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 80 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 June 30, 2024 and the material changes in our results of operations for the three and six months ended June 30, 2024 as compared to the same periods in 2023. We also discuss in the MD&A any trends that we believe may materially affect our future operations or financial condition. June 30, 2024 | 10-Q 36 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. Premium revenues and investment income are our two primary sources of revenue and thus key to our profitability. Premium revenues consist of all money deposited by customers into new and existing insurance policies. We view these premiums in two categories - first year premiums are premiums received within the first 12 months of a policy's issuance and thereafter any premiums received are renewal premiums. We believe premium 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 the prior periods, and how we view trends with respect to sales and retention. In the past year, we have significantly expanded our domestic distribution in the Life Insurance segment and first year premiums have more than doubled in this segment quarter-over-quarter and almost doubled year-to-date as compared to 2023. Because of this significant growth, in the second quarter of 2024, we entered into a coinsurance agreement with RGA Reinsurance Company ("RGA") in order to provide more capacity for growth. Under this agreement, CICA Domestic initially elected for RGA to reinsure 50% of its newly written final expense business, which means that we cede 50% of premiums in our domestic final expense business to RGA. We refer to "direct" premiums as all premiums received and "net" or "total" premiums as all premiums received less premiums ceded to RGA and our other reinsurers. In addition to our domestic growth, first year premiums in our international business have increased in both the three and six months ended June 30, 2024, as compared to the same periods in 2023, due to focused marketing campaigns with our international distribution channel. 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") direct premium results. June 30, 2024 | 10-Q 37 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS Our renewal life and A&H premium revenues in the six months ended June 30, 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. Investments. Our net investment income increased for both the three and six months ended June 30, 2024 by 2% compared to the same prior year periods, due primarily to investment income from our limited partnership investments and a growing diversified invested asset base. June 30, 2024 | 10-Q 38 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS Claims and Surrenders. 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 below. In the three and six months ended June 30, 2024 compared to the prior year periods: • death claim benefits decreased for three months ended June 30, 2024 and increased for six months ended June 30, 2024 from fluctuation in the number of reported claims, • surrenders decreased slightly as we continue to focus on retention efforts, and • matured endowments increased as expected due to many of our endowment policies reaching their contractual maturity dates. Operating Expenses. Operating expenses are our second largest expense and thus also drive our operating results. Our general operating expenses for the three and six months ended June 30, 2024 increased compared to the prior year periods. The primary reason for the increase was the accrual of $3.5 million in legal fees awarded to certain defendants in the trade secret lawsuit. We have not paid any of these fees and intend to appeal the judgment against us. See Part II, Item 1, Legal Proceedings - Trade Secret Lawsuit. To a lesser extent, the increase was also due to our continued investment in the growth of our business and costs incurred as we transitioned to a new CEO. June 30, 2024 | 10-Q 39 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS FINANCIAL HIGHLIGHTS Our net income before federal income taxes decreased to $3.3 million in the three months ended June 30, 2024, from $6.0 million in the three months ended June 30, 2023. While our revenues increased by $3.6 million due primarily to higher premiums and other income, which is generated mostly from supplemental contracts with life contingencies that are entered into by policyholders with maturing endowments, our net income decreased due to the accrual of the $3.5 million in legal fees awarded to the defendants in the trade secret