462 5.2 75,359 5.3 Other long-term investments 92,141 6.5 82,725 5.8 Cash and cash equivalents 26,344 1.9 26,997 1.8 Total cash and invested assets $ 1,410,686 100.0 % 1,429,344 100.0 % The following tables represent the amortized cost, gross unrealized gains and losses and fair value of fixed maturity securities as of the dates indicated. Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value June 30, 2024 (In thousands) Fixed maturity securities: Available-for-sale: U.S. Treasury securities $ 5,961 91 94 5,958 U.S. Government-sponsored enterprises 3,388 167 1 3,554 States and political subdivisions 307,734 1,184 31,690 277,228 Corporate: Financial 272,484 1,266 34,834 238,916 Consumer 252,587 1,036 43,286 210,337 Utilities 127,169 202 23,296 104,075 Energy 79,407 9 9,602 69,814 Communications 70,884 129 10,251 60,762 All other 111,070 382 15,486 95,966 Commercial mortgage-backed 271 — 6 265 Residential mortgage-backed 106,900 5 12,486 94,419 Asset-backed 52,632 477 1,000 52,109 Total fixed maturity securities $ 1,390,487 4,948 182,032 1,213,403 June 30, 2024 | 10-Q 10 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value December 31, 2023 (In thousands) Fixed maturity securities: Available-for-sale: U.S. Treasury securities $ 5,983 127 48 6,062 U.S. Government-sponsored enterprises 3,404 250 1 3,653 States and political subdivisions 314,203 2,160 29,132 287,231 Corporate: Financial 266,485 2,066 31,255 237,296 Consumer 250,672 2,145 37,094 215,723 Utilities 123,625 615 20,253 103,987 Energy 73,808 64 8,049 65,823 Communications 74,029 309 8,892 65,446 All other 111,124 647 12,439 99,332 Commercial mortgage-backed 171 — — 171 Residential mortgage-backed 107,174 9 10,060 97,123 Asset-backed 58,360 290 1,516 57,134 Total fixed maturity securities $ 1,389,038 8,682 158,739 1,238,981 The Company's investments in equity securities are shown below. Fair Value (In thousands) June 30, 2024 December 31, 2023 Equity securities: Bond mutual funds $ 738 740 Common stock 693 665 Non-redeemable preferred stock 7 7 Non-redeemable preferred stock fund 3,898 3,870 Total equity securities $ 5,336 5,282 VALUATION OF INVESTMENTS Available-for-sale ("AFS") fixed maturity securities are reported in the consolidated financial statements at fair value. Equity securities are measured at fair value with the change in fair value recorded through net income. The Company recognized net investment related losses of $ 0.1 million and $ 0.2 million for the three months ended June 30, 2024 and 2023, respectively. The Company recognized net investment related gains of $ 0.1 million for both of the six months ended June 30, 2024 and 2023. The Company considers several factors in its review and evaluation of individual investments, using the process described in Part IV, Item 15, Note 2. Investments in the notes to the consolidated financial statements of our Form 10-K to determine whether a credit valuation loss exists. For the three and six months ended June 30, 2024 and 2023, the Company recorded no credit valuation losses on fixed maturity securities. June 30, 2024 | 10-Q 11 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) For fixed maturity security investments that have unrealized losses as of June 30, 2024 and December 31, 2023, the gross unrealized losses and related fair values that have been in a continuous unrealized loss position by timeframe are as follows. June 30, 2024 Less than 12 months Greater than 12 months Total (In thousands, except for # of securities) Fair Value Unrealized Losses # of Securities Fair Value Unrealized Losses # of Securities Fair Value Unrealized Losses # of Securities Fixed maturity securities: Available-for-sale securities: U.S. Treasury securities $ 667 62 3 559 32 4 1,226 94 7 U.S. Government-sponsored enterprises — — — 220 1 1 220 1 1 States and political subdivisions 25,258 275 32 169,451 31,415 209 194,709 31,690 241 Corporate: Financial 23,367 442 49 175,029 34,392 214 198,396 34,834 263 Consumer 18,537 642 40 175,453 42,644 227 193,990 43,286 267 Utilities 13,900 582 45 83,076 22,714 149 96,976 23,296 194 Energy 7,875 81 25 60,455 9,521 74 68,330 9,602 99 Communications 1,997 51 3 56,077 10,200 67 58,074 10,251 70 All Other 7,140 233 18 80,830 15,253 97 87,970 15,486 115 Commercial mortgage-backed 120 1 1 96 5 1 216 6 2 Residential mortgage-backed 155 2 9 93,954 12,484 87 94,109 12,486 96 Asset-backed 10,188 119 17 18,755 881 22 28,943 1,000 39 Total fixed maturity securities $ 109,204 2,490 242 913,955 179,542 1,152 1,023,159 182,032 1,394 December 31, 2023 Less than 12 months Greater than 12 months Total (In thousands, except for # of securities) Fair Value Unrealized Losses # of Securities Fair Value Unrealized Losses # of Securities Fair Value Unrealized Losses # of Securities Fixed maturity securities: Available-for-sale securities: U.S. Treasury securities $ 1,203 40 5 65 8 2 1,268 48 7 U.S. Government-sponsored enterprises 221 1 1 — — — 221 1 1 States and political subdivisions 19,540 357 35 164,264 28,775 192 183,804 29,132 227 Corporate: Financial 12,584 383 19 176,521 30,872 217 189,105 31,255 236 Consumer 10,175 265 16 176,725 36,829 223 186,900 37,094 239 Utilities 3,596 66 20 85,169 20,187 137 88,765 20,253 157 Energy 3,291 57 1 59,392 7,992 76 62,683 8,049 77 Communications 5,784 153 5 56,108 8,739 69 61,892 8,892 74 All Other 2,080 32 5 85,757 12,407 100 87,837 12,439 105 Residential mortgage-backed 849 38 5 95,806 10,022 86 96,655 10,060 91 Asset-backed 4,757 111 8 32,764 1,405 40 37,521 1,516 48 Total fixed maturity securities $ 64,080 1,503 120 932,571 157,236 1,142 996,651 158,739 1,262 June 30, 2024 | 10-Q 12 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) In each category of our fixed maturity securities described above, we do not intend to sell our investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases. As of June 30, 2024 and December 31, 2023, 99.2 % and 99.4 % of the fair value of our fixed maturity securities portfolio, respectively, were rated investment grade. While the losses are currently unrealized, we continue to monitor all fixed maturity securities on an on-going basis as future information may become available which could result in an allowance being recorded. These unrealized losses on fixed maturity securities are due to noncredit-related factors, including change in credit spreads and rising interest rates since purchase, which have little bearing on the recoverability of our investments, hence they are not recognized as credit losses. The fair value is expected to recover as the securities approach maturity or if market yields for such investments decline. The amortized cost and fair value of fixed maturity securities at June 30, 2024 by contractual maturity are shown in the table below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date have been reflected based upon final stated maturity. June 30, 2024 Amortized Cost Fair Value (In thousands) Fixed maturity securities: Due in one year or less $ 13,739 13,634 Due after one year through five years 131,109 128,939 Due after five years through ten years 287,364 278,050 Due after ten years 958,275 792,780 Total fixed maturity securities $ 1,390,487 1,213,403 The Company uses the specific identification method of the individual security to determine the cost basis