Income Taxes

12 Months Ended

Dec. 31, 2024

Income Tax Disclosure [Abstract]

Income Taxes

CICA International and CICA Bermuda are considered controlled foreign corporations for federal income tax purposes. As a result, the insurance activity of CICA International and CICA Bermuda are subject to Subpart F of the Internal Revenue Code ("IRC") 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 any taxable earnings in excess of $1.2 million for a minimum of 15 years.

In connection with the transfer of CICA Bermuda’s business from a zero tax jurisdiction to CICA International’s 4% tax jurisdiction in Puerto Rico, certain opening tax assets and liabilities, mainly related to investments, DAC and reserves, were established and the Company's consolidated deferred federal income tax liability was reduced by $4.4 million. Since the transfer was between companies under common control, the $4.4 million reduction in the deferred federal income tax liability was recorded as a credit to equity, $1.4 million of which increased retained earnings and $3.0 million of which reduced accumulated other comprehensive income (loss), based on the nature of the components during 2023 in accordance with ASC Topic 805.

A summary of the income (loss) before federal income tax expense, by jurisdiction, is as follows:

Years ended December 31, (In thousands)	2024		2023
Income (loss) before federal income tax:
United States	$	(4,317)	(214)
Puerto Rico	19,297		11,514
Bermuda	—		14,874
Total income before federal income tax	$	14,980	26,174

Federal income tax expense (benefit) consists of:

Years ended December 31, (In thousands)	2024		2023
Current income tax expense (benefit) related to:
United States - normal operations	$	286	1,271
United States - UTP impact	—		(971)
Puerto Rico	1,582		577
Bermuda	—		—
Total current income tax expense	1,868		877
Deferred income tax expense (benefit) related to:
United States	(908)		968
Puerto Rico	(892)		(108)
Bermuda	—		—
Total deferred income tax expense (benefit)	(1,800)		860
Total federal income tax expense (benefit)	$	68	1,737

A reconciliation between the U.S. corporate income tax rate and the effective income tax rate is as follows:

Years ended December 31, (In thousands, except for %)	2024		%		2023		%
Expected federal income tax expense (benefit):	$	3,146	21.0	%	$	5,497	21.0	%
Foreign tax effects:
Puerto Rico:
Statutory tax rate difference between Puerto Rico and United States	(3,280)		(21.9)		(5,029)		(19.2)
Income tax exclusion	(48)		(0.3)		(48)		(0.2)
Other	(35)		(0.2)		—		—
Effect of cross-border tax laws:
Subpart F inclusions	(524)		(3.5)		1,595		6.1
PFIC QEF inclusions	800		5.3		570		2.2
Other	2		—		—		—
Nontaxable or nondeductible items:
Tax-exempt interest and dividends-received deduction	(23)		(0.1)		(35)		(0.1)
Compensation limitation under Section 162(m) & 280(g)	(2)		—		80		0.3
Other	52		0.3		—		—
Changes in unrecognized tax benefits	—		—		(971)		(3.7)
Other	(20)		(0.1)		78		0.2
Total federal income tax expense (benefit)	$	68	0.5	%	$	1,737	6.6	%

A summary of the total federal income tax payments made and refunds received by jurisdiction is as follows:

Years ended December 31, (In thousands)	2024		2023
Tax payments (refunds)
United States	$	(828)	1,798
Puerto Rico	1,300		1
Bermuda	—		—
Total tax payments	$	472	1,799

The components of deferred federal income taxes are as follows:

