Executive Summary / Key Takeaways

• Citizens, Inc. (CIA) leverages a long history and specialized expertise to serve distinct niche markets, particularly non-U.S. residents seeking U.S. dollar-denominated life insurance and domestic middle-to-lower-income households, differentiating itself through tailored products and unique distribution channels.
• Recent strategic initiatives, including new product introductions, significant expansion of U.S. state licensing, and rapid growth in its agent network, are driving substantial increases in first year premiums and insurance issued, positioning the company for future revenue and profit growth despite current top-line pressure.
• While Q1 2025 results showed a decrease in income before tax, primarily due to non-cash investment losses and higher operating expenses from growth investments, core premium growth signals underlying business momentum.
• The company maintains a strong balance sheet with no debt and ample liquidity, supported by consistent positive operating cash flow and a substantial portfolio of marketable securities, though managing liquidity related to increasing endowment maturities and commission advances for new business remains a focus.
• Management anticipates continued sales growth leading to revenue and profit growth in 2025 and stronger growth in 2026, underpinned by its competitive advantages in niche markets and ongoing operational enhancements.

A Foundation Built on Niche Expertise

For over 55 years, Citizens, Inc. has carved out a distinct identity in the life insurance industry by focusing on underserved niche markets. Unlike broad-based competitors like MetLife (MET) or Prudential Financial (PRU), CIA specializes in providing U.S. dollar-denominated life insurance and endowment products to non-U.S. residents, primarily in Latin America and the Pacific Rim, a segment it has served for decades. Domestically, its Home Service segment targets the life insurance needs of middle- and lower-income markets, predominantly in the U.S. Gulf Coast region, through small face amount whole life, industrial life, and final expense policies distributed via funeral homes and independent agents.

This targeted approach, built through a history of both organic sales and strategic acquisitions, allows CIA to optimize its competitive position in segments where larger, more generalized insurers may lack the tailored products, cultural understanding, or specialized distribution networks required for effective penetration. While competitors like Aflac (AFL) and Lincoln National Corporation (LNC) also operate in overlapping areas like supplemental and life insurance, CIA's specific focus on U.S. dollar-based products for foreign residents and community-based distribution for domestic final expense provides a unique value proposition. This niche agility, supported by cultural and linguistic expertise, can translate into higher customer loyalty and recurring revenue in these specific markets compared to the broader, less customized approaches of larger rivals.

The company's operational technology, supported by its Computing Technology, Inc. (CTI) subsidiary and recently bolstered by the appointment of a Chief Information Officer and a global Chief Operating Officer in early 2025, is strategically aimed at enhancing efficiency within these niche operations. While not a product-specific technological moat like a unique material science, this focus on improving processes, removing complexity, and streamlining underwriting, new business, claims, and policyholder services is critical. The stated goal is to drive global business growth and ensure critical activities support the company's promises to policyholders. These operational improvements are intended to support the expansion of its agent network and enhance the customer experience within its specialized distribution channels, contributing to its competitive standing by potentially improving agent productivity and reducing processing friction, areas where smaller players might otherwise struggle against the scale advantages of larger competitors.

Strategic Momentum and Recent Performance

CIA's strategy of leveraging its niche expertise and expanding its reach is currently driving significant momentum in key operational metrics. In 2024, the company achieved record levels of insurance issued, exceeding $1.1 billion, a 54% increase from 2023, and reached its highest-ever total direct insurance in force of over $5.2 billion. This growth is a direct result of strategic initiatives, including the introduction of new domestic final expense products and the expansion of its distribution channels, both domestically and internationally. The global network of producing agents increased by an impressive 72% in 2024, and the company expanded its U.S. licensing to 43 states and Washington, D.C. by the end of 2024, up from 39 at the end of 2023.

The impact of these initiatives is evident in the recent financial results for the first quarter ended March 31, 2025. Direct first year life and A&H premiums saw a substantial increase compared to the same period in 2024, driven by the new domestic final expense business and increased international sales of whole life products. Direct renewal premiums also saw a slight increase, benefiting from the strong first year sales in 2024.

