CITIZENS, INC. 10-Q

Item 1. FINANCIAL STATEMENTS CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Balance Sheets (In thousands) September 30, 2024 December 31, 2023 (Unaudited) Assets: Investments: Fixed maturity securities available-for-sale, at fair value (amortized cost: $ 1,391,580 and $ 1,389,038 in 2024 and 2023, respectively) $ 1,273,497 1,238,981 Equity securities, at fair value 5,716 5,282 Policy loans 72,463 75,359 Other long-term investments (portion measured at fair value $ 93,167 and $ 82,460 in 2024 and 2023, respectively) 93,433 82,725 Total investments 1,445,109 1,402,347 Cash and cash equivalents 32,382 26,997 Accrued investment income 17,082 17,360 Reinsurance recoverable 7,278 3,991 Deferred policy acquisition costs 192,268 175,768 Cost of insurance acquired 9,566 10,043 Current federal income tax receivable 505 1,546 Property and equipment, net 10,975 11,809 Due premiums 10,090 11,264 Other assets (less allowance for losses of $ 574 and $ 408 in 2024 and 2023, respectively) 10,554 7,803 Total assets $ 1,735,809 1,668,928 See accompanying Notes to Consolidated Financial Statements. September 30, 2024 | 10-Q 2 Table of Contents CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Balance Sheets, Continued (In thousands, except share amounts) September 30, 2024 December 31, 2023 (Unaudited) Liabilities and Stockholders' Equity: Liabilities: Policy liabilities: Future policy benefit reserves: Life insurance $ 1,236,873 1,229,253 Accident and health insurance 998 889 Total future policy benefit reserves 1,237,871 1,230,142 Policyholders' funds: Annuities 145,838 133,216 Dividend accumulations 47,052 44,960 Premiums paid in advance 32,420 32,446 Policy claims payable 9,236 6,637 Other policyholders' funds 7,076 7,363 Total policyholders' funds 241,622 224,622 Total policy liabilities 1,479,493 1,454,764 Commissions payable 3,843 3,445 Deferred federal income tax liability 2,367 1,102 Other liabilities 42,533 37,488 Total liabilities 1,528,236 1,496,799 Commitments and contingencies ( Notes 7 and 8 ) Stockholders' Equity: Common stock: Class A, no par value, 100,000,000 shares authorized, 54,222,644 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 269,356 268,675 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 53,441 42,150 Accumulated other comprehensive income (loss) ( 94,683 ) ( 118,155 ) Treasury stock, at cost ( 23,725 ) ( 23,725 ) Total stockholders' equity 207,573 172,129 Total liabilities and stockholders' equity $ 1,735,809 1,668,928 See accompanying Notes to Consolidated Financial Statements. September 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 Nine Months Ended September 30, September 30, (In thousands, except per share amounts) 2024 2023 2024 2023 Revenues: Premiums: Life insurance $ 42,461 41,794 122,823 118,020 Accident and health insurance 452 296 1,324 1,201 Property insurance ( 16 ) ( 64 ) ( 18 ) 780 Net investment income 17,377 17,372 52,404 51,687 Investment related gains (losses), net 827 ( 892 ) 1,537 ( 477 ) Other income 630 884 3,457 2,620 Total revenues 61,731 59,390 181,527 173,831 Benefits and Expenses: Insurance benefits paid or provided: Claims and surrenders 36,478 37,723 104,121 100,798 Increase (decrease) in future policy benefit reserves 471 ( 3,880 ) ( 130 ) ( 5,802 ) Policyholder liability remeasurement (gain) loss 1,157 1,024 2,836 2,860 Policyholders' dividends 1,320 1,414 3,748 3,783 Total insurance benefits paid or provided 39,426 36,281 110,575 101,639 Commissions 12,957 9,444 35,639 27,340 Other general expenses 12,095 11,949 40,072 35,477 Capitalization of deferred policy acquisition costs ( 10,430 ) ( 7,132 ) ( 29,304 ) ( 20,034 ) Amortization of deferred policy acquisition costs 4,493 4,056 12,804 11,544 Amortization of cost of insurance acquired 153 151 477 465 Total benefits and expenses 58,694 54,749 170,263 156,431 Income before federal income tax 3,037 4,641 11,264 17,400 Federal income tax expense (benefit) 247 1,943 ( 27 ) 3,704 Net income 2,790 2,698 11,291 13,696 Per Share Amounts: Basic earnings per share of Class A common stock 0.06 0.06 0.23 0.28 Diluted earnings per share of Class A common stock 0.05 0.05 0.22 0.27 Other Comprehensive Income (Loss): Unrealized gains (losses) on fixed maturity securities: Unrealized holding gains (losses) arising during period 59,101 ( 59,817 ) 31,427 ( 36,811 ) Reclassification adjustment for losses (gains) included in net income ( 100 ) 419 547 481 Unrealized gains (losses) on fixed maturity securities, net 59,001 ( 59,398 ) 31,974 ( 36,330 ) Change in current discount rate for liability for future policy benefits ( 45,404 ) 60,054 ( 5,887 ) 45,825 Income tax expense (benefit) on other comprehensive income items 356 ( 1,040 ) 2,615 ( 882 ) Other comprehensive income (loss) 13,241 1,696 23,472 10,377 Total comprehensive income (loss) $ 16,031 4,394 34,763 24,073 See accompanying Notes to Consolidated Financial Statements. September 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 Comprehensive income (loss): Net income — — 2,790 — — 2,790 Other comprehensive income (loss) — — — 13,241 — 13,241 Total comprehensive income (loss) — — 2,790 13,241 — 16,031 Stock-based compensation 73 — — — — 73 Balance at September 30, 2024 $ 269,356 3,184 53,441 ( 94,683 ) ( 23,725 ) 207,573 See accompanying Notes to Consolidated Financial Statements. September 30, 2024 | 10-Q 5 Table of Contents CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Stockholders' Equity, Continued (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, 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 Comprehensive income (loss): Net income — — 2,698 — — 2,698 Other comprehensive