December 31, (In thousands)	2024		2023
Deferred tax assets:
Future policy benefit reserves	$	—	739
Net operating and capital loss carryforwards	1,774		353
Accrued policyholder dividends and expenses	200		218
Deferred intercompany loss	1,721		1,780
Unrealized losses on investments available-for-sale	15,816		12,786
Accrued compensation	745		379
Lease liability	1,628		1,895
Fixed assets	394		249
Other	1,065		270
Total gross deferred tax assets	23,343		18,669
Less:
Valuation allowance	5,073		4,468
Net deferred tax assets	18,270		14,201
Deferred tax liabilities:
DAC, COIA and intangible assets	(14,619)		(11,556)
Future policy benefit reserves	(4,363)		—
Investments	(316)		(322)
Tax reserves transition liability	(747)		(1,494)
Right-of-use lease asset	(1,628)		(1,895)
Other	(39)		(36)
Total gross deferred tax liabilities	(21,712)		(15,303)
Net deferred tax liability	$	(3,442)	(1,102)

A summary of changes in the components of deferred federal and state income taxes is as follows:

December 31, (In thousands)	2024		2023
Deferred federal and state income taxes:
Balance January 1,	$	(1,102)	(3,653)
Deferred tax benefit (expense)	1,800		(860)
Investments available-for-sale	3,031		2,424
Change in valuation allowance	(605)		(230)
Effects of unrealized gains (losses) on reserves	(6,566)		1,217
Balance December 31,	$	(3,442)	(1,102)

The Company and our subsidiaries have $6.3 million in net operating loss carryforwards in the U.S. at December 31, 2024. The Company and our subsidiaries have capital loss carryforwards of $2.0 million in the U.S. and $0.5 million in Puerto Rico at December 31, 2024, which begin expiring in 2026 and 2031, respectively.

At December 31, 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. Thus, the Company holds valuation allowances of $5.1 million and $4.5 million in other comprehensive income (loss) at December 31, 2024 and 2023, respectively.

The Company recognizes only the impact of tax positions that, based on their technical merits, are more likely than not to be sustained upon an audit by the taxing authority.

A reconciliation of unrecognized tax benefits is as follows:

Years ended December 31, (In thousands)	2024		2023
Balance January 1,	$	—	971
Reductions for tax positions of prior years	—		(971)
Balance December 31,	$	—	—

The Company accrued an uncertain tax position of $1.0 million at December 31, 2022 which would have affected the effective tax rate if recognized. However, the Company released all of the remaining uncertain tax positions, including interest, during the fourth quarter of 2023 following the expiration of the statute of limitations on the tax year ended December 31, 2019. The Company has no uncertain tax positions as of December 31, 2024.

The Company’s practice is to recognize interest and penalties related to income tax matters in income tax expense.  In the consolidated statements of operations and comprehensive income (loss), we recorded no interest income for the year ended December 31, 2024 and $0.2 million for the year ended December 31, 2023.

The Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was enacted on March 27, 2020 in response to the COVID-19 pandemic. The CARES Act, among other things, permitted net operating losses incurred in 2018, 2019 and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. During the year ended December 31, 2022, the Company was able to claim a net refund for taxes paid in preceding years as a result of the CARES Act. As of December 31, 2024, the Company has an accrued tax refund remaining of $0.7 million.

The American Rescue Plan Act of 2021 was enacted on March 11, 2021 and the Inflation Reduction Act was enacted on August 16, 2022. These Acts did not have a material impact on the Company's financial statements.

The Company's federal income tax return is filed on a consolidated basis with the following entities:

Citizens, Inc.

CICA Life Insurance Company of America

Magnolia Guaranty Life Insurance Company

Security Plan Life Insurance Company

Security Plan Fire Insurance Company

Computing Technology, Inc.

The method of tax allocation among companies is subject to a written tax sharing agreement, approved by the Board of Directors, whereby allocation is made primarily on a separate return basis pursuant to the wait-and-see method.  Under this method, consolidated group members are not given current credit or refunds for net operating losses until taxable income on a separate return basis is generated. Intercompany tax balances are settled at least annually.

The Company and our subsidiaries file income tax returns in the U.S. federal jurisdiction and various U.S. states. Our subsidiaries are subject to examination by U.S. tax authorities for tax years ending after December 31, 2021.

The Company's Puerto Rico subsidiaries are subject to examination by Puerto Rico tax authorities for tax years ending after December 31, 2022.