However, the company's reported results for Q1 2025 reflect the impact of external factors and growth investments. Total revenues decreased to $55.7 million from $57.7 million in Q1 2024. Income before federal income tax saw a significant decrease, resulting in a loss of $1.8 million compared to income of $4.9 million in the prior year period. This decline was primarily driven by a $3.9 million decrease in investment related gains and losses, largely a non-cash impact related to a further write-down of the company's investment in the BlackRock Global Renewable Power Fund III, which has faced market headwinds. Additionally, total insurance benefits paid or provided increased by $2.5 million, and other general expenses rose by $1.4 million, reflecting continued investment in business growth and higher equity compensation costs.

While the reported income figure was impacted by these items, adjusted total revenues (excluding investment related gains/losses) increased to $58.5 million in Q1 2025 from $56.7 million in Q1 2024, and adjusted income before federal income tax was $1.1 million compared to $4.0 million in the prior year, suggesting underlying operational performance remains more stable when excluding volatile investment impacts and discrete items.

Investment Portfolio and Liquidity Profile

CIA's financial strength is underpinned by a conservatively managed investment portfolio and a robust liquidity profile. As of March 31, 2025, total assets stood at $1.70 billion. The investment portfolio, totaling $1.42 million, is heavily weighted towards fixed maturity securities, which comprised 86.9% of total investments. The vast majority of these fixed maturity securities (99.2% by fair value at March 31, 2025) are rated investment grade.

The company's investment income is a crucial component of its revenue. Net investment income was $17.38 million in Q1 2025, slightly down from $17.49 million in Q1 2024, primarily due to lower income from limited partnership investments. The portfolio has faced challenges from the low interest rate environment, necessitating reinvestment at lower yields historically, although the annualized yield on average invested assets was 4.52% in Q1 2025, comparable to 4.59% in Q1 2024. The portfolio holds significant unrealized losses on fixed maturity securities ($169.3 million at March 31, 2025), attributed to noncredit-related factors like rising interest rates. Management does not intend to sell these securities and does not expect to be required to sell them before recovery of amortized cost.

Liquidity is a key focus for CIA. The company has consistently generated positive net cash from operating activities annually since 2004, providing a stable source of funds. In Q1 2025, net cash provided by operating activities was $0.7 million. Net cash used in investing activities was $11.4 million, reflecting purchases of fixed maturity securities and other long-term investments. The company maintains a strong balance sheet with no debt as of March 31, 2025.

While overall liquidity is strong, the company faces specific cash flow demands and potential risks. Payments for claims and surrenders are the largest use of cash. Matured endowment benefits are increasing as policies reach contractual maturity, with a significant increase seen in Q1 2025. This trend is expected to continue at elevated levels over the next few years, posing a liquidity risk if a high proportion of policyholders elect lump sum payouts. Surrenders have also been higher than usual in recent years, potentially exacerbated by external economic pressures like inflation. Rapid growth in domestic first year sales, particularly those with advance commissions, also creates an upfront cash strain.

To mitigate these risks, CIA introduced a new product in 2024 designed to encourage policyholders with maturing endowments to purchase new life insurance. It also entered a coinsurance agreement with RGA Reinsurance Company (RGA) in Q2 2024, ceding 50% of its new final expense business to alleviate expense strain and provide capacity. The company also has access to a $20 million senior secured revolving credit facility, which was undrawn as of March 31, 2025, providing additional liquidity if needed. Regulatory restrictions on cash transfers from insurance subsidiaries to the holding company also influence liquidity management.

Competitive Dynamics and Strategic Responses

The competitive landscape for CIA is characterized by a mix of large, diversified players and smaller, niche-focused companies. While giants like MetLife and Prudential Financial operate across broad segments with significant scale and brand recognition, CIA's strength lies in its deep understanding and tailored approach to specific underserved markets. In the international U.S. dollar-denominated life insurance market, CIA positions itself as a market leader, leveraging its long history and specialized products. Domestically, its Home Service segment competes in the final expense market, where its agent network and funeral home relationships provide a distinct distribution advantage that is difficult for larger, less specialized insurers to replicate efficiently.