income (loss) — — — 1,696 — 1,696 Total comprehensive income (loss) — — 2,698 1,696 — 4,394 Stock-based compensation 180 — — — — 180 Other 1 — — 1,327 — — 1,327 Balance at September 30, 2023 $ 268,423 3,184 31,332 ( 126,667 ) ( 23,525 ) 152,747 1 See Note 11 - Income Taxes for details. See accompanying Notes to Consolidated Financial Statements. September 30, 2024 | 10-Q 6 Table of Contents CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended September 30, (In thousands) 2024 2023 Cash flows from operating activities: Net income $ 11,291 13,696 Adjustments to reconcile net income to net cash provided by operating activities: Investment related (gains) losses on sale of investments and other assets, net ( 1,537 ) 477 Net deferred policy acquisition costs ( 16,500 ) ( 8,490 ) Amortization of cost of insurance acquired 477 465 Depreciation 443 380 Amortization of premiums and discounts on investments 3,738 3,761 Stock-based compensation 1,052 333 Deferred federal income tax expense (benefit) ( 1,350 ) 652 Change in: Accrued investment income 278 8 Reinsurance recoverable ( 3,287 ) 778 Due premiums 1,174 2,168 Future policy benefit reserves 1,842 ( 5,111 ) Other policyholders' liabilities 19,002 8,156 Federal income tax payable 1,041 1,253 Commissions payable and other liabilities 6,397 ( 3,116 ) Other, net ( 2,969 ) 34 Net cash provided by operating activities 21,092 15,444 Cash flows from investing activities: Purchases of fixed maturity securities, available-for-sale ( 49,345 ) ( 50,077 ) Sales of fixed maturity securities, available-for-sale 4,659 13,690 Maturities and calls of fixed maturity securities, available-for-sale 37,907 23,128 Sales of equity securities — 770 Principal payments on mortgage loans 7 6 (Increase) decrease in policy loans, net 2,896 3,023 Sales of other long-term investments 2,226 3,793 Purchases of other long-term investments ( 11,123 ) ( 13,262 ) Purchases of property and equipment ( 561 ) ( 292 ) Maturities of short-term investments — 750 Net cash used in investing activities ( 13,334 ) ( 18,471 ) See accompanying Notes to Consolidated Financial Statements. September 30, 2024 | 10-Q 7 Table of Contents CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Cash Flows, Continued (Unaudited) Nine Months Ended September 30, (In thousands) 2024 2023 Cash flows from financing activities: Annuity deposits $ 5,181 5,443 Annuity withdrawals ( 7,183 ) ( 7,828 ) Acquisition of treasury stock — ( 719 ) Other ( 371 ) ( 57 ) Net cash used in financing activities ( 2,373 ) ( 3,161 ) Net increase (decrease) in cash and cash equivalents 5,385 ( 6,188 ) Cash and cash equivalents at beginning of year 26,997 22,973 Cash and cash equivalents at end of period $ 32,382 16,785 SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES: During the nine months ended September 30, 2024 and 2023, various fixed maturity issuers exchanged securities with book values of $ 3.7 million and $ 5.4 million, respectively, for securities of equal value. The Company had $ 0.3 million of net unsettled security trades at September 30, 2023 and none at September 30, 2024. The Company recognized $ 36 thousand right-of-use assets in exchange for new operating lease liabilities during the nine months ended September 30, 2023 and none during the nine months ended September 30, 2024. See accompanying Notes to Consolidated Financial Statements. September 30, 2024 | 10-Q 8 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"), Security Plan Life Insurance Company ("SPLIC"), Security Plan Fire Insurance Company ("SPFIC"), Magnolia Guaranty Life Insurance Company ("MGLIC"), Computing Technology, Inc. ("CTI"), Nexo Global Services LLC, a Puerto Rico holding company ("Nexo") and its wholly-owned subsidiaries, CICA Life A.I., a Puerto Rico company ("CICA International") and Nexo Enrollment Services LLC, a Puerto Rico service company ("NES"). 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 September 30, 2024, the consolidated statements of operations and comprehensive income (loss) and stockholders' equity for the three and nine months ended September 30, 2024 and September 30, 2023 and the consolidated statements of cash flows for the nine months ended September 30, 2024 and September 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 September 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 Domestic and CICA International. CICA Domestic. 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 primarily ordinary whole life, final expense and life products with living benefits throughout the U.S. CICA International. 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 and on August 31, 2023, CICA Bermuda transferred all of its insurance in force business to CICA International. CICA International offers U.S. dollar-denominated products to non-U.S. residents/citizens internationally, including endowment products, which are principally accumulation contracts that incorporate an element of life insurance protection and ordinary whole life insurance. 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. NES provides services to policyholders of CICA International. Our Home Service Insurance segment operates through our subsidiaries SPLIC and MGLIC, and focuses on the life insurance needs of the middle- and lower-income markets 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. SPLIC also issues critical illness policies. Prior to June 30, 2023, SPFIC issued dwelling and contents property insurance policies. As of June 30, 2023, we ceased all operations for SPFIC. September 30, 2024 | 10-Q 9 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) CTI provides data processing systems and services to the Company. 