used in the calculation of realized gains and losses related to security sales. Three Months Ended Six Months Ended June 30, June 30, (In thousands) 2024 2023 2024 2023 Fixed maturity securities, available-for-sale: Proceeds $ 2,151 1,379 4,659 4,244 Gross realized gains $ 90 — 91 5 Gross realized losses $ 147 5 196 17 (4) FAIR VALUE MEASUREMENTS Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We hold AFS fixed maturity securities, which are carried at fair value with changes in fair value reported through other comprehensive income (loss). We also report our equity securities and certain other long-term investments at fair value with changes in fair value reported through the consolidated statements of operations and comprehensive income (loss). Fair value measurements are generally based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our view of market assumptions in the absence of observable market information. We utilize valuation techniques that maximize the use of June 30, 2024 | 10-Q 13 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) observable inputs and minimize the use of unobservable inputs. All assets and liabilities carried at fair value are required to be classified and disclosed in one of the following three categories: • Level 1 - Quoted prices for identical instruments in active markets. • Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs or whose significant value drivers are observable. • Level 3 - Instruments whose significant value drivers are unobservable. Level 1 primarily consists of financial instruments whose value is based on quoted market prices such as U.S. Treasury securities and actively traded mutual fund and stock investments. Level 2 includes those financial instruments that are valued by independent pricing services or broker quotes. These pricing models are primarily industry-standard models that consider various inputs, such as interest rates, credit spreads and foreign exchange rates for the underlying financial instruments. All significant inputs are observable or derived from observable information in the marketplace or are supported by observable levels at which transactions are executed in the marketplace. Financial instruments in this category primarily include corporate securities, U.S. Government-sponsored enterprise securities, securities issued by states and political subdivisions and certain mortgage and asset-backed securities. Level 3 is comprised of financial instruments whose fair value is estimated based on non-binding broker prices utilizing significant inputs not based on or corroborated by readily available market information. We have no investments in this category. The following tables set forth our assets measured at fair value on a recurring basis as of the dates indicated. June 30, 2024 Level 1 Level 2 Level 3 Total Fair Value (In thousands) Financial assets: Fixed maturity securities, available-for-sale: U.S. Treasury and U.S. Government-sponsored enterprises $ 5,958 3,554 — 9,512 States and political subdivisions — 277,228 — 277,228 Corporate 42 779,828 — 779,870 Commercial mortgage-backed — 265 — 265 Residential mortgage-backed — 94,419 — 94,419 Asset-backed — 52,109 — 52,109 Total fixed maturity securities, available-for-sale 6,000 1,207,403 — 1,213,403 Equity securities: Bond mutual funds 738 — — 738 Common stock 693 — — 693 Non-redeemable preferred stock 7 — — 7 Non-redeemable preferred stock fund 3,898 — — 3,898 Total equity securities 5,336 — — 5,336 Other long-term investments (1) — — — 91,875 Total financial assets $ 11,336 1,207,403 — 1,310,614 (1) In accordance with Subtopic 820-10, certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient are not classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the consolidated balance sheets. June 30, 2024 | 10-Q 14 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) December 31, 2023 Level 1 Level 2 Level 3 Total Fair Value (In thousands) Financial assets: Fixed maturity securities, available-for-sale: U.S. Treasury and U.S. Government-sponsored enterprises $ 6,062 3,653 — 9,715 States and political subdivisions — 287,231 — 287,231 Corporate 43 787,564 — 787,607 Commercial mortgage-backed — 171 — 171 Residential mortgage-backed — 97,123 — 97,123 Asset-backed — 57,134 — 57,134 Total fixed maturity securities, available-for-sale 6,105 1,232,876 — 1,238,981 Equity securities: Bond mutual funds 740 — — 740 Common stock 665 — — 665 Non-redeemable preferred stock 7 — — 7 Non-redeemable preferred stock fund 3,870 — — 3,870 Total equity securities 5,282 — — 5,282 Other long-term investments (1) — — — 82,460 Total financial assets $ 11,387 1,232,876 — 1,326,723 (1) In accordance with Subtopic 820-10, certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient are not classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the consolidated balance sheets. FINANCIAL INSTRUMENTS VALUATION FINANCIAL INSTRUMENTS CARRIED AT FAIR VALUE Fixed maturity securities, available-for-sale. At June 30, 2024, fixed maturity securities, valued using a third-party pricing source, totaled $ 1.2 billion for Level 2 assets and comprised 92.1 % of total reported fair value of our financial assets. The Level 1 and Level 2 valuations are reviewed and updated quarterly through testing by comparisons to separate pricing models, other third-party pricing services, and back tested to recent trades. In addition, we obtain information annually relative to the third-party pricing models and review model parameters for reasonableness. There were no Level 3 assets at June 30, 2024. As of June 30, 2024, there were no material changes to the valuation methods or assumptions used to determine fair values, and no broker or third-party prices were changed from the values received. Equity securities. Our equity securities are classified as Level 1 assets as their fair values are based upon quoted market prices. Limited partnerships. The Company considers the net asset value ("NAV") to represent the value of the investment fund and is measured by the total value of assets minus the total value of liabilities. The following table includes information related to our investments in limited partnerships that calculate NAV per share. For these investments, which are measured at fair value on a recurring basis, we use the NAV per share to measure fair value. The Company recognized net investment related gains of $ 4 thousand and $ 1.3 million and gains of $ 0.9 million and June 30, 2024 | 10-Q 15 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) $ 0.3 million on limited partnerships held for the three and six months ended June 30, 2024 and June 30, 2023, respectively. These investments are included in other long-term investments on the consolidated balance sheets. June 30, 2024 December 31, 2023 (In thousands, except for years) Fair Value Using NAV Per Share Unfunded Commit- ments Range (In years) Fair Value Using NAV Per Share Unfunded Commit- ments Range (In years) Description Limited partnerships: Middle market Investments in privately-originated, performing senior secured debt primarily in North America-based companies $ 36,816 2,701 3 $ 34,858 3,452 4 Global equity fund Investments in common stocks of U.S., international developed and emerging markets with a focus on long-term capital growth 10,909 — 0 10,345 — 0 Late-stage growth Investments in private late-stage, established companies seeking capital to accelerate growth prior to an IPO or sale 24,973 10,905 4 to 6 20,524 14,271 4 to 6 Infrastructure Investments in climate infrastructure assets, focusing on renewable power generation in wind and solar energy 19,177 7,548 9 to 11 16,733 9,576 10 Total limited partnerships $ 91,875 21,154 $ 82,460 27,299 The majority of our limited partnership investments are not redeemable because distributions from the funds will be received when the underlying investments of the funds are liquidated. The life spans indicated above may be shortened or extended at the fund manager's discretion, typically in one or two-year increments. The global equity fund is redeemable monthly. FINANCIAL INSTRUMENTS NOT CARRIED AT FAIR VALUE Estimates of fair values are made at a specific point in time, based on relevant market prices and information about the financial instruments. The estimated fair values of financial instruments presented below are not necessarily indicative of the amounts the Company might realize in actual market transactions. The carrying amount and fair value for the financial assets and liabilities on the consolidated financial statements not otherwise disclosed for the periods indicated were as follows: June 30, 2024 December 31, 2023 (In thousands) Carrying Value Fair Value Carrying Value Fair Value Financial assets: Policy loans $ 73,462 73,462 75,359 75,359 Residential mortgage loan 37 38 42 42 Cash and cash equivalents 26,344 26,344 26,997 26,997 Financial liabilities: Annuity - investment contracts 67,627 61,066 67,690 63,283 June 30, 2024 | 10-Q 16 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) Policy loans. Policy loans had a weighted average annual interest rate of 7.7 % at both June 30, 2024 and December 31, 2023 and no specified maturity dates. The aggregate fair value of policy loans approximates the carrying value reflected on the consolidated balance sheets. Policy loans are an integral part of the life insurance policies we have in force, cannot be valued separately and are not marketable. Therefore, the fair value of policy loans approximates the carrying value and policy loans are considered Level 3 assets in the fair value hierarchy. Residential mortgage loan. This mortgage loan is secured by a residential property. The interest rate for this loan was 7.0 % at both June 30, 2024 and December 31, 2023. At June 30, 2024, the remaining loan matures in four years . Management estimated the fair value using an annual interest rate of 6.25 % at both June 30, 2024 and December 31, 2023. Our mortgage loan is considered a Level 3 asset in the fair value hierarchy and is included in other long-term investments on the consolidated balance sheets. Cash and cash equivalents. The fair value of cash and cash equivalents approximates carrying value and are characterized as Level 1 assets in the fair value hierarchy. Annuity liabilities. The fair value of the Company's liabilities under annuity contracts, which are considered Level 3 liabilities, was estimated at June 30, 2024 and December 31, 2023 using discounted cash flows based upon spot rates adjusted for various risk adjustments ranging from 4.25 % to 4.74 % and 3.80 % to 4.50 %, respectively. The fair value of liabilities under all insurance contracts are taken into consideration in the overall management of interest rate risk, which seeks to minimize exposure to changing interest rates through the matching of investment maturities with amounts due under insurance contracts. Other long-term investments. Financial instruments included in other long-term investments are classified in various levels of the fair value hierarchy. The following table summarizes the carrying amounts of these investments. Carrying Value (In thousands ) June 30, 2024 December 31, 2023 Other long-term investments: Limited partnerships $ 91,875 82,460 FHLB common stock 207 202 Mortgage loans 37 42 All other investments 22 21 Total other long-term investments $ 92,141 82,725 We are a member of the Federal Home Loan Bank ("FHLB") of Dallas and such membership requires members to own stock in the FHLB. Our FHLB stock is carried at amortized cost, which approximates fair value. (5) DEFERRED POLICY ACQUISITION COSTS AND COST OF INSURANCE ACQUIRED DAC The following tables roll forward the DAC and COIA balances for the six months ended June 30, 2024 and 2023 by reporting cohort. Our reporting cohorts are Permanent, which summarizes insurance policies with premiums payable over the lifetime of the policy, and Permanent Limited Pay, which summarizes insurance policies with June 30, 2024 | 10-Q 17 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) premiums payable for a limited time after which the policy is fully paid up. Both reporting cohorts include whole life and endowment policies. Six Months Ended June 30, 2024 (In thousands) Permanent Permanent Limited Pay Other Business Total Life Insurance: Balance, beginning of year $ 105,552 14,075 1,213 120,840 Capitalizations 13,658 1,611 138 15,407 Amortization expense ( 6,304 ) ( 470 ) ( 170 ) ( 6,944 ) Balance, end of period 112,906 15,216 1,181 129,303 Home Service Insurance: Balance, beginning of year 43,280 10,564 1,084 54,928 Capitalizations 2,727 621 119 3,467 Amortization expense ( 1,117 ) ( 213 ) ( 37 ) ( 1,367 ) Balance, end of period 44,890 10,972 1,166 57,028 Consolidated: Balance, beginning of year 148,832 24,639 2,297 175,768 Capitalizations 16,385 2,232 257 18,874 Amortization expense ( 7,421 ) ( 683 ) ( 207 ) ( 8,311 ) Balance, end of period $ 157,796 26,188 2,347 186,331 Six Months Ended June 30, 2023 (In thousands) Permanent Permanent Limited Pay Other Business Total Life Insurance: Balance, beginning of year $ 100,926 11,542 1,016 113,484 Capitalizations 7,212 1,436 169 8,817 Amortization expense ( 5,909 ) ( 382 ) ( 38 ) ( 6,329 ) Balance, end of period 102,229 12,596 1,147 115,972 Home Service Insurance: Balance, beginning of year 38,793 9,729 921 49,443 Capitalizations 3,340 629 116 4,085 Amortization expense ( 1,015 ) ( 196 ) 52 ( 1,159 ) Balance, end of period 41,118 10,162 1,089 52,369 Consolidated: Balance, beginning of year 139,719 21,271 1,937 162,927 Capitalizations 10,552 2,065 285 12,902 Amortization expense ( 6,924 ) ( 578 ) 14 ( 7,488 ) Balance, end of period $ 143,347 22,758 2,236 168,341 DAC capitalization increased for the six months ended June 30, 2024, compared to the same prior year period mainly from increased commissions from higher first year sales in our Life Insurance segment. June 30, 2024 | 10-Q 18 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) COIA Six Months Ended June 30, 2024 (In thousands) Permanent Permanent Limited Pay Other Business Total Life Insurance: Balance, beginning of year $ 249 695 406 1,350 Amortization expense ( 8 ) ( 25 ) ( 22 ) ( 55 ) Balance, end of period 241 670 384 1,295 Home Service Insurance: Balance, beginning of year 7,194 168 1,331 8,693 Amortization expense ( 187 ) ( 4 ) ( 78 ) ( 269 ) Balance, end of period 7,007 164 1,253 8,424 Consolidated: Balance, beginning of year 7,443 863 1,737 10,043 Amortization expense ( 195 ) ( 29 ) ( 100 ) ( 324 ) Balance, end of period $ 7,248 834 1,637 9,719 Six Months Ended June 30, 2023 (In