Compared to competitors like MetLife and Prudential Financial, CIA operates at a smaller scale, which can result in higher operating costs per unit due to less automation and economies of scale. This is reflected in potentially lower operating and net margins compared to these larger, more efficient rivals. However, CIA's niche focus and cultural expertise can lead to higher customer retention and potentially better gross margins within its specific target demographics.

Against competitors like Aflac, known for its strong brand and digital platforms in supplemental insurance, or Lincoln National Corporation, which focuses on cost-efficient annuities, CIA differentiates through its unique distribution channels and language-specific services. While AFL and LNC may have advantages in digital innovation speed and overall financial health (e.g., higher ROE and more stable profitability), CIA's targeted approach through independent agents and funeral homes can provide better market penetration in specific lower-income and multicultural segments.

CIA's strategic responses to this competitive environment involve leveraging its core strengths while addressing vulnerabilities. The focus on developing new products tailored to its markets (like domestic final expense and products for maturing endowments) directly addresses evolving customer needs and competitive pressures. Expanding its agent network and state licensing increases its reach. Operational improvements, supported by recent leadership appointments in IT and Operations, aim to enhance efficiency and service delivery, potentially narrowing the cost gap with larger competitors and improving agent productivity. The coinsurance agreement with RGA Reinsurance Company is a strategic move to manage the financial strain of rapid growth in certain segments and enhance capacity, allowing CIA to compete more effectively. While direct quantitative comparisons of operational efficiency or technological advantages with all competitors are challenging to ascertain, the strategic intent behind CIA's investments in these areas is clearly aimed at reinforcing its niche positioning and improving its ability to compete on service and targeted market penetration.

Outlook and Future Trajectory

Management's outlook for Citizens, Inc. is centered on converting recent operational momentum into improved financial performance. The company expects continued sales growth, driven by its expanded agent network, increased state licensing, and new product offerings. This sales growth is anticipated to lead to revenue and profit growth in the full year 2025, with stronger growth projected for the full year 2026.

Key assumptions underlying this outlook include the continued success of its strategic initiatives in driving new business, effective management of the increasing volume of matured endowments, and maintaining strong persistency in its in-force business. The coinsurance agreement with RGA Reinsurance Company is expected to support the growth in final expense business by managing upfront costs.

While the low interest rate environment continues to present challenges for investment yields, and market volatility can impact investment-related results, the core business's ability to generate premiums and manage expenses remains critical. The company's focus on managing controllable operating expenses while investing in growth initiatives is expected to contribute to future profitability.

Risks to this outlook include potential adverse changes in market conditions impacting investments, higher-than-expected surrenders or lump sum payouts of maturing endowments, challenges in recruiting and retaining agents, regulatory changes, and potential impacts from litigation. However, management believes the company's strong capital position, consistent operating cash flow, and strategic focus on niche markets position it well to navigate these challenges and drive long-term value creation for shareholders.

Conclusion

Citizens, Inc. presents a compelling investment narrative rooted in its deep expertise and strategic focus on specialized niche insurance markets. While recent financial results have been impacted by non-cash investment losses and growth-related expenses, the underlying business shows promising momentum driven by successful strategic initiatives in product development, distribution expansion, and agent growth. The company's robust liquidity, debt-free balance sheet, and consistent operating cash flow provide a solid foundation. Despite facing competitive pressures from larger, more scaled rivals and navigating risks associated with market volatility and policyholder behavior, CIA's targeted approach, operational enhancements, and clear growth strategy position it for anticipated revenue and profit growth in the coming years. The ability to effectively manage liquidity related to endowment maturities and commission advances, alongside continued execution on its growth initiatives, will be key factors for investors to monitor as the company seeks to translate its operational strengths into enhanced shareholder value.