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. September 30, 2024 | 10-Q 10 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) (3) INVESTMENTS The Company invests primarily in fixed maturity securities, which totaled 86.2 % of total cash and invested assets at September 30, 2024, as shown below. Carrying Value (In thousands, except for %) September 30, 2024 December 31, 2023 Amount % Amount % Cash and invested assets: Fixed maturity securities $ 1,273,497 86.2 % 1,238,981 86.7 % Equity securities 5,716 0.4 5,282 0.4 Policy loans 72,463 4.9 75,359 5.3 Other long-term investments 93,433 6.3 82,725 5.8 Cash and cash equivalents 32,382 2.2 26,997 1.8 Total cash and invested assets $ 1,477,491 100.0 % 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 September 30, 2024 (In thousands) Fixed maturity securities: Available-for-sale: U.S. Treasury securities $ 5,950 165 29 6,086 U.S. Government-sponsored enterprises 3,380 287 — 3,667 States and political subdivisions 299,622 2,531 23,940 278,213 Corporate: Financial 276,156 4,152 24,177 256,131 Consumer 253,133 2,358 32,726 222,765 Utilities 127,449 1,032 17,247 111,234 Energy 83,130 452 6,535 77,047 Communications 71,071 293 7,500 63,864 All other 111,435 823 10,675 101,583 Commercial mortgage-backed 268 1 2 267 Residential mortgage-backed 106,816 14 7,633 99,197 Asset-backed 53,170 926 653 53,443 Total fixed maturity securities $ 1,391,580 13,034 131,117 1,273,497 September 30, 2024 | 10-Q 11 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) September 30, 2024 December 31, 2023 Equity securities: Bond mutual funds $ 766 740 Common stocks 774 665 Non-redeemable preferred stock 8 7 Non-redeemable preferred stock fund 4,168 3,870 Total equity securities $ 5,716 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 gains of $ 0.4 million for both the three and nine months ended September 30, 2024, respectively, on equity securities held. The Company recognized net investment related losses of $ 0.4 million and $ 0.3 million for the three and nine months ended September 30, 2023, respectively. 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 nine months ended September 30, 2024 and 2023, the Company recorded no credit valuation losses on fixed maturity securities. September 30, 2024 | 10-Q 12 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) For fixed maturity security investments that have unrealized losses as of September 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. September 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 $ 569 16 2 315 13 4 884 29 6 States and political subdivisions 12,007 126 21 160,393 23,814 180 172,400 23,940 201 Corporate: Financial 11,511 27 8 165,303 24,150 194 176,814 24,177 202 Consumer 8,889 122 14 173,308 32,604 216 182,197 32,726 230 Utilities 2,805 132 8 86,941 17,115 146 89,746 17,247 154 Energy 3,199 4 4 55,625 6,531 65 58,824 6,535 69 Communications 2,749 34 4 50,790 7,466 60 53,539 7,500 64 All Other 10,989 97 18 71,434 10,578 84 82,423 10,675 102 Commercial mortgage-backed — — — 96 2 1 96 2 1 Residential mortgage-backed 46 — 3 98,714 7,633 84 98,760 7,633 87 Asset-backed 3,973 71 4 16,507 582 18 20,480 653 22 Total fixed maturity securities $ 56,737 629 86 879,426 130,488 1,052 936,163 131,117 1,138 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 September 30, 2024 | 10-Q 13 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 September 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 September 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. September 30, 2024 Amortized Cost Fair Value (In thousands) Fixed maturity securities: Due in one year or less $ 13,425 13,375 Due after one year through five years 136,629 137,256 Due after five years through ten years 276,325 277,228 Due after ten years 965,201 845,638 Total fixed maturity securities $ 1,391,580 1,273,497 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 Nine Months Ended September 30, September 30, (In thousands) 2024 2023 2024 2023 Fixed maturity securities, available-for-sale: Proceeds $ — 9,446 4,659 13,690 Gross realized gains $ — 38 91 43 Gross realized losses $ — 436 196 453 (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 September 30, 2024 | 10-Q 14 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. September 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 $ 6,086 3,667 — 9,753 States and political subdivisions — 278,213 — 278,213 Corporate 47 832,577 — 832,624 Commercial mortgage-backed — 267 — 267 Residential mortgage-backed — 99,197 — 99,197 Asset-backed — 53,443 — 53,443 Total fixed maturity securities, available-for-sale 6,133 1,267,364 — 1,273,497 Equity securities: Bond mutual funds 766 — — 766 Common stocks 774 — — 774 Non-redeemable preferred stock 8 — — 8 Non-redeemable preferred stock fund 4,168 — — 4,168 Total equity securities 5,716 — — 5,716 Other long-term investments (1) — — — 93,167 Total financial assets $ 11,849 1,267,364 — 1,372,380 (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. September 30, 2024 | 10-Q 15 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 stocks 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 September 30, 2024, fixed maturity securities, valued using a third-party pricing source, totaled $ 1.3 billion for Level 2 assets and comprised 92.3 % 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 September 30, 2024. As of September 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 $ 0.5 million and $ 1.8 million for the three and nine months ended September 30, 2024, respectively, and losses of $ 0.1 million and gains of $ 0.2 million on limited partnerships September 30, 2024 | 10-Q 16 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) held for the three and nine months ended September 30, 2023, respectively. These investments are included in other long-term investments on the consolidated balance sheets. September 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 $ 34,832 1,669 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 11,908 — 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 25,431 10,102 4 to 6 20,524 14,271 4 to 6 Infrastructure Investments in environmental infrastructure and related technology, focusing on renewable power generation and distribution 20,996 6,345 9 to 11 16,733 9,576 10 Total limited partnerships $ 93,167 18,116 $ 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: September 30, 2024 December 31, 2023 (In thousands) Carrying Value Fair Value Carrying Value Fair Value Financial assets: Policy loans $ 72,463 72,463 75,359 75,359 Residential mortgage loan 35 36 42 42 Cash and cash equivalents 32,382 32,382 26,997 26,997 Financial liabilities: Annuity - investment contracts 68,077 63,468 67,690 63,283 Policy loans. Policy loans had a weighted average annual interest rate of 7.7 % at both September 30, 2024 and December 31, 2023 and no specified maturity dates. The aggregate fair value of policy loans approximates the September 30, 2024 | 10-Q 17 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) 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 September 30, 2024 and December 31, 2023. At September 30, 2024, the remaining loan matures in four years . Management estimated the fair value using an annual interest rate of 6.25 % at both September 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 September 30, 2024 and December 31, 2023 using discounted cash flows based upon spot rates adjusted for various risk adjustments ranging from 3.40 % to 4.40 % 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 ) September 30, 2024 December 31, 2023 Other long-term investments: Limited partnerships $ 93,167 82,460 FHLB common stock 210 202 Mortgage loans 35 42 All other investments 21 21 Total other long-term investments $ 93,433 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 nine months ended September 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 September 30, 2024 | 10-Q 18 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) with premiums payable for a limited time after which the policy is fully paid up. Both reporting cohorts include whole life and endowment policies. Nine Months Ended September 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 21,792 2,220 250 24,262 Amortization expense ( 9,763 ) ( 740 ) ( 278 ) ( 10,781 ) Balance, end of period 117,581 15,555 1,185 134,321 Home Service Insurance: Balance, beginning of year 43,280 10,564 1,084 54,928 Capitalizations 3,973 892 177 5,042 Amortization expense ( 1,698 ) ( 323 ) ( 2 ) ( 2,023 ) Balance, end of period 45,555 11,133 1,259 57,947 Consolidated: Balance, beginning of year 148,832 24,639 2,297 175,768 Capitalizations 25,765 3,112 427 29,304 Amortization expense ( 11,461 ) ( 1,063 ) ( 280 ) ( 12,804 ) Balance, end of period $ 163,136 26,688 2,444 192,268 Nine Months Ended September 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 11,220 2,385 353 13,958 Amortization expense ( 8,859 ) ( 586 ) ( 197 ) ( 9,642 ) Balance, end of period 103,287 13,341 1,172 117,800 Home Service Insurance: Balance, beginning of year 38,793 9,729 921 49,443 Capitalizations 5,026 865 185 6,076 Amortization expense ( 1,542 ) ( 295 ) ( 65 ) ( 1,902 ) Balance, end of period 42,277 10,299 1,041 53,617 Consolidated: Balance, beginning of year 139,719 21,271 1,937 162,927 Capitalizations 16,246 3,250 538 20,034 Amortization expense ( 10,401 ) ( 881 ) ( 262 ) ( 11,544 ) Balance, end of period $ 145,564 23,640 2,213 171,417 DAC capitalization increased for the nine months ended September 30, 2024, compared to the same prior year period mainly from increased commissions from higher first year sales in our Life Insurance segment. September 30, 2024 | 10-Q 19 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) COIA Nine Months Ended September 30, 2024 (In thousands) Permanent Permanent Limited Pay Other Business Total Life Insurance: Balance, beginning of year $ 249 695 406 1,350 Amortization expense ( 12 ) ( 36 ) ( 33 ) ( 81 ) Balance, end of period 237 659 373 1,269 Home Service Insurance: Balance, beginning of year 7,194 168 1,331 8,693 Amortization expense ( 279 ) ( 5 ) ( 112 ) ( 396 ) Balance, end of period 6,915 163 1,219 8,297 Consolidated: Balance, beginning of year 7,443 863 1,737 10,043 Amortization expense ( 291 ) ( 41 ) ( 145 ) ( 477 ) Balance, end of period $ 7,152 822 1,592 9,566 Nine Months Ended September 30, 2023 (In thousands) Permanent Permanent Limited Pay Other Business Total Life Insurance: Balance, beginning of year $ 267 750 444 1,461 Amortization expense ( 14 ) ( 43 ) ( 29 ) ( 86 ) Balance, end of period 253 707 415 1,375 Home Service Insurance: Balance, beginning of year 7,583 176 1,427 9,186 Amortization expense ( 293 ) ( 6 ) ( 80 ) ( 379 ) Balance, end of period 7,290 170 1,347 8,807 Consolidated: Balance, beginning of year 7,850 926 1,871 10,647 Amortization expense ( 307 ) ( 49 ) ( 109 ) ( 465 ) Balance, end of period $ 7,543 877 1,762 10,182 (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, September 30, 2024 | 10-Q 20 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. September 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 Effect of changes in cash flow assumptions 17,731 274 18,005 ( 462 ) 21 ( 441 ) Effect of actual variances from expected experience ( 12,203 ) 973 ( 11,230 ) ( 5,784 ) ( 3,526 ) ( 9,310 ) Adjusted beginning of year balance 257,954 14,780 272,734 95,799 12,007 107,806 Issuances 74,426 2,249 76,675 11,412 1,853 13,265 Interest accrual 8,342 380 8,722 3,193 394 3,587 Net premiums collected ( 36,066 ) ( 2,420 ) ( 38,486 ) ( 9,116 ) 892 ( 8,224 ) Derecognition and other ( 5,530 ) 92 ( 5,438 ) 317 57 374 Ending balance at original discount rate 299,126 15,081 314,207 101,605 15,203 116,808 Effect of changes in discount rates ( 1,303 ) ( 43 ) ( 1,346 ) ( 2,042 ) ( 325 ) ( 2,367 ) Balance, end of period $ 297,823 15,038 312,861 99,563 14,878 114,441 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 Effect of changes in cash flow assumptions 18,320 734 19,054 ( 502 ) ( 1,078 ) ( 1,580 ) Effect of actual variances from expected experience ( 9,656 ) 2,916 ( 6,740 ) ( 5,880 ) ( 1,692 ) ( 7,572 ) Adjusted beginning of year balance 1,004,626 206,405 1,211,031 211,142 121,171 332,313 Issuances 75,132 2,352 77,484 11,407 1,858 13,265 Interest accrual 33,624 6,185 39,809 7,233 4,305 11,538 Benefit payments ( 67,441 ) ( 13,281 ) ( 80,722 ) ( 11,399 ) ( 4,286 ) ( 15,685 ) Derecognition and other ( 6,642 ) 16 ( 6,626 ) 301 51 352 Ending balance at original discount rate 1,039,299 201,677 1,240,976 218,684 123,099 341,783 Effect of changes in discount rates ( 8,395 ) ( 6,067 ) ( 14,462 ) ( 5,797 ) ( 2,493 ) ( 8,290 ) Balance, end of period $ 1,030,904 195,610 1,226,514 212,887 120,606 333,493 Net liability for future policy benefits $ 733,081 180,572 913,653 113,324 105,728 219,052 Less: Reinsurance recoverable 1,308 — 1,308 — — — Net liability for future policy benefits, after reinsurance recoverable $ 731,773 180,572 912,345 113,324 105,728 219,052 The Company performed its annual review of policy benefit reserves assumptions in the third quarter of 2024 and recorded the effects of changes in its cash flow assumptions, which resulted in a net increase in future policy benefit September 30, 2024 | 10-Q 21 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) reserves, primarily driven by mortality and lapse assumptions that better reflect emerging experience for the new CICA Domestic block of business. For the nine months ended September 30, 2024, the Life Insurance segment increased reserves compared to the same period in 2023 due to the unfavorable impact of actual versus expected experience related to mortality and lapses. There was little impact to the Home Service Insurance segment resulting from actual to expected experience for the nine months ended September 30, 2024 and 2023. September 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 Effect of changes in cash flow assumptions ( 210 ) 38 ( 172 ) ( 343 ) 85 ( 258 ) Effect of actual variances from expected experience 4,156 1,059 5,215 ( 5,631 ) ( 4,477 ) ( 10,108 ) Adjusted beginning of year balance 251,547 11,779 263,326 94,251 10,002 104,253 Issuances 20,918 2,608 23,526 13,854 3,107 16,961 Interest accrual 6,897 248 7,145 3,019 348 3,367 Net premiums collected ( 31,480 ) ( 2,004 ) ( 33,484 ) ( 8,909 ) 2,019 ( 6,890 ) Derecognition and other 567 240 807 475 113 588 Ending balance at original discount rate 248,449 12,871 261,320 102,690 15,589 118,279 Effect of changes in discount rates ( 16,380 ) ( 501 ) ( 16,881 ) ( 9,438 ) ( 1,397 ) ( 10,835 ) Balance, end of period $ 232,069 12,370 244,439 93,252 14,192 107,444 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 Effect of changes in cash flow assumptions ( 389 ) ( 702 ) ( 1,091 ) ( 257 ) 331 74 Effect of actual variances from expected experience 6,338 3,489 9,827 ( 5,472 ) ( 1,337 ) ( 6,809 ) Adjusted beginning of year balance 1,002,118 210,838 1,212,956 208,459 120,902 329,361 Issuances 21,360 2,798 24,158 13,854 3,115 16,969 Interest accrual 32,470 6,288 38,758 6,987 4,242 11,229 Benefit payments ( 63,211 ) ( 16,732 ) ( 79,943 ) ( 12,246 ) ( 4,707 ) ( 16,953 ) Derecognition and other 97 42 139 464 109 573 Ending balance at original discount rate 992,834 203,234 1,196,068 217,518 123,661 341,179 Effect of changes in discount rates ( 78,072 ) ( 18,778 ) ( 96,850 ) ( 23,934 ) ( 12,670 ) ( 36,604 ) Balance, end of period $ 914,762 184,456 1,099,218 193,584 110,991 304,575 Net liability for future policy benefits $ 682,693 172,086 854,779 100,332 96,799 197,131 September 30, 2024 | 10-Q 22 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. September 30, 2024 September 30, 2023 (In thousands) Life Insurance Home Service Insurance Consolidated Life Insurance Home Service Insurance Consolidated Life Insurance: Permanent $ 731,773 113,324 845,097 682,693 100,332 783,025 Permanent limited pay 180,572 105,728 286,300 172,086 96,799 268,885 Deferred profit liability 29,572 29,158 58,730 27,616 26,138 53,754 Other 32,426 14,320 46,746 28,011 13,926 41,937 Total life insurance 974,343 262,530 1,236,873 910,406 237,195 1,147,601 Accident & Health: Other 586 412 998 596 281 877 Total future policy benefit reserves $ 974,929 262,942 1,237,871 911,002 237,476 1,148,478 The following table provides the amount of undiscounted and discounted expected gross premiums and expected future benefit payments for long-term duration contracts. September 30, 2024 September 30, 2023 (In thousands) Life Insurance Home Service Insurance Life Insurance Home Service Insurance Undiscounted: Permanent: Expected future gross premiums $ 731,580 448,837 604,059 459,405 Expected future benefit payments 1,586,017 487,851 1,483,068 484,239 Permanent Limited Pay: Expected future gross premiums 46,270 76,032 47,868 77,544 Expected future benefit payments 322,188 320,318 325,964 320,563 Discounted: Permanent: Expected future gross premiums $ 564,242 272,938 453,277 261,271 Expected future benefit