thousands) Permanent Permanent Limited Pay Other Business Total Life Insurance: Balance, beginning of year $ 267 750 444 1,461 Amortization expense ( 10 ) ( 30 ) ( 18 ) ( 58 ) Balance, end of period 257 720 426 1,403 Home Service Insurance: Balance, beginning of year 7,583 176 1,427 9,186 Amortization expense ( 197 ) ( 4 ) ( 55 ) ( 256 ) Balance, end of period 7,386 172 1,372 8,930 Consolidated: Balance, beginning of year 7,850 926 1,871 10,647 Amortization expense ( 207 ) ( 34 ) ( 73 ) ( 314 ) Balance, end of period $ 7,643 892 1,798 10,333 (6) POLICYHOLDERS’ LIABILITIES LIABILITY FOR FUTURE POLICY BENEFITS The following tables summarize balances of and changes in the liability for future policy benefits for our reporting cohorts: Permanent, which summarizes insurance policies with premiums payable over the lifetime of the policy, June 30, 2024 | 10-Q 19 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) and Permanent Limited Pay, which summarizes insurance policies with premiums payable for a limited time after which the policy is fully paid up. Both reporting cohorts include whole life and endowment policies. June 30, 2024 (In thousands) Life Insurance Home Service Insurance Permanent Permanent Limited Pay Total Permanent Permanent Limited Pay Total Present Value of Expected Net Premiums: Balance, beginning of year $ 244,917 13,260 258,177 98,831 14,926 113,757 Beginning balance at original discount rate 252,426 13,533 265,959 102,045 15,512 117,557 Effects of actual variances from expected experience ( 3,880 ) 456 ( 3,424 ) ( 2,791 ) ( 1,813 ) ( 4,604 ) Adjusted beginning of year balance 248,546 13,989 262,535 99,254 13,699 112,953 Issuances 39,391 1,566 40,957 8,038 1,278 9,316 Interest accrual 5,243 245 5,488 2,135 266 2,401 Net premiums collected ( 21,932 ) ( 1,537 ) ( 23,469 ) ( 6,056 ) 159 ( 5,897 ) Derecognition and other ( 3,417 ) 97 ( 3,320 ) 190 35 225 Ending balance at original discount rate 267,831 14,360 282,191 103,561 15,437 118,998 Effect of changes in discount rates ( 10,055 ) ( 333 ) ( 10,388 ) ( 5,741 ) ( 867 ) ( 6,608 ) Balance, end of period $ 257,776 14,027 271,803 97,820 14,570 112,390 Present Value of Expected Future Policy Benefits: Balance, beginning of year $ 973,350 195,122 1,168,472 211,946 122,784 334,730 Beginning balance at original discount rate 995,962 202,755 1,198,717 217,524 123,941 341,465 Effects of actual variances from expected experience ( 2,480 ) 2,137 ( 343 ) ( 2,714 ) ( 917 ) ( 3,631 ) Adjusted beginning of year balance 993,482 204,892 1,198,374 214,810 123,024 337,834 Issuances 39,803 1,650 41,453 8,037 1,280 9,317 Interest accrual 22,134 4,127 26,261 4,826 2,878 7,704 Benefit payments ( 42,634 ) ( 9,283 ) ( 51,917 ) ( 7,789 ) ( 3,037 ) ( 10,826 ) Derecognition and other ( 4,154 ) 16 ( 4,138 ) 187 32 219 Ending balance at original discount rate 1,008,631 201,402 1,210,033 220,071 124,177 344,248 Effect of changes in discount rates ( 45,573 ) ( 13,063 ) ( 58,636 ) ( 15,138 ) ( 7,865 ) ( 23,003 ) Balance, end of period $ 963,058 188,339 1,151,397 204,933 116,312 321,245 Net liability for future policy benefits $ 705,282 174,312 879,594 107,113 101,742 208,855 Less: Reinsurance recoverable 142 — 142 — — — Net liability for future policy benefits, after reinsurance recoverable $ 705,140 174,312 879,452 107,113 101,742 208,855 June 30, 2024 | 10-Q 20 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) June 30, 2023 (In thousands) Life Insurance Home Service Insurance Permanent Permanent Limited Pay Total Permanent Permanent Limited Pay Total Present Value of Expected Net Premiums: Balance, beginning of year $ 235,228 10,209 245,437 93,508 13,255 106,763 Beginning balance at original discount rate 247,601 10,682 258,283 100,225 14,394 114,619 Effects of actual variances from expected experience 3,081 466 3,547 ( 2,910 ) ( 2,291 ) ( 5,201 ) Adjusted beginning of year balance 250,682 11,148 261,830 97,315 12,103 109,418 Issuances 13,189 1,449 14,638 9,091 2,125 11,216 Interest accrual 4,571 150 4,721 1,996 230 2,226 Net premiums collected ( 20,049 ) ( 1,203 ) ( 21,252 ) ( 5,919 ) 948 ( 4,971 ) Derecognition and other 293 60 353 272 82 354 Ending balance at original discount rate 248,686 11,604 260,290 102,755 15,488 118,243 Effect of changes in discount rates ( 10,320 ) ( 404 ) ( 10,724 ) ( 5,247 ) ( 927 ) ( 6,174 ) Balance, end of period $ 238,366 11,200 249,566 97,508 14,561 112,069 Present Value of Expected Future Policy Benefits: Balance, beginning of year $ 947,415 195,612 1,143,027 200,351 116,356 316,707 Beginning balance at original discount rate 996,169 208,051 1,204,220 214,188 121,908 336,096 Effects of actual variances from expected experience 4,533 2,114 6,647 ( 2,750 ) ( 579 ) ( 3,329 ) Adjusted beginning of year balance 1,000,702 210,165 1,210,867 211,438 121,329 332,767 Issuances 13,442 1,479 14,921 9,090 2,129 11,219 Interest accrual 21,673 4,210 25,883 4,642 2,822 7,464 Benefit payments ( 39,414 ) ( 10,676 ) ( 50,090 ) ( 8,532 ) ( 3,317 ) ( 11,849 ) Derecognition and other 31 29 60 268 80 348 Ending balance at original discount rate 996,434 205,207 1,201,641 216,906 123,043 339,949 Effect of changes in discount rates ( 38,485 ) ( 10,615 ) ( 49,100 ) ( 10,009 ) ( 3,436 ) ( 13,445 ) Balance, end of period $ 957,949 194,592 1,152,541 206,897 119,607 326,504 Net liability for future policy benefits $ 719,583 183,392 902,975 109,389 105,046 214,435 Net premiums collected is defined as the transactional gross premiums collected in the current period times the net premium ratio. Issuances are calculated as the present value, using the locked-in discount rate, of the expected net premiums or the expected future policy benefits related to new policies issued during the six months ended June 30, 2024 and 2023. Interest accrual is the interest earned on the beginning present value of either the expected net premiums or the expected future policy benefits using the locked-in discount rate. Benefit payments are the transactional benefits (death, lapse, surrenders and maturities) paid in the current period. Derecognition refers to a subset of the issuances or the present value of future premiums released on new issues that lapsed during the six months ended June 30, 2024 and 2023 as well as other reconciling items. The effects of actual variances from expected experience lines are primarily impacted by the actual policy cash flows during the period compared to that which was expected in the reserve assumptions. If the net of the two lines is a positive number, the implication is an unfavorable result with policy cash flows less favorable than assumed while a negative number implies a favorable result compared to assumptions. Our policy experience will vary from actual experience in any one period, either favorably or unfavorably. June 30, 2024 | 10-Q 21 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) The following table reconciles the net liability for future policy benefits shown above to the liability for future policy benefits reported in the consolidated balance sheets. June 30, 2024 June 30, 2023 (In thousands) Life Insurance Home Service Insurance Consolidated Life Insurance Home Service Insurance Consolidated Life Insurance: Permanent $ 705,140 107,113 812,253 719,583 109,389 828,972 Permanent limited pay 174,312 101,742 276,054 183,392 