lawsuit described above, as well as a $1.8 million increase in claims and surrenders benefits paid due to higher matured endowments, which increased as expected due to many of our endowment policies reaching their contractual maturity dates. Our net income before federal income taxes decreased from $12.8 million in the six months ended June 30, 2023 to $8.2 million in the six months ended June 30, 2024. Other than the accrual of the $3.5 million in legal fees in the second quarter of 2024 mentioned above, this is due primarily to first quarter results, which despite having higher life insurance premium revenue, higher investment related gains and losses, and higher net investment income, had a decline in net income before federal income taxes due primarily to an increase in total benefits and expenses driven by higher death claims and the contractually matured endowments. We also incurred $4.8 million in higher commissions paid in the six months ended June 30, 2024 as compared to the prior year period due to the large increase in first year sales, which have a higher commission rate than renewal sales. Our net income per share of Class A common stock was $0.08 and $0.17 for the three and six months ended June 30, 2024, respectively, compared to $0.12 and $0.22 in the prior year periods. Financial Condition at June 30, 2024 • Total assets of $1.7 billion • Total investments of $1.4 billion; fixed maturity securities comprised 88% of total investments • $5.1 billion of direct insurance in force • No debt • Net income per share of Class A common stock of $0.17 • Book value per share of Class A common stock of $3.85 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 Form 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, high interest rates and ceasing operations of our property insurance business. See also Part I, Item 1, Note 8. Commitments and Contingencies , as well as Part II, Item 1, Legal Proceedings - Trade Secret Lawsuit for a discussion of the trade secret lawsuit, which has impacted our results of operations and could negatively impact our cash if we do not succeed in our appeal. June 30, 2024 | 10-Q 40 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS 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, number of policies, and average face amounts for ordinary life policies issued during the periods indicated are shown below. Six Months Ended June 30, 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 $ 212,720,099 2,029 $ 104,840 $ 172,606,411 1,808 $ 95,468 Domestic 233,468,132 20,070 11,633 2,570,500 232 11,080 Total Life Insurance 446,188,231 22,099 20,190 175,176,911 2,040 85,871 Home Service Insurance 123,431,074 9,749 12,661 153,445,775 12,005 12,782 Total $ 569,619,305 31,848 $ 328,622,686 14,045 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 73% increase in total insurance issued in the six months ended June 30, 2024 as compared to the prior year period. The growth in our Life Insurance segment is primarily attributable to strong sales of our new domestic final expense products, which accounted for over half of the insurance issued through June 30, 2024. The Life Insurance segment also benefited from sales of our international whole life product, which accounted for 65% of total insurance issued internationally in this segment for the six months ended June 30, 2024. Insurance issued in our Home Service Insurance segment decreased for the six months ended June 30, 2024 compared to the 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. June 30, 2024 | 10-Q 41 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS CONSOLIDATED RESULTS OF OPERATIONS REVENUES Our revenues are generated primarily by insurance renewal premiums and investment income from invested assets. Three Months Ended Six Months Ended June 30, June 30, (In thousands) 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 Total revenues increased in the three and six months ended June 30, 2024 as compared to the prior year periods, due to significantly higher first year life insurance premiums, higher net investment income and higher other income from supplemental contract revenue. The Company stopped accepting premiums for property insurance at the end of May 2023 and ceased these operations on June 30, 2023. Therefore, the table below shows a summary of our life and A&H premiums for the periods indicated. Three Months Ended Six Months Ended June 30, June 30, (In thousands) 2024 2023 2024 2023 Life and A&H premiums: Direct premiums: First year $ 7,893 4,277 13,824 8,451 Renewal 36,032 35,977 69,161 69,759 Total direct life and A&H premiums 43,925 40,254 82,985 78,210 Reinsurance (1,366) (415) (1,751) (1,079) Total life and A&H premiums $ 42,559 39,839 81,234 77,131 Premium Income. Total direct premiums increased 9% and 6% in the three and six months ended June 30, 2024, respectively, compared to the same periods in 2023 due to strong first year premium growth primarily in our Life Insurance segment. Reinsurance ceded premiums increased in the three and six months ended June 30, 2024 compared to the same periods in 2023 due to our new coinsurance agreement with RGA entered in the second quarter of 2024 related to our CICA Domestic business. June 30, 2024 | 10-Q 42 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 is as follows: Three Months Ended Six Months Ended June 30, June 30, (In thousands, except for %) 2024 2023 2024 2023 Gross investment income: Fixed maturity securities $ 15,343 15,006 30,480 29,951 Equity securities 73 159 148 324 Policy loans 1,382 1,514 2,838 3,053 Long-term investments 1,268 1,091 2,492 2,012 Other investment income 185 140 421 264 Total investment income 18,251 17,910 36,379 35,604 Investment expenses (711) (669) (1,352) (1,289) Net investment income $ 17,540 17,241 35,027 34,315 Net investment income, annualized $ 70,054 68,630 Average invested assets, at amortized cost $ 1,522,573 1,518,827 Annualized yield on average invested assets 4.60 % 4.52 % 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 and six months ended June 30, 2024 compared to the same periods 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 losses of $0.3 million and gains of $0.7 million during the three and six months ended June 30, 2024, respectively, compared to investment related gains of $0.7 million and $0.4 million during the same prior year periods. As described above, the gains and losses are primarily related to the fair value change of our limited partnership and equity security 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. June 30, 2024 | 10-Q 43 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS BENEFITS AND EXPENSES Three Months Ended Six Months Ended June 30, June 30, (In thousands) 2024 2023 2024 2023 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 Payments of claims and surrenders benefits constitute the majority of our expenses. Total benefits and expenses increased in the three and six months ended June 30, 2024 as compared to same periods in 2023 driven primarily by higher matured endowments in both periods and higher death claim benefits in the first quarter of 2024 as compared to the same period in 2023. The $3.5 million accrual of legal fees awarded to the defendants in the trade secret trial, reflected in other general expenses, also contributed to the increase in the three months ended June 30, 2024. Claims and Surrenders. Three Months Ended Six Months Ended June 30, June 30, (In thousands) 2024 2023 2024 2023 Claims and surrenders: Death claim benefits $ 5,298 5,636 12,156 11,018 Surrender benefits 14,330 14,990 26,461 27,306 Endowment benefits 1,945 2,076 3,699 4,185 Matured endowment benefits 11,047 9,062 21,808 17,827 Property claims 7 366 (6) 708 A&H and other policy benefits 1,903 646 3,525 2,031 Total claims and surrenders $ 34,530 32,776 67,643 63,075 Death claim benefits are being impacted by the increase in policies issued over the past few years. Surrender benefits decreased in the three and six months ended June 30, 2024 compared to the same periods 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. June 30, 2024 | 10-Q 44 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS Matured endowment benefits increased for the three and six months ended June 30, 2024 compared to the same periods 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 and six months ended June 30, 2024, the change in future policy benefit reserves varied due to the amount of reserves released in connection with higher matured endowments compared to increases in insurance issued and increases in our in force block of business. 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 and six months ended June 30, 2024, the increases in first year sales led to an increase in commission related expenses. 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 and six months ended June 30, 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 and six months ended June 30, 2024, compared to the same periods 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 We operate in two 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. June 30, 2024 | 10-Q 45 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS The following table sets forth income (loss) before federal income tax by segment during the periods indicated. Three Months Ended Six Months Ended June 30, June 30, (In thousands) 2024 2023 2024 2023 Income (loss) before federal income tax: Segments: Life Insurance $ 7,472 7,473 13,272 13,845 Home Service Insurance 1,411 624 2,034 1,957 Total segments 8,883 8,097 15,306 15,802 Other Non-Insurance Enterprises (5,581) (2,053) (7,079) (3,043) Total income before federal income tax $ 3,302 6,044 8,227 12,759 LIFE INSURANCE Detailed results of operations in the Life Insurance segment for the periods indicated are as follows: Three Months Ended Six Months Ended June 30, June 30, (In thousands) 2024 2023 2024 2023 Revenues: Premiums $ 31,605 28,773 59,466 54,980 Net investment income 13,812 13,498 27,498 26,809 Investment related gains (losses), net (279) 738 807 301 Other income 2,218 856 2,724 1,735 Total revenues 47,356 43,865 90,495 83,825 Benefits and expenses: Insurance benefits paid or provided: Claims and surrenders 29,169 26,968 56,533 51,407 Increase (decrease) in future policy benefit reserves (2,269) (1,863) (3,462) (3,683) Policyholder liability remeasurement (gain) loss 1,306 885 1,679 1,701 Policyholders' dividends 1,186 1,255 2,417 2,356 Total insurance benefits paid or provided 29,392 27,245 57,167 51,781 Commissions 8,543 4,765 15,503 9,524 Other general expenses 6,925 5,646 12,961 11,105 Capitalization of deferred policy acquisition costs (8,591) (4,457) (15,407) (8,817) Amortization of deferred policy acquisition costs 3,586 3,167 6,944 6,329 Amortization of cost of insurance acquired 29 26 55 58 Total benefits and expenses 39,884 36,392 77,223 69,980 Income before federal income tax $ 7,472 7,473 13,272 13,845 In our Life Insurance segment, income before federal income tax was $7.5 million in both the three months ended June 30, 2024 and 2023. In the 2024 period, $3.5 million in higher revenues was offset by higher matured endowments and higher general expenses supporting our domestic growth strategy. In the six months ended June 30, 2024 | 10-Q 46 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS June 30, 2024, income before federal income tax decreased by $0.6 million from the prior year period for the above reasons as well as higher death claims in the six month period . Life Insurance segment premium breakout is detailed below. Three Months Ended Six Months Ended June 30, June 30, (In thousands) 2024 2023 2024 2023 Premiums: Direct premiums: First year $ 6,496 2,805 11,080 5,399 Renewal 26,468 26,380 50,118 50,643 Total direct premiums 32,964 29,185 61,198 56,042 Reinsurance (1,359) (412) (1,732) (1,062) Total premiums $ 31,605 28,773 59,466 54,980 Premiums. Our total premiums increased by 10% and 8% in the three and six months ended June 30, 2024, respectively, as compared to the same periods in 2023 due to the 103% and 90% increase, respectively, 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 six months ended June 30, 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; however, the growth in sales over the last 2 years contributed to the slight increase in renewal premiums in the three months ended June 30, 2024 as compared to 2023. The increase in reinsurance ceded premiums in the three and six months ended June 30, 2024, compared to the same periods in 2023, is due to our new coinsurance agreement with RGA entered in the second quarter of 2024 related to our CICA Domestic business. 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 80 different countries across the globe. The following table sets forth our premiums by location for the three and six months ended June 30, 2024 and 2023. Three Months Ended Six Months Ended June 30, June 30, (In thousands) 2024 2023 2024 2023 International premiums: Colombia $ 6,043 6,281 12,026 12,338 Taiwan 3,617 3,590 8,159 8,892 Venezuela 3,663 3,682 6,978 7,404 Ecuador 3,145 3,157 6,189 6,403 Argentina 2,673 2,396 4,771 4,580 Other Non-U.S. 9,532 9,534 18,347 18,375 Total international premiums 28,673 28,640 56,470 57,992 Domestic premiums 3,382 926 5,704 1,893 Reinsurance and change in premium accruals (450) (793) (2,708) (4,905) Total premiums $ 31,605 28,773 59,466 54,980 June 30, 2024 | 10-Q 47 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS Net Investment Income . Our net investment income increased by 2% and 3% for the three and six months ended June 30, 2024, respectively, compared to the same periods in 2023 due to our higher average portfolio yield. The majority of our investment income is derived from fixed maturity securities; however, long-term investment income continues to increase as our limited partnership asset base grows. Investment Related Gains (Losses), Net. We recorded investment related losses of $0.3 million and gains of $0.8 million during the three and six months ended June 30, 2024, respectively, compared to investment related gains of $0.7 million and $0.3 million during the same prior year periods, resulting primarily from the change in estimated fair market value of our limited partnership investments. Claims and Surrenders. The following table sets forth our primary claims and surrender benefits paid within our Life Insurance segment for the three and six months ended June 30, 2024 compared to the same periods in 2023. Three Months Ended Six Months Ended June 30, June 30, (In thousands) 2024 2023 2024 2023 Claims and surrenders: Death claim benefits $ 1,186 1,391 3,184 2,139 Surrender benefits 13,373 13,982 24,810 25,610 Endowment benefits 1,943 2,073 3,696 4,181 Matured endowment benefits 10,861 8,915 21,476 17,535 A&H and other policy benefits 1,806 607 3,367 1,942 Total claims and surrenders $ 29,169 26,968 56,533 51,407 During the three and six months ended June 30, 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 and six months ended June 30, 2024 compared to the prior year periods which we believe is due to our retention efforts. Death claim benefits increased for the six months ended June 30, 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 for the three and six months ended June 30, 2024 and 2023 was the result of reserves released due to surrenders and higher matured endowment benefits. These releases were partially offset by increases in reserves due to insurance issued and normal increases in our in force block of business policy benefit reserves. June 30, 2024 | 10-Q 48 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 Six Months Ended June 30, June 30, (In thousands) 2024 2023 2024 2023 Revenues: Premiums $ 10,954 10,953 21,766 22,995 Net investment income 3,529 3,450 7,066 6,920 Investment related gains (losses), net 23 (12) (68) 87 Other income 20 1 20 1 Total revenues 14,526 14,392 28,784 30,003 Benefits and expenses: Insurance benefits paid or provided: Claims and surrenders 5,361 5,808 11,110 11,668 Increase (decrease) in future policy benefit reserves 1,217 919 2,861 1,761 Policyholder liability remeasurement (gain) loss 54 71 — 135 Policyholders' dividends 5 6 11 13 Total insurance benefits paid or provided 6,637 6,804 13,982 13,577 Commissions 3,689 4,118 7,179 8,372 Other general expenses 3,931 4,299 7,420 8,767 Capitalization of deferred policy acquisition costs (1,952) (2,087) (3,467) (4,085) Amortization of deferred policy acquisition costs 687 507 1,367 1,159 Amortization of cost of insurance acquired 123 127 269 256 Total benefits and expenses 13,115 13,768 26,750 28,046 Income before federal income tax $ 1,411 624 2,034 1,957 In our Home Service Insurance segment, we reported income before federal income tax of $1.4 million and $2.0 million in the three and six months ended June 30, 2024, respectively, as compared to income of $0.6 million and $2.0 million in the prior year periods. The higher income is primarily driven by a decrease in other general expenses and lower claims and surrenders, partially due to ceasing our property insurance operations as of June 30, 2023, which also impacted premium revenue. Home Service Insurance segment life and A&H premium breakout is detailed below. Three Months Ended Six Months Ended June 30, June 30, (In thousands) 2024 2023 2024 2023 Direct life and A&H premiums: First year $ 1,397 1,472 2,744 3,052 Renewal 9,564 9,597 19,043 19,116 Total direct life and A&H premiums $ 10,961 11,069 21,787 22,168 June 30, 2024 | 10-Q 49 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS Premiums. Our first year life and A&H premiums declined 5% and 10% in the three and six months ended June 30, 2024, respectively, compared to the same prior year periods as we continue to make changes to our agents' compensation structures to improve the quality and the persistency of sales in this segment. Claims and Surrenders. Payments of claims and surrender benefits, which are the largest portion of our expenses, are summarized as follows: Three Months Ended Six Months Ended June 30, June 30, (In thousands) 2024 2023 2024 2023 Claims and surrenders: Death claim benefits $ 4,112 4,245 8,972 8,879 Surrender benefits 957 1,008 1,651 1,696 Endowment benefits 2 3 3 4 Matured endowment benefits 186 147 332 292 Property claims 7 366 (6) 708 A&H and other policy benefits 97 39 158 89 Total claims and surrenders $ 5,361 5,808 11,110 11,668 The majority of claims and surrender benefits in our Home Service Insurance segment are death claim benefits. Death claim benefits decreased slightly in the three months and increased slightly in the six months ended June 30, 2024 compared to the same prior year periods. 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 and six months ended June 30, 2024 compared to the same periods in 2023, primarily due to ceasing our property insurance business as discussed above. OTHER NON-INSURANCE ENTERPRISES Three Months Ended Six Months Ended June 30, June 30, (In thousands) 2024 2023 2024 2023 Loss before federal income tax $ (5,581) (2,053) (7,079) (3,043) 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. The primary reason for the increased loss before federal income tax in the three and six months ended June 30, 2024 compared to the same periods in 2023 is the legal accrual described above. INVESTMENTS Our investments are an integral part of our business success. Our cash and invested assets at June 30, 2024 were $1.4 billion, of which 86% 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. June 30, 2024 | 10-Q 50 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 June 30, 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 $ 9,512 0.7 % $ 9,715 0.7 % Corporate 779,870 55.2 787,607 55.1 States and political subdivisions (1) 277,228 19.7 287,231 20.1 Mortgage-backed (2) 94,684 6.7 97,294 6.8 Asset-backed 52,109 3.7 57,134 4.0 Total fixed maturity securities 1,213,403 86.0 1,238,981 86.7 Cash and cash equivalents 26,344 1.9 26,997 1.8 Other investments: Policy loans 73,462 5.2 75,359 5.3 Equity securities 5,336 0.4 5,282 0.4 Other long-term investments 92,141 6.5 82,725 5.8 Total cash, cash equivalents and invested assets $ 1,410,686 100.0 % $ 1,429,344 100.0 % (1) Includes $121.2 million and $124.2 million of securities guaranteed by third parties at June 30, 2024 and December 31, 2023, respectively. (2) Includes $93.5 million and $96.1 million of U.S. Government-sponsored enterprises at June 30, 2024 and December 31, 2023, respectively. The carrying value of the Company’s fixed maturity securities investment portfolio at June 30, 2024 was $1.21 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 June 30, 2024 did not materially change from December 31, 2023 – the weighted average was “A” at both dates. Cash and cash equivalents decreased as of June 30, 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 $9.4 million as of June 30, 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 June 30, 2024 and December 31, 2023 included $277.2 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). June 30, 2024 | 10-Q 51 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 June 30, 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 $ 12,902 12,895 6,546 6,889 — — 19,448 19,784 6.4 % AA 43,407 44,076 105,924 122,687 6,259 6,552 155,590 173,315 56.3 A 3,999 4,362 84,785 95,885 4,400 4,393 93,184 104,640 34.0 BBB 533 559 3,988 4,757 1,388 1,450 5,909 6,766 2.2 BB and other 3,028 3,158 69 71 — — 3,097 3,229 1.1 Total $ 63,869 65,050 201,312 230,289 12,047 12,395 277,228 307,734 100.0 % State and political subdivision fixed maturity securities excluding third-party guarantees: AA $ 31,175 31,456 32,993 37,408 3,824 3,819 67,992 72,683 23.6 % A 16,509 16,974 94,001 104,860 5,834 6,126 116,344 127,960 41.6 BBB 2,875 3,175 17,641 19,807 — — 20,516 22,982 7.5 BB and other 13,310 13,445 56,677 68,214 2,389 2,450 72,376 84,109 27.3 Total $ 63,869 65,050 201,312 230,289 12,047 12,395 277,228 307,734 100.0 % 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 June 30, 2024. (In thousands, except for %) Fair Value Amortized Cost % of Total Fair Value Education $ 45,678 52,079 16.5 % Utilities 40,606 44,876 14.7 Transportation 33,565 40,561 12.1 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 June 30, 2024. The Company holds 22% and 15% of its municipal bond portfolio in Texas and California issuers, respectively, as of June 30, 2024. There were no other states or individual issuer holdings that represented or exceeded 10% of the total municipal bond portfolio as of June 30, 2024. June 30, 2024 | 10-Q 52 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS The table below represents the Company's detailed exposure to municipal bonds in Texas at June 30, 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 $ 12,402 12,391 2,552 2,634 — — 14,954 15,025 AA 16,407 16,405 13,324 15,168 — — 29,731 31,573 A — — 16,879 21,895 — — 16,879 21,895 Total $ 28,809 28,796 32,755 39,697 — — 61,564 68,493 Texas state and political subdivision fixed maturity securities excluding third-party guarantees: AA $ 23,963 23,946 4,418 4,985 — — 28,381 28,931 A 4,846 4,850 16,058 18,077 — — 20,904 22,927 BBB — — 3,194 3,415 — — 3,194 3,415 BB and other — — 9,085 13,220 — — 9,085 13,220 Total $ 28,809 28,796 32,755 39,697 — — 61,564 68,493 The table below represents the Company's detailed exposure to municipal bonds in California at June 30, 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 $ 2,033 2,068 29,081 35,052 2,435 2,733 33,549 39,853 A 1,265 1,650 7,592 9,257 — — 8,857 10,907 Total $ 3,298 3,718 36,673 44,309 2,435 2,733 42,406 50,760 California state and political subdivision fixed maturity securities excluding third-party guarantees: AA $ 449 445 4,209 5,056 — — 4,658 5,501 A 2,849 3,273 17,845 21,642 2,435 2,733 23,129 27,648 BBB — — 570 570 — — 570 570 BB and other — — 14,049 17,041 — — 14,049 17,041 Total $ 3,298 3,718 36,673 44,309 2,435 2,733 42,406 50,760 IMPAIRMENT CONSIDERATIONS RELATED TO INVESTMENTS IN FIXED MATURITY AND EQUITY SECURITIES The Company did not record any credit valuation allowances on fixed maturity securities in either of the three and six months ended June 30, 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. June 30, 2024 | 10-Q 53 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) June 30, 2024 December 31, 2023 Fixed maturity securities $ 1,213,403 1,238,981 Cash and cash equivalents 26,344 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 June 30, 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 six months ended June 30, 2024, our operations provided $11.4 million in net cash. Cash from Investing Activities. We have traditionally also had significant cash flows from both scheduled and unscheduled investment security maturities, redemptions, and prepayments. These cash flows, for the most part, are reinvested in new investments. In the six months ended June 30, 2024, we had net cash outflows from investing activities of $10.2 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. 86% of our total cash, cash equivalents and investments consist of marketable fixed maturity securities classified as available-for-sale that could be readily converted to cash for liquidity needs. 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. We renewed our Credit Facility with Regions Bank on May 3, 2024 on substantially the same terms for an additional three years. See Part I, Item 1, Note 8. Commitments and Contingencies in the notes to our consolidated financial statements, herein, for a description of the Credit Facility. The Credit Facility provides additional liquidity to the June 30, 2024 | 10-Q 54 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS Company for short-term or longer-term needs. As of June 30, 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 54% 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 six months ended June 30, 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 six 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. 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 June 30, 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. June 30, 2024 | 10-Q 55 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 entered into a coinsurance agreement with RGA in the second quarter of 2024 and elected to cede 50% of our final expense business to RGA, which alleviates some of the strain on expenses. We may also seek other options, such as 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 borrow money to contribute capital to CICA Domestic, we could be exposed to cash flow strain. See Part I, Item 1, Note 8. Commitments and Contingencies , as well as Part II, Item 1. Legal Proceedings - Trade Secret Lawsuit, for a discussion of the trade secret lawsuit, which could negatively impact our cash if we do not succeed in our appeal. Regulatory Restrictions on our Use of Cash 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 June 30, 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, 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. June 30, 2024 | 10-Q 56 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS Any capital that Citizens is required to contribute to its insurance subsidiaries could negatively impact the Company's capital resources and liquidity. CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS As of June 30, 2024, we have no additional contractual obligations or off-balance sheet arrangements other than those described in Part I, Item 1, Note 8. 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.