payments 1,030,904 212,887 914,762 193,584 Permanent Limited Pay: Expected future gross premiums 41,999 51,752 42,133 51,091 Expected future benefit payments 195,610 120,606 184,456 110,991 September 30, 2024 | 10-Q 23 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 September 30, Nine Months Ended September 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 $ 27,930 8,391 23,654 8,471 76,047 25,282 68,619 25,573 Permanent Limited Pay 3,395 2,269 3,555 2,308 11,067 6,739 11,333 6,811 Other 2,508 — 4,279 — 7,550 — 7,094 — Less: Reinsurance 1,828 — 392 — 3,559 — 1,452 — Total, net of reinsurance 32,005 10,660 31,096 10,779 91,105 32,021 85,594 32,384 Accident & Health: Other 197 — 53 — 565 — 537 — Less: Reinsurance 1 — 1 — 3 — 3 — Total, net of reinsurance 196 — 52 — 562 — 534 — Total $ 32,201 10,660 31,148 10,779 91,667 32,021 86,128 32,384 Home Service Insurance Segment: Life Insurance: Permanent $ 8,257 1,349 8,372 1,322 24,723 4,040 25,012 3,968 Permanent Limited Pay 1,837 1,636 2,154 1,599 5,905 4,894 6,425 4,777 Other 367 — 178 — 1,114 — 1,012 — Less: Reinsurance 5 — 6 — 24 — 23 — Total, net of reinsurance 10,456 2,985 10,698 2,921 31,718 8,934 32,426 8,745 Accident & Health: Other 256 — 244 — 762 — 667 — Total $ 10,712 2,985 10,942 2,921 32,480 8,934 33,093 8,745 The following table provides the weighted-average durations of the liability for future policy benefits. September 30, 2024 September 30, 2023 (In years) Life Insurance Home Service Insurance Life Insurance Home Service Insurance Permanent: Duration at original discount rate 8.6 16.0 7.8 15.7 Duration at current discount rate 8.6 15.6 8.2 15.6 Permanent Limited Pay: Duration at original discount rate 8.1 14.7 7.9 14.3 Duration at current discount rate 7.8 14.7 7.6 14.4 September 30, 2024 | 10-Q 24 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. September 30, 2024 September 30, 2023 Life Insurance Home Service Insurance Life Insurance Home Service Insurance Permanent: Interest rate at original discount rate 4.87 % 4.96 % 4.92 % 4.98 % Interest rate at current discount rate 4.61 % 5.03 % 5.62 % 5.71 % Permanent Limited Pay: Interest rate at original discount rate 4.28 % 5.03 % 4.29 % 5.05 % Interest rate at current discount rate 4.63 % 5.02 % 5.60 % 5.71 % 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 September 30, 2024 (In thousands) Range of Guaranteed Minimum Crediting Rates: 0.00 % - 1.49 % $ 816 — 726 34,772 36,314 1.50 % - 2.99 % 8,840 176 37 27,092 36,145 3.00 % - 4.49 % 101,646 346 16,039 — 118,031 Greater or equal to 4.50 % 31,519 — — — 31,519 Total $ 142,821 522 16,802 61,864 222,009 At Guaranteed Minimum 1 Basis Point-50 Basis Points Above 51 Basis Points-150 Basis Points Above Greater Than 150 Basis Points Above Total September 30, 2023 (In thousands) Range of Guaranteed Minimum Crediting Rates: 0.00 % - 1.49 % $ 746 — 1,138 37,233 39,117 1.50 % - 2.99 % 30,256 675 63 — 30,994 3.00 % - 4.49 % 104,304 10 — — 104,314 Greater or equal to 4.50 % 31,374 — — — 31,374 Total $ 166,680 685 1,201 37,233 205,799 September 30, 2024 | 10-Q 25 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) The following tables summarize balances of and changes in policyholders' account balances. September 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 17,642 2,132 598 4,211 Premiums received 126 3,015 4,173 500 Interest credited 1,496 2,043 1,377 1,348 Less: Surrenders and withdrawals — 6,997 4,056 6,498 Benefit payments 6,803 — — — Balance, end of period $ 57,030 87,327 47,052 30,600 Weighted-average crediting rates 4.00 % 3.67 % 3.53 % 2.99 % Cash surrender value $ 57,030 87,327 47,052 30,600 September 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 16,086 2,160 474 3,200 Premiums received 85 3,273 4,210 659 Interest credited 1,103 1,988 993 948 Other 1 — — — Less: Surrenders and withdrawals — 7,647 3,238 6,098 Benefit payments 8,466 — — — Balance, end of period $ 41,804 86,581 44,102 33,312 Weighted-average crediting rates 4.01 % 3.57 % 3.05 % 2.96 % Cash surrender value $ 41,804 86,581 44,102 33,312 September 30, 2024 | 10-Q 26 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) The following table reconciles policyholders' account balances shown above to the policyholders' account balance liability in the consolidated balance sheets. As of September 30, (In thousands) 2024 2023 Annuities: Supplemental contracts without life contingencies $ 57,030 41,804 Fixed annuity 87,327 86,581 Unearned revenue reserve 1,481 1,524 Total annuities $ 145,838 129,909 Premiums paid in advance: Premiums paid in advance $ 30,600 33,312 Other 1,820 2,141 Total premiums paid in advance $ 32,420 35,453 (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) September 30, 2024 December 31, 2023 Aggregate assumed life insurance in force $ 3,605 3,772 Aggregate ceded life insurance in force $ 712,565 619,597 Net life insurance in force $ 4,480,563 4,306,429 September 30, 2024 | 10-Q 27 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) The Company's reinsurance recoverable on ceded reinsurance was $ 7.3 million and $ 4.0 million as of September 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 nine months ended September 30, 2024 and 2023 are summarized as follows: Three Months Ended Nine Months Ended September 30, September 30, (In thousands) 2024 2023 2024 2023 Premiums from short duration contracts: Direct $ 449 283 1,376 3,920 Ceded ( 14 ) ( 16 ) ( 16 ) ( 1,798 ) Net premiums earned 435 267 1,360 2,122 Premiums from long duration contracts: Direct 44,295 42,156 126,351 119,353 Assumed 15 16 48 52 Ceded ( 1,848 ) ( 413 ) ( 3,630 ) ( 1,526 ) Net premiums earned 42,462 41,759 122,769 117,879 Total premiums earned $ 42,897 42,026 124,129 120,001 Claims and surrenders assumed $ 22 23 97 90 Claims and surrenders ceded $ ( 1,395 ) ( 133 ) ( 2,876 ) ( 657 ) Commissions assumed and ceded $ ( 2,016 ) 9 ( 2,957 ) 26 Other general expenses ceded $ ( 341 ) — ( 497 ) — (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 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 September 30, 2024 | 10-Q 28 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) 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. We purchased and filed an appeal bond in September 2024 to supercede enforcement of the judgment during the appeal process. 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. Additionally, $ 1.3 million that is reported in cash and cash equivalents on our balance sheet is restricted while the appeal bond remains in place. CONTRACTUAL OBLIGATIONS As of September 30, 2024, CICA International is committed to fund investments up to $ 18.1 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 September 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) September 30, 2024 | 10-Q 29 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) each share of Class A common stock is entitled to receive twice the cash dividends paid on a per share basis to the 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: Nine Months Ended September 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 340 — 122 — Acquisition of Class A shares — — — 325 Balance at end of period 54,223 5,330 53,880 5,262 EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share. Three Months Ended September 30, 2024 2023 (In thousands, except per share amounts) Basic and diluted earnings per share: Numerator: Net income $ 2,790 2,698 Net income allocated to Class A common stock $ 2,790 2,698 Denominator: Weighted average shares of Class A outstanding - basic 49,837 49,615 Weighted average shares of Class A outstanding - diluted 50,669 50,522 Basic earnings per share of Class A common stock $ 0.06 0.06 Diluted earnings per share of Class A common stock $ 0.05 0.05 Nine Months Ended September 30, 2024 2023 (In thousands, except per share amounts) Basic and diluted earnings per share: Numerator: Net income $ 11,291 13,696 Net income allocated to Class A common stock $ 11,291 13,696 Denominator: Weighted average shares of Class A outstanding - basic 49,687 49,739 Weighted average shares of Class A outstanding - diluted 50,519 50,647 Basic earnings per share of Class A common stock $ 0.23 0.28 Diluted earnings per share of Class A common stock 0.22 0.27 September 30, 2024 | 10-Q 30 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) STATUTORY CAPITAL AND SURPLUS Each of our domestic regulated insurance subsidiaries is required to meet stipulated regulatory capital requirements imposed by the U.S. National Association of Insurance Commissioners ("NAIC"). All domestic insurance subsidiaries exceeded the minimum capital requirements at September 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 September 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. At September 30, 2024, CICA International exceeded the required minimum capital and related ratio. (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 and life products with living benefits throughout the U.S. Our Home Service Insurance segment operates through our subsidiaries SPLIC and MGLIC, and focuses on the life insurance needs of the middle- and lower-income markets in Louisiana, Mississippi and Arkansas. SPLIC also issues critical illness policies. Our policies are sold and serviced through funeral homes and independent agents who sell policies, collect premiums and service policyholders. SPFIC 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. September 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 Three Months Ended September 30, 2024 (In thousands) Revenues: Premiums $ 32,201 10,696 — 42,897 Net investment income 13,578 3,552 247 17,377 Investment related gains (losses), net 936 ( 111 ) 2 827 Other income 630 — — 630 Total revenues 47,345 14,137 249 61,731 Benefits and expenses: Insurance benefits paid or provided: Claims and surrenders 30,083 6,395 — 36,478 Increase (decrease) in future policy benefit reserves ( 1,497 ) 1,968 — 471 Policyholder liability remeasurement (gain) loss 1,681 ( 524 ) — 1,157 Policyholders' dividends 1,314 6 — 1,320 Total insurance benefits paid or provided 31,581 7,845 — 39,426 Commissions 9,549 3,408 — 12,957 Other general expenses 6,791 3,756 1,548 12,095 Capitalization of deferred policy acquisition costs ( 8,855 ) ( 1,575 ) — ( 10,430 ) Amortization of deferred policy acquisition costs 3,837 656 — 4,493 Amortization of cost of insurance acquired 26 127 — 153 Total benefits and expenses 42,929 14,217 1,548 58,694 Income (loss) before federal income tax $ 4,416 ( 80 ) ( 1,299 ) 3,037 September 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 Nine Months Ended September 30, 2024 (In thousands) Revenues: Premiums $ 91,667 32,462 — 124,129 Net investment income 41,076 10,618 710 52,404 Investment related gains (losses), net 1,743 ( 179 ) ( 27 ) 1,537 Other income 3,354 20 83 3,457 Total revenues 137,840 42,921 766 181,527 Benefits and expenses: Insurance benefits paid or provided: Claims and surrenders 86,616 17,505 — 104,121 Increase (decrease) in future policy benefit reserves ( 4,959 ) 4,829 — ( 130 ) Policyholder liability remeasurement (gain) loss 3,360 ( 524 ) — 2,836 Policyholders' dividends 3,731 17 — 3,748 Total insurance benefits paid or provided 88,748 21,827 — 110,575 Commissions 25,052 10,587 — 35,639 Other general expenses 19,752 11,176 9,144 40,072 Capitalization of deferred policy acquisition costs ( 24,262 ) ( 5,042 ) — ( 29,304 ) Amortization of deferred policy acquisition costs 10,781 2,023 — 12,804 Amortization of cost of insurance acquired 81 396 — 477 Total benefits and expenses 120,152 40,967 9,144 170,263 Income (loss) before federal income tax $ 17,688 1,954 ( 8,378 ) 11,264 September 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 Three Months Ended September 30, 2023 (In thousands) Revenues: Premiums $ 31,148 10,878 — 42,026 Net investment income 13,661 3,459 252 17,372 Investment related gains (losses), net ( 424 ) ( 370 ) ( 98 ) ( 892 ) Other income 884 — — 884 Total revenues 45,269 13,967 154 59,390 Benefits and expenses: Insurance benefits paid or provided: Claims and surrenders 32,419 5,304 — 37,723 Increase (decrease) in future policy benefit reserves ( 5,587 ) 1,707 — ( 3,880 ) Policyholder liability remeasurement (gain) loss 840 184 — 1,024 Policyholders' dividends 1,405 9 — 1,414 Total insurance benefits paid or provided 29,077 7,204 — 36,281 Commissions 5,406 4,038 — 9,444 Other general expenses 6,036 4,293 1,620 11,949 Capitalization of deferred policy acquisition costs ( 5,141 ) ( 1,991 ) — ( 7,132 ) Amortization of deferred policy acquisition costs 3,313 743 — 4,056 Amortization of cost of insurance acquired 28 123 — 151 Total benefits and expenses 38,719 14,410 1,620 54,749 Income (loss) before federal income tax $ 6,550 ( 443 ) ( 1,466 ) 4,641 September 30, 2024 | 10-Q 34 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) Life Insurance Home Service Insurance Other Non-Insurance Enterprises Consolidated Nine Months Ended September 30, 2023 (In thousands) Revenues: Premiums $ 86,128 33,873 — 120,001 Net investment income 40,470 10,379 838 51,687 Investment related gains (losses), net ( 123 ) ( 283 ) ( 71 ) ( 477 ) Other income 2,619 1 — 2,620 Total revenues 129,094 43,970 767 173,831 Benefits and expenses: Insurance benefits paid or provided: Claims and surrenders 83,826 16,972 — 100,798 Increase (decrease) in future policy benefit reserves ( 9,270 ) 3,468 — ( 5,802 ) Policyholder liability remeasurement (gain) loss 2,541 319 — 2,860 Policyholders' dividends 3,761 22 — 3,783 Total insurance benefits paid or provided 80,858 20,781 — 101,639 Commissions 14,930 12,410 — 27,340 Other general expenses 17,141 13,060 5,276 35,477 Capitalization of deferred policy acquisition costs ( 13,958 ) ( 6,076 ) — ( 20,034 ) Amortization of deferred policy acquisition costs 9,642 1,902 — 11,544 Amortization of cost of insurance acquired 86 379 — 465 Total benefits and expenses 108,699 42,456 5,276 156,431 Income (loss) before federal income tax $ 20,395 1,514 ( 4,509 ) 17,400 (11) INCOME TAXES The effective tax rate is the ratio of tax expense or tax benefit over pre-tax income. The effective tax rate was 8.1 % and ( 0.2 )% for the three and nine months ended September 30, 2024, compared to 41.9 % and 21.3 % 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. As a result of the August 31, 2023 transfer of CICA Bermuda's in force business to CICA International, the Company's consolidated deferred federal income tax liability was reduced by $ 4.3 million due to the difference in the tax rates in the jurisdictions in which the companies operate. Since the transfer was between companies under common control, the $ 4.3 million reduction in the deferred federal income tax liability was recorded as a credit to equity, $ 1.3 million of which increased retained earnings and $ 3.0 million of which reduced accumulated other comprehensive income (loss), based on the nature of the tax components. September 30, 2024 | 10-Q 35 Table of Contents CITIZENS, INC . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited ) At September 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 $ 3.8 million and $ 6.2 million, respectively, through Other Comprehensive Income (Loss). (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 nine months ended September 30, 2024 and 2023, as indicated below. Three Months Ended September 30, 2024 2023 (In thousands) Amount Tax Effect Total Amount Tax Effect Total Unrealized gains (losses): Unrealized holding gains (losses) arising during the period $ 59,101 ( 4,360 ) 54,741 ( 59,817 ) 8,717 ( 51,100 ) Reclassification adjustment for losses (gains) included in net income (loss) ( 100 ) 21 ( 79 ) 419 ( 88 ) 331 Unrealized holding gains (losses), net 59,001 ( 4,339 ) 54,662 ( 59,398 ) 8,629 ( 50,769 ) Change in current discount rate for liability for future policy benefits ( 45,404 ) 3,983 ( 41,421 ) 60,054 ( 7,589 ) 52,465 Other comprehensive income (loss) $ 13,597 ( 356 ) 13,241 656 1,040 1,696 Nine Months Ended September 30, 2024 2023 (In thousands) Amount Tax Effect Total Amount Tax Effect Total Unrealized gains (losses): Unrealized holding gains (losses) arising during the period $ 31,427 ( 2,169 ) 29,258 ( 36,811 ) 7,548 ( 29,263 ) Reclassification adjustment for losses (gains) included in net income 547 ( 115 ) 432 481 ( 101 ) 380 Unrealized holding gains (losses), net 31,974 ( 2,284 ) 29,690 ( 36,330 ) 7,447 ( 28,883 ) Change in current discount rate for liability for future policy benefits ( 5,887 ) ( 331 ) ( 6,218 ) 45,825 ( 6,565 ) 39,260 Other comprehensive income (loss) $ 26,087 ( 2,615 ) 23,472 9,495 882 10,377 (13) RELATED PARTY TRANSACTIONS The Company has various routine related party transactions in conjunction with our holding company structure, such as management service agreements 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 nine months ended September 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. September 30, 2024 | 10-Q 36 Table of Contents CITIZENS, INC. MANAGEMENT'S DISCUSSION & ANALYSIS