105,046 288,438 Deferred profit liability 29,749 27,849 57,598 26,602 25,667 52,269 Other 29,609 14,079 43,688 27,781 13,860 41,641 Total life insurance 938,810 250,783 1,189,593 957,358 253,962 1,211,320 Accident & Health: Other 634 361 995 662 264 926 Total future policy benefit reserves $ 939,444 251,144 1,190,588 958,020 254,226 1,212,246 The following table provides the amount of undiscounted and discounted expected gross premiums and expected future benefit payments for long-term duration contracts. June 30, 2024 June 30, 2023 (In thousands) Life Insurance Home Service Insurance Life Insurance Home Service Insurance Undiscounted: Permanent: Expected future gross premiums $ 687,927 455,504 603,067 464,108 Expected future benefit payments 1,538,163 491,992 1,478,283 482,298 Permanent Limited Pay: Expected future gross premiums 46,682 77,217 46,441 78,064 Expected future benefit payments 325,481 321,190 319,604 319,950 Discounted: Permanent: Expected future gross premiums $ 517,392 267,791 467,315 275,847 Expected future benefit payments 963,058 204,933 957,949 206,897 Permanent Limited Pay: Expected future gross premiums 41,444 51,050 41,200 53,518 Expected future benefit payments 188,339 116,312 194,592 119,607 June 30, 2024 | 10-Q 22 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) The following tables summarize the amount of revenue and interest related to long-term duration contracts recognized in the consolidated statement of operations and comprehensive income (loss): Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 (In thousands) Gross Premiums Interest Expense Gross Premiums Interest Expense Gross Premiums Interest Expense Gross Premiums Interest Expense Life Insurance Segment: Life Insurance: Permanent $ 24,801 8,427 22,507 8,532 48,117 16,891 44,965 17,102 Permanent Limited Pay 4,026 2,207 3,610 2,167 7,672 4,470 7,778 4,503 Other 3,933 — 2,738 — 5,042 — 2,815 — Less: Reinsurance 1,358 — 412 — 1,731 — 1,060 — Total, net of reinsurance 31,402 10,634 28,443 10,699 59,100 21,361 54,498 21,605 Accident & Health: Other 204 — 332 — 368 — 484 — Less: Reinsurance 1 — 2 — 2 — 2 — Total, net of reinsurance 203 — 330 — 366 — 482 — Total $ 31,605 10,634 28,773 10,699 59,466 21,361 54,980 21,605 Home Service Insurance Segment: Life Insurance: Permanent $ 8,225 1,347 8,268 1,322 16,466 2,691 16,640 2,646 Permanent Limited Pay 2,028 1,632 2,117 1,592 4,068 3,258 4,271 3,178 Other 453 — 466 — 747 — 834 — Less: Reinsurance 7 — 2 — 19 — 17 — Total, net of reinsurance 10,699 2,979 10,849 2,914 21,262 5,949 21,728 5,824 Accident & Health: Other 255 — 217 — 506 — 423 — Total $ 10,954 2,979 11,066 2,914 21,768 5,949 22,151 5,824 The following table provides the weighted-average durations of the liability for future policy benefits. June 30, 2024 June 30, 2023 (In years) Life Insurance Home Service Insurance Life Insurance Home Service Insurance Permanent: Duration at original discount rate 8.3 16.1 8.1 16.2 Duration at current discount rate 8.5 15.7 8.4 16.5 Permanent Limited Pay: Duration at original discount rate 8.1 14.5 7.7 14.7 Duration at current discount rate 7.8 14.4 7.6 15.3 June 30, 2024 | 10-Q 23 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) The following table provides the weighted-average interest rates for the liability for future policy benefits. June 30, 2024 June 30, 2023 Life Insurance Home Service Insurance Life Insurance Home Service Insurance Permanent: Interest rate at original discount rate 4.88 % 4.96 % 4.91 % 4.98 % Interest rate at current discount rate 5.18 % 5.37 % 5.02 % 5.09 % Permanent Limited Pay: Interest rate at original discount rate 4.28 % 5.03 % 4.30 % 5.04 % Interest rate at current discount rate 5.18 % 5.37 % 4.99 % 5.09 % LIABILITY FOR POLICYHOLDERS’ ACCOUNT BALANCES The following table presents the policyholders' account balances by range of guaranteed minimum crediting rates and the related range of the difference, in basis points, between rates being credited and the respective guaranteed minimums. At Guaranteed Minimum 1 Basis Point-50 Basis Points Above 51 Basis Points-150 Basis Points Above Greater Than 150 Basis Points Above Total June 30, 2024 (In thousands) Range of Guaranteed Minimum Crediting Rates: 0.00 % - 1.49 % $ 786 — 877 34,729 36,392 1.50 % - 2.99 % 15,451 175 37 19,688 35,351 3.00 % - 4.49 % 100,357 200 13,728 — 114,285 Greater or equal to 4.50 % 31,367 — — — 31,367 Total $ 147,961 375 14,642 54,417 217,395 At Guaranteed Minimum 1 Basis Point-50 Basis Points Above 51 Basis Points-150 Basis Points Above Greater Than 150 Basis Points Above Total June 30, 2023 (In thousands) Range of Guaranteed Minimum Crediting Rates: 0.00 % - 1.49 % $ 749 — 1,131 37,814 39,694 1.50 % - 2.99 % 28,207 616 62 — 28,885 3.00 % - 4.49 % 103,006 10 — — 103,016 Greater or equal to 4.50 % 31,560 — — — 31,560 Total $ 163,522 626 1,193 37,814 203,155 June 30, 2024 | 10-Q 24 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) The following tables summarize balances of and changes in policyholders' account balances. June 30, 2024 (In thousands, except for %) Supplemental Contracts Without Life Contingencies Fixed Annuity Dividend Accumulations Premiums Paid in Advance Balance, beginning of year $ 44,569 87,134 44,960 31,039 Issuances 12,324 1,347 401 2,336 Premiums received 59 1,823 2,736 585 Interest credited 988 1,343 917 890 Less: Surrenders and withdrawals — 4,855 2,370 4,223 Benefit payments 4,608 — — — Balance, end of period $ 53,332 86,792 46,644 30,627 Weighted-average crediting rates 3.98 % 3.61 % 3.44 % 2.96 % Cash surrender value $ 53,332 86,792 46,644 30,627 June 30, 2023 (In thousands, except for %) Supplemental Contracts Without Life Contingencies Fixed Annuity Dividend Accumulations Premiums Paid in Advance Balance, beginning of year $ 32,995 86,807 41,663 34,603 Issuances 10,989 1,515 298 2,043 Premiums received 49 2,147 2,816 515 Interest credited 724 1,335 670 998 Less: Surrenders and withdrawals — 5,246 2,063 4,339 Benefit payments 5,364 — — — Balance, end of period $ 39,393 86,558 43,384 33,820 Weighted-average crediting rates 4.03 % 3.57 % 3.05 % 2.97 % Cash surrender value $ 39,393 86,558 43,384 33,820 June 30, 2024 | 10-Q 25 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) The following table reconciles policyholders' account balances shown above to the policyholders' account balances liability in the consolidated balance sheets. As of June 30, (In thousands) 2024 2023 Annuities: Supplemental contracts without life contingencies $ 53,332 39,393 Fixed annuity 86,792 86,558 Unearned revenue reserve 1,479 1,534 Total annuities $ 141,603 127,485 Premiums Paid in Advance: Premiums paid in advance $ 30,627 33,820 Other 2,110 2,612 Total premiums paid in advance $ 32,737 36,432 (7) REINSURANCE In the normal course of business, the Company reinsures portions of certain policies that we underwrite to mitigate exposure to potential losses and/or to provide additional capacity for growth. In our international business, we generally retain $ 100,000 on any one individual life insurance policy and reinsure the death benefit amount above $ 100,000 . We also reinsure 100 % of our accidental death benefit rider coverage. In the second quarter of 2024, CICA Domestic entered into a coinsurance agreement with RGA Reinsurance Company ("RGA"). Under this agreement, CICA Domestic initially elected for RGA to reinsure 50 % of its newly written final expense business. Prior to 2024, the Company maintained catastrophic reinsurance for its Louisiana property and casualty business operated through Security Plan Fire Insurance Company. This reinsurance had a net retention on any one loss of $ 30,000 , which was the maximum policy limit on any single risk. The Company ceased this business in June 2023 and thus did not renew this reinsurance. Our amounts recoverable from reinsurers represent receivables from and reserves ceded to reinsurers. We obtain reinsurance from multiple reinsurers. We monitor our reinsurance concentration as well as the financial strength ratings of our reinsurers. Their ratings by A.M. Best Company range from A- (Excellent) to A+ (Superior). Assumed and ceded life reinsurance activity is summarized as follows: (In thousands) June 30, 2024 December 31, 2023 Aggregate assumed life insurance in force $ 3,772 3,772 Aggregate ceded life insurance in force $ 673,880 619,597 Net life insurance in force $ 4,449,826 4,306,429 June 30, 2024 | 10-Q 26 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) The Company's reinsurance recoverable on ceded reinsurance was $ 5.2 million and $ 4.0 million as of June 30, 2024 and December 31, 2023, respectively. Premiums, claims and surrenders assumed and ceded and expenses ceded for all lines of business for the three and six months ended June 30, 2024 and 2023 are summarized as follows: Three Months Ended Six Months Ended June 30, June 30, (In thousands) 2024 2023 2024 2023 Premiums from short duration contracts: Direct $ 475 1,741 927 3,637 Assumed — — — — Ceded ( 1 ) ( 1,255 ) ( 2 ) ( 1,782 ) Net premiums earned 474 486 925 1,855 Premiums from long duration contracts: Direct 43,450 39,655 82,056 77,197 Assumed 16 16 33 36 Ceded ( 1,381 ) ( 431 ) ( 1,782 ) ( 1,113 ) Net premiums earned 42,085 39,240 80,307 76,120 Total premiums earned $ 42,559 39,726 81,232 77,975 Claims and surrenders assumed $ 41 35 75 67 Claims and surrenders ceded $ ( 697 ) ( 172 ) ( 1,481 ) ( 524 ) Commissions assumed and ceded $ ( 949 ) 9 ( 941 ) 18 Other general expenses ceded $ ( 156 ) — ( 156 ) — (8) COMMITMENTS AND CONTINGENCIES LITIGATION AND REGULATORY ACTIONS From time to time, we are subject to legal and regulatory actions relating to our business. We may incur defense costs, including attorneys' fees, and other direct litigation costs associated with defending claims. If we suffer an adverse judgment as a result of litigation claims, it could have a material adverse effect on our business, results of operations and financial condition. Trade Secret Lawsuit In the first quarter of 2024, a jury trial was held in the “trade secret lawsuit”. The trade secret lawsuit was filed in 2018 by Citizens, CICA Life Ltd. (Bermuda) and CICA Life Insurance Company of America (collectively, the “Citizens Companies,” “we,” "us" or "our") against certain former employees and independent consultants who we alleged unlawfully took Citizens’ confidential information in order to unfairly compete with us. Our claims against these parties included various unfair competition, tortious interference, breach of contract and other related claims. In March 2024, the jury found that (i) Defendant Carlos Nalsen Landa (“Landa”), a former independent consultant, misappropriated the Citizens’ Companies policyholder information, (ii) Citizens’ former chief underwriter, Michael P. Buchweitz (“Buchweitz”) and Randall Riley (“Riley”), a former Citizens executive and son of Citizens’ founder Harold E. Riley, failed to comply with their Citizens’ confidentiality agreements, and (iii) both Buchweitz and Riley intentionally interfered with former Chief Actuary Jonathan Pollio’s ("Pollio") Citizens’ confidentiality agreement. For Buchweitz, the jury also found that he did not have a good faith belief that he was acting in the bona fide exercise of his own rights when he interfered with Pollio’s Citizens’ confidentiality agreement. Despite these findings, the jury June 30, 2024 | 10-Q 27 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) did not believe that the above-mentioned actions damaged the Citizens Companies economically and thus did not assess any monetary damages against any of the above parties. Additionally, the jury found that Citizens should pay Alexis Delgado (“Delgado”, a former independent consultant) and Landa approximately $ 1.3 million for “money had and received”, an equitable theory that claimed that the Citizens Companies would be unjustly enriched if they didn’t pay past and future commissions to Delgado and Landa. We accrued this expense at December 31, 2023. On April 30, 2024, Defendants Riley (through his estate), Buchweitz and Delgado filed a motion against the Citizens Companies seeking payment of legal fees and a hearing was held on these matters on May 21, 2024. On July 26, 2024, the trial court awarded Riley and Buchweitz approximately $ 3.5 million of their legal fees. We accrued this expense in the quarter ended June 30, 2024. We do not believe the jury properly found that Delgado or Landa were entitled to any prior or future commissions as there was no evidence that we actually held any amount of commissions that they claim they should have received. We also do not believe that Riley or Buchweitz are entitled to legal fees because they were found to have breached the contracts whose fee shifting provisions they sought to invoke. We have not paid any amounts to Delgado, Landa, Riley, Buchweitz or any of their attorneys and intend to appeal the judgment against us. If we aren't successful in our appeal, we may have to pay approximately $ 5 million as a result of the trade secret lawsuit. The accrued amounts are reflected as "other liabilities" on our balance sheet. CONTRACTUAL OBLIGATIONS As of June 30, 2024, CICA International is committed to fund investments up to $ 21.2 million related to limited partnerships previously described. CREDIT FACILITY On May 3, 2024 , the Company renewed its $ 20 million senior secured revolving credit facility (the “Credit Facility”) with Regions Bank ("Regions"). The Credit Facility has a three-year term, maturing on May 5, 2027, and allows the Company to borrow up to $ 20 million for working capital purposes, capital expenditures and other corporate purposes. Revolving loans may be requested by the Company in aggregate minimum principal amounts of $ 0.5 million per loan. At the Company's election, the revolving loans may either bear a rate (a fluctuating rate per annum) equal to the greatest of (a) Regions' prime rate, (b) the federal funds rate plus 0.50 %, (c) the index rate plus 1.00 % or (d) 0.75 %. The Company is required to pay Regions an annual commitment fee of 0.375 % of the unused portion of the Credit Facility in quarterly installments, which the Company expenses as it is incurred. Obligations under the Credit Facility are secured by substantially all of the assets of the Company other than the equity interests in its subsidiaries, real estate owned by the Company, and other limited exceptions. The Credit Facility contains customary events of default and financial, affirmative and negative covenants, including but not limited to restrictions on indebtedness, liens, investments, asset dispositions and restricted payments. As of June 30, 2024, the Company had no t borrowed any funds against the Credit Facility and was not in violation of any covenants. (9) STOCKHOLDERS' EQUITY AND RESTRICTIONS STOCK Our Restated and Amended Articles of Incorporation authorize the issuance of 127,000,000 shares, of which 100,000,000 shares shall be Class A common stock, 2,000,000 shares shall be Class B common stock, and 25,000,000 shall be preferred stock. Both authorized classes of common stock are equal in all respects, except (a) each share of Class A common stock is entitled to receive twice the cash dividends paid on a per share basis to the June 30, 2024 | 10-Q 28 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) Class B common stock, if any; and (b) the holders of the Class B common stock have the exclusive right to elect a simple majority of the Board of Directors of Citizens. Citizens currently has no outstanding preferred stock or Class B common stock other than that held in treasury. A summary of the change in the number of shares of Class A common stock and treasury stock issued is as follows: Six Months Ended June 30, 2024 2023 (In thousands) Common Stock Class A Treasury Stock Common Stock Class A Treasury Stock Balance at beginning of year 53,883 5,330 53,758 4,937 Stock issued for compensation 163 — 106 — Acquisition of Class A shares — — — 325 Balance at end of period 54,046 5,330 53,864 5,262 EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share. Three Months Ended June 30, 2024 2023 (In thousands, except per share amounts) Basic and diluted earnings per share: Numerator: Net income $ 3,959 6,126 Net income allocated to Class A common stock $ 3,959 6,126 Denominator: Weighted average shares of Class A outstanding - basic 49,639 49,758 Weighted average shares of Class A outstanding - diluted 50,809 50,552 Basic and diluted earnings per share of Class A common stock $ 0.08 0.12 Six Months Ended June 30, 2024 2023 (In thousands, except per share amounts) Basic and diluted earnings per share: Numerator: Net income $ 8,501 10,998 Net income allocated to Class A common stock $ 8,501 10,998 Denominator: Weighted average shares of Class A outstanding - basic 49,606 49,791 Weighted average shares of Class A outstanding - diluted 50,775 50,584 Basic and diluted earnings per share of Class A common stock $ 0.17 0.22 STATUTORY CAPITAL AND SURPLUS Each of our regulated insurance subsidiaries is required to meet stipulated regulatory capital requirements. These include capital requirements imposed by the U.S. National Association of Insurance Commissioners ("NAIC") and June 30, 2024 | 10-Q 29 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) the Bermuda Monetary Authority ("BMA"). All domestic insurance subsidiaries exceeded the minimum capital requirements at June 30, 2024. On March 27, 2024 , Citizens and the Colorado Division of Insurance entered into a capital maintenance agreement that specifies that Citizens will infuse capital as needed to ensure that CICA Domestic's RBC remains above 350 %. As CICA Domestic's RBC exceeded 350% at June 30, 2024, no capital contribution was necessary. 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 Office of the Commissioner of Insurance ("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, which expires on August 31, 2024 , 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. Since CICA International's capital exceeds both of the metrics , Citizens is not required to make a capital contribution. Any capital that Citizens is required to contribute could negatively impact the Company's capital resources and liquidity. (10) SEGMENT AND OTHER OPERATING INFORMATION The Company has two reportable segments: Life Insurance and Home Service Insurance. Our Life Insurance segment issues endowment contracts, which are principally accumulation contracts that incorporate an element of life insurance protection, and ordinary whole life insurance to non-U.S. residents through CICA International. These contracts are designed to provide a fixed amount of insurance coverage over the life of the insured and may utilize rider benefits to provide additional coverage and annuity benefits to enhance accumulations. CICA Domestic issues ordinary whole life, final expense, life products with living benefits, critical illness and credit life and credit disability policies throughout the U.S. Our Home Service Insurance segment operates through our subsidiaries SPLIC, MGLIC and SPFIC, and focuses on the life insurance needs of the middle- and lower-income markets, primarily in Louisiana, Mississippi and Arkansas. Our policies are sold and serviced through funeral homes and independent agents who sell policies, collect premiums and service policyholders. Our Home Service Insurance segment also sold property insurance policies in Louisiana and Arkansas until operations were ceased effective June 30, 2023. The Life Insurance and Home Service Insurance portions of the Company constitute separate businesses. In addition to the Life Insurance and Home Service Insurance business, the Company also operates other non-insurance portions of the Company ("Other Non-Insurance Enterprises"), which primarily include the Company’s IT and corporate-support functions. The accounting policies of the reportable segments and Other Non-Insurance Enterprises are presented in accordance with U.S. GAAP and are the same as those described in the summary of significant accounting policies in our Form 10-K . The Company evaluates profit and loss performance based on U.S. GAAP net income before federal income taxes for its two reportable segments. The Company's Other Non-Insurance Enterprises represents the only reportable difference between segments and consolidated operations. June 30, 2024 | 10-Q 30 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) Life Insurance Home Service Insurance Other Non-Insurance Enterprises Consolidated Three Months Ended June 30, 2024 (In thousands) Revenues: Premiums $ 31,605 10,954 — 42,559 Net investment income 13,812 3,529 199 17,540 Investment related gains (losses), net ( 279 ) 23 3 ( 253 ) Other income 2,218 20 — 2,238 Total revenues 47,356 14,526 202 62,084 Benefits and expenses: Insurance benefits paid or provided: Claims and surrenders 29,169 5,361 — 34,530 Increase (decrease) in future policy benefit reserves ( 2,269 ) 1,217 — ( 1,052 ) Policyholder liability remeasurement (gain) loss 1,306 54 — 1,360 Policyholders' dividends 1,186 5 — 1,191 Total insurance benefits paid or provided 29,392 6,637 — 36,029 Commissions 8,543 3,689 — 12,232 Other general expenses 6,925 3,931 5,783 16,639 Capitalization of deferred policy acquisition costs ( 8,591 ) ( 1,952 ) — ( 10,543 ) Amortization of deferred policy acquisition costs 3,586 687 — 4,273 Amortization of cost of insurance acquired 29 123 — 152 Total benefits and expenses 39,884 13,115 5,783 58,782 Income (loss) before federal income tax $ 7,472 1,411 ( 5,581 ) 3,302 June 30, 2024 | 10-Q 31 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) Life Insurance Home Service Insurance Other Non-Insurance Enterprises Consolidated Six Months Ended June 30, 2024 (In thousands) Revenues: Premiums $ 59,466 21,766 — 81,232 Net investment income 27,498 7,066 463 35,027 Investment related gains (losses), net 807 ( 68 ) ( 29 ) 710 Other income 2,724 20 83 2,827 Total revenues 90,495 28,784 517 119,796 Benefits and expenses: Insurance benefits paid or provided: Claims and surrenders 56,533 11,110 — 67,643 Increase (decrease) in future policy benefit reserves ( 3,462 ) 2,861 — ( 601 ) Policyholder liability remeasurement (gain) loss 1,679 — — 1,679 Policyholders' dividends 2,417 11 — 2,428 Total insurance benefits paid or provided 57,167 13,982 — 71,149 Commissions 15,503 7,179 — 22,682 Other general expenses 12,961 7,420 7,596 27,977 Capitalization of deferred policy acquisition costs ( 15,407 ) ( 3,467 ) — ( 18,874 ) Amortization of deferred policy acquisition costs 6,944 1,367 — 8,311 Amortization of cost of insurance acquired 55 269 — 324 Total benefits and expenses 77,223 26,750 7,596 111,569 Income (loss) before federal income tax $ 13,272 2,034 ( 7,079 ) 8,227 June 30, 2024 | 10-Q 32 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) Life Insurance Home Service Insurance Other Non-Insurance Enterprises Consolidated Three Months Ended June 30, 2023 (In thousands) Revenues: Premiums $ 28,773 10,953 — 39,726 Net investment income 13,498 3,450 293 17,241 Investment related gains (losses), net 738 ( 12 ) ( 23 ) 703 Other income 856 1 — 857 Total revenues 43,865 14,392 270 58,527 Benefits and expenses: Insurance benefits paid or provided: Claims and surrenders 26,968 5,808 — 32,776 Increase (decrease) in future policy benefit reserves ( 1,863 ) 919 — ( 944 ) Policyholder liability remeasurement (gain) loss 885 71 — 956 Policyholders' dividends 1,255 6 — 1,261 Total insurance benefits paid or provided 27,245 6,804 — 34,049 Commissions 4,765 4,118 — 8,883 Other general expenses 5,646 4,299 2,323 12,268 Capitalization of deferred policy acquisition costs ( 4,457 ) ( 2,087 ) — ( 6,544 ) Amortization of deferred policy acquisition costs 3,167 507 — 3,674 Amortization of cost of insurance acquired 26 127 — 153 Total benefits and expenses 36,392 13,768 2,323 52,483 Income (loss) before federal income tax $ 7,473 624 ( 2,053 ) 6,044 June 30, 2024 | 10-Q 33 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) Life Insurance Home Service Insurance Other Non-Insurance Enterprises Consolidated Six Months Ended June 30, 2023 (In thousands) Revenues: Premiums $ 54,980 22,995 — 77,975 Net investment income 26,809 6,920 586 34,315 Investment related gains (losses), net 301 87 27 415 Other income 1,735 1 — 1,736 Total revenues 83,825 30,003 613 114,441 Benefits and expenses: Insurance benefits paid or provided: Claims and surrenders 51,407 11,668 — 63,075 Increase (decrease) in future policy benefit reserves ( 3,683 ) 1,761 — ( 1,922 ) Policyholder liability remeasurement (gain) loss 1,701 135 — 1,836 Policyholders' dividends 2,356 13 — 2,369 Total insurance benefits paid or provided 51,781 13,577 — 65,358 Commissions 9,524 8,372 — 17,896 Other general expenses 11,105 8,767 3,656 23,528 Capitalization of deferred policy acquisition costs ( 8,817 ) ( 4,085 ) — ( 12,902 ) Amortization of deferred policy acquisition costs 6,329 1,159 — 7,488 Amortization of cost of insurance acquired 58 256 — 314 Total benefits and expenses 69,980 28,046 3,656 101,682 Income (loss) before federal income tax $ 13,845 1,957 ( 3,043 ) 12,759 (11) INCOME TAXES The effective tax rate is the ratio of tax expense over pre-tax income. The effective tax rate was ( 19.9 )% and 3.3 % for the three and six months ended June 30, 2024, compared to ( 1.4 )% and 13.8 % for the same periods in 2023, respectively. CICA Bermuda and CICA International are considered controlled foreign corporations for federal income tax purposes. As a result, the insurance activity of CICA Bermuda and CICA International are subject to Subpart F of the Internal Revenue Code and are included in Citizens’ taxable income. Due to the 0 % enacted tax rate in Bermuda for all periods prior to the transfer of CICA Bermuda's insurance in force business to CICA International, there are no deferred taxes recorded for CICA Bermuda's temporary differences. The Government of Puerto Rico approved a tax exemption decree for CICA International which freezes the income tax rate at 0 % on taxable earnings up to $ 1.2 million and 4 % on taxable earnings in excess of $ 1.2 million for a minimum of 15 years. The effective tax rate varies from the prevailing corporate federal income tax rate of 21.0% mainly due to the impact of Subpart F and uncertain tax positions. At June 30, 2024 and 2023, we determined it was more likely than not that a portion of our capital deferred tax assets would not be realized in their entirety. The Company recorded valuation allowances of $ 5.0 million and $ 3.9 million, respectively, through Other Comprehensive Income (Loss). June 30, 2024 | 10-Q 34 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) (12) OTHER COMPREHENSIVE INCOME (LOSS) The changes in the components of other comprehensive income (loss) are reported net of the effects of income taxes of 21% for domestic entities and 4 % for Puerto Rican entities for the three and six months ended June 30, 2024 and 2023, as indicated below. Three Months Ended June 30, 2024 2023 (In thousands) Amount Tax Effect Total Amount Tax Effect Total Unrealized gains (losses): Unrealized holding gains (losses) arising during the period $ ( 14,258 ) 993 ( 13,265 ) ( 20,430 ) 1,111 ( 19,319 ) Reclassification adjustment for losses (gains) included in net income (loss) 199 ( 42 ) 157 24 ( 5 ) 19 Unrealized holding gains (losses), net ( 14,059 ) 951 ( 13,108 ) ( 20,406 ) 1,106 ( 19,300 ) Change in current discount rate for liability for future policy benefits 5,522 ( 568 ) 4,954 6,251 151 6,402 Other comprehensive income (loss) $ ( 8,537 ) 383 ( 8,154 ) ( 14,155 ) 1,257 ( 12,898 ) Six Months Ended June 30, 2024 2023 (In thousands) Amount Tax Effect Total Amount Tax Effect Total Unrealized gains (losses): Unrealized holding gains (losses) arising during the period $ ( 27,674 ) 2,191 ( 25,483 ) 23,006 ( 1,169 ) 21,837 Reclassification adjustment for losses (gains) included in net income 647 ( 136 ) 511 62 ( 13 ) 49 Unrealized holding gains (losses), net ( 27,027 ) 2,055 ( 24,972 ) 23,068 ( 1,182 ) 21,886 Change in current discount rate for liability for future policy benefits 39,517 ( 4,314 ) 35,203 ( 14,229 ) 1,024 ( 13,205 ) Other comprehensive income (loss) $ 12,490 ( 2,259 ) 10,231 8,839 ( 158 ) 8,681 (13) RELATED PARTY TRANSACTIONS The Company has various routine related party transactions in conjunction with our holding company structure, such as a management service agreement related to costs incurred, a tax sharing agreement between entities, and inter-company dividends and capital contributions. There were no changes related to these relationships during the six months ended June 30, 2024 except as described in Note 1. Financial Statements under Basis of Presentation and Consolidation. See our Form 10-K for a comprehensive discussion of related party transactions. (14) SUBSEQUENT EVENTS The Company has evaluated the impact of subsequent events as defined by the accounting guidance through the date this report was issued and determined that no other significant subsequent events need to be recognized or disclosed at this time. June 30, 2024 | 10-Q 35 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS