##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended June 30, 2007
 or
 o
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transition period from  to
 Commission File Number: 1-3004
 CITIZENS, INC.
 
  Colorado
    
    84-0755371(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)400 East Anderson Lane, Austin, Texas
    
    78752(Address of principal executive offices)
    
    (Zip Code)
  
  
  þ o
  o þ o
  o þ




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 INDEX
 PageNumberPart I. Financial InformationItem 1. Financial StatementsConsolidated Statements of Financial Position, June 30, 2007, (Unaudited) and December 31, 2006
    
    3Consolidated Statements of Operations, Three Months Ended June 30, 2007 and 2006 (Unaudited)
    
    5Consolidated Statements of Operations, Six Months Ended June 30, 2007 and 2006 (Unaudited)
    
    6Consolidated Statements of Cash Flows, Six Months Ended June 30, 2007 and 2006 (Unaudited)
    
    7Notes to Consolidated Financial Statements
    
    9Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    18Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    31Item 4. Controls and Procedures
    
    32Part II. Other InformationItem 1. Legal Proceedings
    
    34Item 1A Risk Factors
    
    35Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    36Item 3. Defaults Upon Senior Securities
    
    36Item 4. Submission of Matters to a Vote of Security Holders
    
    36Item 5. Other Information
    
    36Item 6. Exhibits
    
    36Certification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906
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PART I. FINANCIAL INFORMATION
 
 ITEM 1.
    
    FINANCIAL STATEMENTS
 CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
 (In thousands)
 (Unaudited)June 30,
    
    
    December 31,2007
    
    
    2006AssetsInvestments:Fixed maturities available-for-sale, at fair value
(cost $512,078 and $497,939 in 2007 and 2006, respectively)
    
    $
    496,466
    
    
    
    488,318Equity securities available-for-sale, at fair value
(cost $10,314 and $279 in 2007 and 2006, respectively)
    
    
    11,237
    
    
    
    312Mortgage loans on real estate
    
    
    362
    
    
    
    456Policy loans
    
    
    25,022
    
    
    
    23,542Real estate and other long-term investments
(less $226 and $206 accumulated depreciation in 2007 and 2006,
respectively)
    
    
    5,098
    
    
    
    2,427Total investments
    
    
    538,185
    
    
    
    515,055Cash and cash equivalents
    
    
    10,032
    
    
    
    24,521Accrued investment income
    
    
    7,265
    
    
    
    7,107Reinsurance recoverable
    
    
    14,183
    
    
    
    16,044Deferred policy acquisition costs
    
    
    93,401
    
    
    
    86,975Other intangible assets
    
    
    1,080
    
    
    
    1,093Cost of customer relationships acquired
    
    
    33,159
    
    
    
    34,812Excess of cost over net assets acquired
    
    
    11,386
    
    
    
    11,386Federal income tax receivable
    
    
    58
    
    
    
    Deferred Federal income tax asset
    
    
    824
    
    
    
    Property and equipment, net
    
    
    7,269
    
    
    
    7,350Due premium, net
(less $1,325 and $1,440 allowance for doubtful
accounts in 2007 and 2006, respectively)
    
    
    5,605
    
    
    
    6,078Prepaid expenses
    
    
    1,229
    
    
    
    Other assets
    
    
    780
    
    
    
    763Total assets
    
    $
    724,456
    
    
    
    711,184
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF FINANCIAL POSITION, CONTINUED
 (In thousands, except share amounts)
 (Unaudited)June 30,
    
    
    December 31,2007
    
    
    2006Liabilities and Stockholders EquityLiabilities:Future policy benefit reserves:Life insurance
    
    $
    487,738
    
    
    
    473,355Annuities
    
    
    21,899
    
    
    
    20,761Accident and health insurance
    
    
    8,931
    
    
    
    10,604Dividend accumulations
    
    
    4,987
    
    
    
    5,027Premium deposits
    
    
    12,640
    
    
    
    11,897Policy claims payable
    
    
    8,226
    
    
    
    9,448Unearned premiums
    
    
    2,490
    
    
    
    1,812Other policyholders funds
    
    
    3,685
    
    
    
    3,771Total policy liabilities
    
    
    550,596
    
    
    
    536,675Commissions payable
    
    
    2,024
    
    
    
    2,581Federal income tax payable
    
    
    
    
    
    
    2,031Deferred Federal income tax
    
    
    
    
    
    
    1,498Warrants outstanding
    
    
    2,027
    
    
    
    1,831Funds held in trust and other liabilities
    
    
    14,629
    
    
    
    14,074Total liabilities
    
    
    569,276
    
    
    
    558,690Commitments and contingencies (Note 8)Cumulative convertible preferred stock  Series A(Series A-1 - $500 stated value per share, 25,000 shares authorized,
issued and outstanding in 2007 and 2006; Series A-2 - $935 stated value
per share, 5,000 shares authorized, 4,014 issued and outstanding in 2007
and 2006)
    
    
    13,552
    
    
    
    12,883Stockholders Equity:Common stock:Class A, no par value, 100,000,000 shares
authorized, 43,473
,671 shares issued in 2007
and 43,425,524 shares
issued in 2006, including
shares in treasury of
3,135,738 in 2007 and 2006
    
    
    209,397
    
    
    
    210,066Class B, no par value, 2,000,000 shares
authorized, 1,001,714 shares issued and
outstanding in 2007 and 2006
    
    
    3,184
    
    
    
    3,184Retained deficit
    
    
    (50,316
    )
    
    
    (56,282
    )Accumulated other comprehensive loss:Unrealized losses on securities, net of tax
    
    
    (9,626
    )
    
    
    (6,346
    )152,639
    
    
    
    150,622Treasury stock, at cost
    
    
    (11,011
    )
    
    
    (11,011
    )Total stockholders equity
    
    
    141,628
    
    
    
    139,611Total liabilities and stockholders equity
    
    $
    724,456
    
    
    
    711,184
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 Three Months Ended June 30
 (In thousands, except per share amounts)
 (Unaudited)
 2007
    
    
    2006Revenues:Premiums:Life insurance
    
    $
    32,460
    
    
    
    29,109Accident and health insurance
    
    
    381
    
    
    
    307Property insurance
    
    
    1,183
    
    
    
    1,104Net investment income
    
    
    7,064
    
    
    
    6,724Realized gains (losses), net
    
    
    (119
    )
    
    
    260Decrease in fair value of warrants
    
    
    231
    
    
    
    175Other income
    
    
    433
    
    
    
    366Total revenues
    
    
    41,633
    
    
    
    38,045Benefits and expenses:Insurance benefits paid or provided:Claims and surrenders
    
    
    12,946
    
    
    
    14,055Increase in future policy benefit reserves
    
    
    8,389
    
    
    
    7,403Policyholders dividends
    
    
    1,422
    
    
    
    1,306Total insurance
benefits paid or
provided
    
    
    22,757
    
    
    
    22,764Commissions
    
    
    8,997
    
    
    
    8,834Other underwriting, acquisition and insurance
expenses
    
    
    7,324
    
    
    
    8,334Capitalization of deferred policy acquisition costs
    
    
    (6,782
    )
    
    
    (6,688
    )Amortization of deferred policy acquisition costs
    
    
    3,329
    
    
    
    3,052Amortization of cost of customer relationships
acquired and other intangibles
    
    
    826
    
    
    
    865Total benefits and expenses
    
    
    36,451
    
    
    
    37,161Income before Federal income tax
    
    
    5,182
    
    
    
    884Federal income tax expense
    
    
    1,655
    
    
    
    136Net income
    
    $
    3,527
    
    
    
    748Net income applicable to common stock
    
    $
    3,016
    
    
    
    240Per Share Amounts:Basic and diluted earnings per share of
common stock
    
    $
    0.07
    
    
    
    0.01Weighted average shares outstanding  basic and
diluted
    
    
    41,315
    
    
    
    41,202
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 
 CONSOLIDATED
STATEMENTS OF OPERATIONS
 Six Months Ended June 30
(In thousands, except per share amounts)
(Unaudited)
 2007
    
    
    2006Revenues:Premiums:Life insurance
    
    $
    63,276
    
    
    
    57,150Accident and health insurance
    
    
    803
    
    
    
    732Property insurance
    
    
    2,362
    
    
    
    1,765Net investment income
    
    
    14,131
    
    
    
    12,994Realized gains (losses), net
    
    
    (132
    )
    
    
    1,133Decrease (increase) in fair value of warrants
    
    
    (196
    )
    
    
    365Other income
    
    
    785
    
    
    
    717Total revenues
    
    
    81,029
    
    
    
    74,856Benefits and expenses:Insurance benefits paid or provided:Claims and surrenders
    
    
    27,102
    
    
    
    28,203Increase in future policy benefit reserves
    
    
    15,324
    
    
    
    14,509Policyholders dividends
    
    
    2,652
    
    
    
    2,328Total insurance benefits paid or
provided
    
    
    45,078
    
    
    
    45,040Commissions
    
    
    17,386
    
    
    
    17,631Other underwriting, acquisition and insurance
expenses
    
    
    14,224
    
    
    
    15,309Capitalization of deferred policy acquisition costs
    
    
    (12,906
    )
    
    
    (13,014
    )Amortization of deferred policy acquisition costs
    
    
    6,480
    
    
    
    5,674Amortization of cost of customer relationships
acquired and other intangibles
    
    
    1,667
    
    
    
    1,831Total benefits and expenses
    
    
    71,929
    
    
    
    72,471Income before Federal income tax
    
    
    9,100
    
    
    
    2,385Federal income tax expense
    
    
    3,134
    
    
    
    616Net income
    
    $
    5,966
    
    
    
    1,769Net income applicable to common stock
    
    $
    4,952
    
    
    
    755Per Share Amounts:Basic and diluted earnings per share of
common stock
    
    $
    0.12
    
    
    
    0.02Weighted average shares outstanding  basic and
diluted
    
    
    41,303
    
    
    
    41,185
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 Six Months Ended June 30
 (In thousands)
 2007
    
    
    2006Cash flows from operating activities:Net income
    
    $
    5,966
    
    
    
    1,769Adjustments to reconcile net income to net cash
provided by operating activities:Realized losses (gains) on sale of
investments and other assets
    
    
    132
    
    
    
    (1,133
    )Net deferred policy acquisition costs
    
    
    (6,426
    )
    
    
    (8,310
    )Amortization of cost of customer relationships
acquired, and other intangibles
    
    
    1,667
    
    
    
    1,831Increase (decrease) in fair value of warrants
    
    
    196
    
    
    
    (365
    )Depreciation
    
    
    455
    
    
    
    531Amortization of premiums and discounts on
fixed maturities
    
    
    737
    
    
    
    809Deferred Federal income tax expense (benefit)
    
    
    (531
    )
    
    
    217Change in:Accrued investment income
    
    
    (158
    )
    
    
    (515
    )Reinsurance recoverable
    
    
    1,861
    
    
    
    960Due premium
    
    
    473
    
    
    
    (5,016
    )Future policy benefit reserves
    
    
    13,705
    
    
    
    19,817Other policy liabilities
    
    
    73
    
    
    
    (1,172
    )Federal income tax
    
    
    (2,089
    )
    
    
    (2,464
    )Commissions payable and other liabilities
    
    
    42
    
    
    
    3,792Other, net
    
    
    (1,217
    )
    
    
    682Net cash provided by operating activities
    
    
    14,886
    
    
    
    11,433Cash flows from investing activities:Sale of fixed maturities, available-for-sale
    
    
    3,344
    
    
    
    16,378Maturities and redemptions of fixed maturities,
available-for-sale
    
    
    42,265
    
    
    
    13,514Purchase of fixed maturities, available-for-sale
    
    
    (60,600
    )
    
    
    (46,995
    )Sale of equity securities, available-for-sale
    
    
    74
    
    
    
    176Purchase of equity securities, available-for-sale
    
    
    (10,111
    )
    
    
    Principal payments on mortgage loans
    
    
    94
    
    
    
    82Sale of other long-term investments and property
and equipment
    
    
    340
    
    
    
    90Principal payments on note receivable
    
    
    1
    
    
    
    474Decrease (increase) in policy loans, net
    
    
    (1,480
    )
    
    
    7Purchase of other long-term investments and property and equipment
    
    
    (3,445
    )
    
    
    (760
    )Net cash used in investing activities
    
    
    (29,518
    )
    
    
    (17,034
    )(Continued)
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
Six Months Ended June 30
(In thousands)
(Unaudited)
 2007
    
    
    2006Cash flows from financing activities:Annuity deposits
    
    $
    1,114
    
    
    
    1,255Annuity withdrawals
    
    
    (971
    )
    
    
    (1,134
    )Net cash provided by financing activities
    
    
    143
    
    
    
    121Net decrease in cash and cash equivalents
    
    
    (14,489
    )
    
    
    (5,480
    )Cash and cash equivalents at beginning of period
    
    
    24,521
    
    
    
    18,311Cash and cash equivalents at end of period
    
    $
    10,032
    
    
    
    12,831Supplemental disclosures of operating activities:Cash paid during the period for income taxes
    
    $
    5,754
    
    
    
    2,864
 Supplemental Disclosure of Non-Cash Investing and Financing Activities:
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 June 30, 2007  (Unaudited)
 (1)
    
    Financial StatementsThe interim consolidated financial statements include the accounts and operations of
Citizens, Inc. (Citizens), incorporated in the state of Colorado on November 8, 1977, and
its wholly-owned subsidiaries, CICA Life Insurance Company of America (CICA), Computing
Technology, Inc. (CTI), Funeral Homes of America, Inc. (FHA), Insurance Investors, Inc.
(III), Citizens National Life Insurance Company (CNLIC), Security Plan Life Insurance
Company (SPLIC), and Security Plan Fire Insurance Company (SPFIC). Citizens and its
consolidated subsidiaries are collectively referred to as the Company, we, or our.The consolidated statement of financial position for June 30, 2007, the consolidated
statements of operations for the three and six-month periods ended June 30, 2007 and
2006, and the consolidated statements of cash flows for the six-month periods then ended
have been prepared by the Company without audit. Certain adjustments have been made to
prior period financials, to include the prior period and inter-quarter adjustments, as
described in note 17 of the Companys Annual Report on Form
10-K, as amended, for the fiscal year
ended December 31, 2006. In the opinion of management, all adjustments to present fairly
the financial position, results of operations and changes in cash flows at June 30, 2007,
and for comparative periods presented have been made.During the first quarter of 2007, the Company discovered an overstatement of life
reserves, due to the use of an incorrect interest rate going back several years, in the
amount of $1 million. A correction was made during the quarter resulting in an increase
to net income of $660,000. The Company also identified and corrected discrepancies that
went undetected at December 31, 2006 in the amount of $823,000, related to the
under-accrual of interest on various policyholder liabilities and under-accrual of
unearned profit liability reserve. These corrections caused a decrease in net income of
$543,000. During the second quarter of 2007, the Company discovered an overstatement of
policy claims payable of $650,000. The overstatement was corrected during the second
quarter, resulting in an increase to net income of $429,000. The net effect of these
three prior year corrections was an increase in net income of $546,000, which is not
considered to have a material impact on the Companys financial position or results of
operations.Certain information and footnote disclosures normally included in financial statements
prepared in accordance with United States of America (U.S.) generally accepted accounting
principles (U.S. GAAP) have been omitted. It is suggested that these financial
statements be read in conjunction with the financial statements and notes thereto
included in the Companys Annual Report on Form 10-K, as amended, for the year ended
December 31, 2006 filed with the Securities and Exchange Commission. The results of
operations for the period ended June 30, 2007, are not necessarily indicative of the
operating results for the full year.
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(2)
    
    Accounting PronouncementsIn September 2005, the American Institute of Certified Public Accountants (AICPA) issued
Statement of Position (SOP) 05-1, Accounting by Insurance Enterprises for Deferred
Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts
(SOP 05-1). SOP 05-1 provides guidance on accounting by insurance enterprises for
deferred acquisition costs on internal replacements of insurance and investment
contracts other than those specifically described in SFAS No. 97, Accounting and
Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized
Gains and Losses from the Sale of Investments. SOP 05-1 defines an internal replacement
as a modification in product benefits, features, rights, or coverages that occurs by the
exchange of a contract for a new contract, or by amendment, endorsement, or rider to a
contract, or by the election of a feature or coverage within a contract. Under SOP
05-1, modifications that result in a substantially unchanged contract will be accounted
for as a continuation of the replaced contract. A replacement contract that is
substantially changed will be accounted for as an extinguishment of the replaced
contract resulting in a release of unamortized deferred acquisition costs and unearned
inducements associated with the replaced contract. SOP 05-1 was implemented in the
first quarter of 2007 and did not have a material effect on the Companys financial
position or results of operations. Later clarification from the AICPA on SOP 05-1
implementation addressed reinstatements of previously lapsed policies. The unamortized
deferred policy acquisition costs (DAC) of lapsed policies should be written off per the
clarification. The Company had previously restored the DAC on lapsed policies that were
subsequently reinstated. SOP 05-1 is only applied prospectively for reinstatements
occurring in quarters beginning after December 31, 2006. The effect of adopting SOP
05-1 has been to increase DAC amortization by $436,000 over what it would have been
otherwise.On July 13, 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48, Accounting for Uncertainty in Income Taxes  an interpretation of
FASB Statement No. 109(FIN 48), which clarifies the accounting for uncertainty in
income tax positions. FIN 48 prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of an income tax
position taken or expected to be taken in a tax return. FIN 48 also provides guidance
on derecognition, classification, interest and penalties, accounting in interim periods,
and additional disclosures. The effective date of this implementation guidance was
January 1, 2007, with the cumulative effect of the change in accounting principles
recorded as an adjustment to opening retained earnings. The implementation of FIN 48
was not material to the Companys consolidated financial condition, as the Company has
no significant uncertain tax positions.In September 2006, the FASB issued Statement of Financial Accounting Standard (SFAS) No
157, Fair Value Measurements(SFAS 157). SFAS 157 defines fair value, establishes a
framework for measuring fair value in GAAP and requires enhanced disclosures about fair
value measurements. However, SFAS 157 does not require new fair value measurements.
The guidance in SFAS 157 will be applied prospectively with the exception of certain
financial and hybrid instruments measured at initial recognition under SFAS 133 and for
block discounts of financial instruments. Additionally, SFAS 157 will increase the
disclosures required. The pronouncement is
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effective for fiscal years beginning after November 15, 2007. The Company is currently
evaluating the impact of SFAS 157 on the Companys financial instruments and its
consolidated financial statements.In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities(SFAS 159). SFAS 159 permits the option to measure
most financial instruments and certain other items at fair value at specified election
dates. The change in value represents the unrealized gains and losses that will be
included in earnings. The fair value option will generally be applied on an
instrument-by-instrument basis and is generally an irrevocable election. SFAS 159 is
effective for fiscal years beginning after November 15, 2007. The Company plans to
adopt this guidance effective January 1, 2008. The Company is evaluating its assets and
liabilities to determine which financial instruments, if any, are eligible to account
for at fair value under SFAS 159 and the related impact on the Companys consolidated
financial statements.(3)
    
    Revolving Line of CreditThe Company has a $75 million line of credit with Regions Bank that terminates in October
2007. The line of credit provides for a maximum of $5,000,000 for general corporate
purposes not related to the acquisition of insurance companies. Although the line of
credit was increased from an original level of $30 million, additional borrowing above
the $30 million amount will require the prior written approval of the holders of the
Companys preferred stock. No amount was outstanding on this line of credit at June 30,
2007.(4)
    
    Segment InformationThe Company has three reportable segments: Life Insurance, Home Service Insurance, and
Other Non-Insurance Enterprises. The accounting policies of the segments are in
accordance with U.S. GAAP and are the same as those used in the preparation of the
Companys consolidated financial statements. The Company evaluates profit and loss
performance based on U.S. GAAP net income before federal income taxes for its three
reportable segments.The Life Insurance segment, consisting of ordinary whole-life policies, is sold primarily
throughout Central and South America and Taiwan. Traditional ordinary life, credit life
and final expense policies, are also marketed in the Midwest and southern U.S. The Life
Insurance segment is aggregated from CICA and CNLIC. The Company has no assets, offices
or employees outside of the U.S. and requires that all transactions be in U.S. Dollars
paid in the U.S.The Companys Home Service Insurance segment focuses on writing final expense ordinary
life insurance utilizing the home service marketing distribution method, whereby
approximately 350 employee-agents work on a route system to collect premiums and service
policyholders. The Company also uses the home service method to write small property
policies on Louisiana residents.The measurement of segment profit and loss and segment assets does not include material
transactions between segments. The Company has no reportable differences between
segments and consolidated operations.
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Prior to the fourth quarter of 2006, the Company operated segments for domestic and
international life insurance. In 2006, the Company determined these segments should be
combined, as the operations have become less diversified, the marketing philosophies are
similar and operations are under common management control. Additionally, internal
analysis and reporting is based on total life insurance operations. The segment amounts
for 2006 have been reclassified to conform with the current presentation.
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Three Months Ended June 30,2007
    
    
    2006(In thousands)Profit (Loss) MeasurementIncome (loss) before Federal income tax:Life Insurance
    
    $
    2,698
    
    
    
    1,381Home Service Insurance
    
    
    2,865
    
    
    
    353Other Non-Insurance Enterprises
    
    
    (381
    )
    
    
    (850
    )Total consolidated income
    
    $
    5,182
    
    
    
    884Selected Components of Profit (Loss) MeasurementRevenue:Life Insurance
    
    $
    28,148
    
    
    
    24,997Home Service Insurance
    
    
    12,966
    
    
    
    12,583Other Non-Insurance Enterprises
    
    
    519
    
    
    
    465Total consolidated revenue
    
    $
    41,633
    
    
    
    38,045Premiums:Life Insurance
    
    $
    24,161
    
    
    
    20,959Home Service Insurance
    
    
    9,863
    
    
    
    9,561Other Non-Insurance Enterprises
    
    
    
    
    
    
    Total consolidated premiums
    
    $
    34,024
    
    
    
    30,520Net investment incomeLife Insurance
    
    $
    3,791
    
    
    
    3,567Home Service Insurance
    
    
    3,185
    
    
    
    3,048Other Non-Insurance Enterprises
    
    
    88
    
    
    
    109Total consolidated net investment income
    
    $
    7,064
    
    
    
    6,724Amortization expense:Life Insurance
    
    $
    3,236
    
    
    
    3,032Home Service Insurance
    
    
    919
    
    
    
    885Other Non-Insurance Enterprises
    
    
    
    
    
    
    Total consolidated amortizaion expense
    
    $
    4,155
    
    
    
    3,917Realized gains (losses) on sale of
investments and other assets:Life Insurance
    
    $
    (36
    )
    
    
    287Home Service Insurance
    
    
    (83
    )
    
    
    (27
    )Other Non-Insurance Enterprises
    
    
    
    
    
    
    Total consolidated realized gains (losses)
    
    $
    (119
    )
    
    
    260
 13




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##### Table of Contents



Six Months Ended June 30,2007
    
    
    2006(In thousands)Profit (Loss) MeasurementIncome (loss) before Federal income tax:Life Insurance
    
    $
    4,506
    
    
    
    2,299Home Service Insurance
    
    
    5,033
    
    
    
    305Other Non-Insurance Enterprises
    
    
    (439
    )
    
    
    (219
    )Total consolidated income
    
    $
    9,100
    
    
    
    2,385Selected Components of Profit (Loss) MeasurementRevenue:Life Insurance
    
    $
    54,675
    
    
    
    48,146Home Service Insurance
    
    
    25,970
    
    
    
    25,741Other Non-Insurance Enterprises
    
    
    384
    
    
    
    969Total consolidated revenue
    
    $
    81,029
    
    
    
    74,856Premiums:Life Insurance
    
    $
    46,747
    
    
    
    40,778Home Service Insurance
    
    
    19,694
    
    
    
    18,869Other Non-Insurance Enterprises
    
    
    
    
    
    
    Total consolidated premiums
    
    $
    66,441
    
    
    
    59,647Net investment incomeLife Insurance
    
    $
    7,589
    
    
    
    6,881Home Service Insurance
    
    
    6,352
    
    
    
    5,889Other Non-Insurance Enterprises
    
    
    190
    
    
    
    224Total consolidated net investment income
    
    $
    14,131
    
    
    
    12,994Amortization expense:Life Insurance
    
    $
    6,476
    
    
    
    5,941Home Service Insurance
    
    
    1,671
    
    
    
    1,564Other Non-Insurance Enterprises
    
    
    
    
    
    
    Total consolidated amortizaion expense
    
    $
    8,147
    
    
    
    7,505Realized gains (losses) on sale of
investments and other assets:Life Insurance
    
    $
    (43
    )
    
    
    152Home Service Insurance
    
    
    (77
    )
    
    
    981Other Non-Insurance Enterprises
    
    
    (12
    )
    
    
    Total consolidated realized gains (losses)
    
    $
    (132
    )
    
    
    1,133
 14




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##### Table of Contents



June 30,
    
    
    December 31,2007
    
    
    2006(In thousands)AssetsLife Insurance
    
    $
    408,681
    
    
    
    395,297Home Service Insurance
    
    
    299,678
    
    
    
    300,368Other Non-Insurance
Enterprises
    
    
    16,097
    
    
    
    15,519Total consolidated assets
    
    $
    724,456
    
    
    
    711,184
 (5) Total Comprehensive Income (Loss)
 Three Months Ended June 30,2007
    
    
    2006(In thousands)Net income
    
    $
    3,527
    
    
    
    748Other comprehensive loss net of tax:Unrealized net losses on investments
in fixed maturities available-for-sale
and equity securities
    
    
    (4,987
    )
    
    
    (3,838
    )Total comprehensive loss
    
    $
    (1,460
    )
    
    
    (3,090
    )
 Six Months Ended June 30,2007
    
    
    2006(In thousands)Net income
    
    $
    5,966
    
    
    
    1,769Other comprehensive loss net of tax:Unrealized net losses on investments
in fixed maturities available-for-sale
and equity securities
    
    
    (3,280
    )
    
    
    (10,543
    )Total comprehensive income (loss)
    
    $
    2,686
    
    
    
    (8,774
    )
 15




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##### Table of Contents



(6)
    
    Earnings per ShareThe following tables set forth the computation of basic and diluted earnings per share:
 Three months ended June 30,2007
    
    
    2006(In thousands except per share amounts)Basic and diluted earnings per share:Numerator:Net income
    
    $
    3,527
    
    
    
    748Less: Preferred stock dividends
    
    
    (177
    )
    
    
    (173
    )Accretion of deferred issuance costs
and discounts on preferred stock
    
    
    (334
    )
    
    
    (335
    )Net income to common stockholders
    
    $
    3,016
    
    
    
    240Denominator:Weighted average shares outstanding  basic and
diluted
    
    
    41,315
    
    
    
    41,202Basic and diluted earnings per share of
common stock
    
    $
    0.07
    
    
    
    0.01
 Six months ended June 30,2007
    
    
    2006(In thousands except per share amounts)Basic and diluted earnings per share:Numerator:Net income
    
    $
    5,966
    
    
    
    1,769Less: Preferred stock dividends
    
    
    (345
    )
    
    
    (345
    )Accretion of deferred issuance costs
and discounts on preferred stock
    
    
    (669
    )
    
    
    (669
    )Net income to common stockholders
    
    $
    4,952
    
    
    
    755Denominator:Weighted average shares outstanding  basic and
diluted
    
    
    41,303
    
    
    
    41,185Basic and diluted earnings per share of
common stock
    
    $
    0.12
    
    
    
    0.02
  16




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##### Table of Contents



(7)
    
    Federal Income TaxesThe effective tax rate for the second quarter of 2007 was 31.9% versus 15.4% in the
second quarter of 2006. This was primarily a result of the decrease in fair value of
outstanding warrants not being taxable in 2007 and 2006. Also, there was a decrease in
the tax valuation allowance related to CNLIC during the second quarter of 2006, which
decreased tax expense.The tax rate for the six months ended June 30, 2007 was 34.4% versus 25.8% in 2006.
This is primarily related to the change in fair value of warrants not being tax
affected.The Company implemented FIN 48 during the first quarter of 2007. One provision of FIN
48 requires accruing interest on potential tax deficiencies resulting from unsustainable
tax positions. The Company did not accrue any interest related to uncertain tax
positions during the three or six months ended June 30, 2007.The Company and its subsidiaries file income tax returns in the U.S. federal
jurisdiction, and various U.S. states. Most of the Company and its subsidiaries are not
subject to examination by U.S. tax authorities for years prior to 2003. Several
subsidiaries have open tax years going back as far as 1994, due to net operating loss
carry-forwards. Most state tax authorities cannot examine tax years prior to 2002.(8)
    
    Legal ProceedingsWe have been named as a defendant in one lawsuit pursuing class certification filed in
the United States District Court, Eastern District of Louisiana. The suit was initially
filed on August 28, 2006, and was styled Abadie, et al v. Aegis Security Insurance Co.,
et al. That suit sought payments for claims denied by our property and casualty
insurance subsidiary, Security Plan Fire Insurance Company (SPFIC), and other
declaratory relief relating to Hurricane Katrina. Most property and casualty insurers
in Louisiana were named in that lawsuit. The Abadiesuit was consolidated into an
action styled In Re: Katrina Canal Breaches Consolidated Litigation(Katrina
Consolidated Litigation). On November 27, 2006, the trial court judge, in three of the
cases which comprise the Katrina Consolidated Litigation (not the Abadie case),
concluded that the flood exclusions contained in the policies at issue in those three
cases  except for the policies of State Farm  were ambiguous as to whether the
exclusions pertained to flooding resulting from the negligence of third parties and,
therefore, that the policies in those three cases provide coverage for all flooding
resulting from the negligence of third parties. The trial court judge immediately
certified his opinion for appeal, which was accepted by the U.S. Court of Appeals for
the Fifth Circuit. The oral argument before the U.S. Court of Appeals for the Fifth
Circuit took place on June 6, 2007. On August 2, 2007, the U.S. Court of Appeals for
the Fifth Circuit issued its ruling. In its ruling, the Court concluded that the flood
exclusions in the policies at issue unambiguously excluded coverage and that the
plaintiff policyholders are not entitled to recover for flood damage under their
policies. The plaintiff policyholders may request that the U.S. Court of Appeals for
the Fifth Circuit reconsider its ruling. The plaintiffs may also ultimately seek review
by the United States Supreme Court. As such, the ruling of the U.S. Court of Appeals for
the Fifth Circuit is not yet a final judgment. We intend to continue to vigorously
defend the applicable flood exclusion language and defend against any proposed class
certification. On March 27, 2007, the Abadiematter was administratively closed by the
court. Prior to that, a Master Class Action Insurance Complaint was filed in the
 17




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##### Table of Contents



Katrina Consolidated Litigation in the United States District Court, Eastern District of
Louisiana on March 15, 2007. The Master Class Action Insurance Complaint supersedes all
previously filed class action complaints. SPFIC is named as a defendant in the Master
Class Action Insurance Complaint. The class allegations in Abadiewere dismissed on
April 18, 2007, as they have been superseded by the Master Class Action Insurance
Complaint. Presently, the Master Class Action Insurance Complaint is stayed by order of
the court. In the event of an adverse outcome, particularly with regard to (a) whether
the flooding is covered by the SPFIC policies and (b) whether this litigation is
appropriate for class certification, the potential exposure to SPFIC, while not at this
time quantifiable, could be substantial.We are also a defendant in a lawsuit originally filed on August 6, 1999 in the Texas
District Court, Austin, Texas, now styled Citizens Insurance Company of America,
Citizens, Inc., Harold E. Riley and Mark A. Oliver, Petitioners v. Fernando Hakim
Daccach, Respondent, in which a class was originally certified by the trial court, and
affirmed by the Court of Appeals for the Third District of Texas. We appealed the grant
of class status to the Texas Supreme Court, and oral arguments occurred on October 21,
2004. On March 2, 2007, the Texas Supreme Court reversed the Court of Appeals
affirmation of the trial courts class certification order, decertified the class and
remanded the case to the trial court for further proceedings consistent with the Texas
Supreme Courts opinion. The suit alleges that certain life insurance policies that we
made available by our primary life insurance subsidiary to non-U.S. residents, when
combined with a policy feature that allowed policy dividends to be assigned to two
non-U.S. trusts for the purpose of accumulating ownership of our Class A common stock,
along with allowing the policyholders to make additional contributions to the trusts,
were actually offers and sales of securities that occurred in Texas by unregistered
dealers in violation of the registration provisions of the Texas securities laws. The
remedy sought was rescission and return of the insurance premium payments. We intend to
continue to pursue a vigorous defense in any remaining proceeding. However, we expect
financial exposure to us, if any, would be significantly less than had the purported
class not been decertified.We are a party to other various legal proceedings incidental to our business, which we
do not consider to be material in the event of adverse outcomes to us.
 
 ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS
 FORWARD-LOOKING STATEMENTS
 Certain statements contained in this report are not statements of historical fact and constitute
forward-looking statements within the meaning of the Private Securities Litigation Reform Act (the
Act), including, without limitation, the statements specifically identified as forward-looking
statements within this document. Many of these statements contain risk factors as well. In
addition, certain statements in future filings by the Company with the Securities and Exchange
Commission, in press releases, and in oral and written statements made by or with the approval of
the Company which are not statements of historical fact constitute forward-looking statements
within the meaning of the Act. Examples of forward-looking statements, include, but are not
limited to: (i) projections of revenues, income or loss, earnings or loss per share, the payment
or non-payment of dividends, capital structure, and other financial items, (ii) statements of our
plans and objectives or our management or Board of Directors including those relating to
 18




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##### Table of Contents



products or services, (iii) statements of future economic performance and (iv) statements of
assumptions underlying such statements. Words such as believes, anticipates, expects,
intends, targeted, may, will and similar expressions are intended to identify
forward-looking statements but are not the exclusive means of identifying such statements.
 Forward-looking statements involve risks and uncertainties, which may cause actual results to
differ materially from those in such statements. Factors that could cause actual results to differ
from those discussed in the forward-looking statements include, but are not limited to: (i) the
strength of foreign and U.S. economies in general and the strength of the local economies where our
policyholders reside; (ii) the effects of and changes in trade, monetary and fiscal policies and
laws; (iii) inflation, interest rates, stock market and monetary fluctuations and volatility;
(iv) the timely development of and acceptance of new insurance products and services and perceived
overall value of these products and services by existing and potential customers; (v) changes in
consumer spending, borrowing and saving habits; (vi) a concentration of our insurance business
from persons residing in Latin and South America and the Pacific Rim; (vii) uncertainties in
assimilating acquisitions; (viii) the persistency of existing and future insurance policies sold
by the Company and its subsidiaries; (ix) the dependence of the Company on its executive officers;
(x) the ability to control expenses; (xi) the effect of changes in laws and regulations
(including laws and regulations concerning insurance) with which the Company and its subsidiaries
must comply, (xii) the effect of changes in accounting policies and practices, as may be adopted
by the regulatory agencies as well as the Financial Accounting Standards Board, (xiii) changes in
the Companys organization and compensation plans; (xiv) the costs and effects of litigation and
of unexpected or adverse outcomes in such litigation; (xv) declines in market values of commercial
real estate; and (xvi) the success of the Company at managing the risks involved in the
foregoing.
 Our forward-looking statements speak only as of the date on which such statements are made, and we
undertake no obligation to update any forward-looking statement to reflect events or circumstances
after the date on which any such statement is made to reflect the occurrence of unanticipated
events.
 We make available, free of charge, through our Internet website ( http://www.citizensinc.com ), our
Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Section 16
reports filed by officers and directors, news releases, proxies, and, if applicable, amendments to
those reports filed or furnished pursuant to the Securities Exchange Act of 1934, as soon as
reasonably practicable after we electronically file such reports with, or furnish such reports to,
the Securities and Exchange Commission. We are not including any of the information contained on
our website as part of, or incorporating it by reference into, this report.
 Overview
  
    
    the issuance of ordinary life insurance in U.S. Dollar-denominated amounts to
foreign nationals with significant net worth; and
    
    offering final expense ordinary life insurance through the home service distribution
channel in Louisiana.
 19




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##### Table of Contents



Life Insurance.
   Home Service Insurance.
   20




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##### Table of Contents



Marketplace Conditions and Trends
  
    
    As an increasing percentage of the world population reaches retirement age, we
believe we will benefit from increased demand for living products rather than death
products, as aging baby boomers will require cash accumulation to provide expenses to
meet their lifetime needs. Our ordinary life products are designed for our policy
owners to accumulate cash values to provide for living expenses in an insureds later
years, while continuously providing a death benefit.
    
    Corporate bond defaults and credit downgrades, which have resulted in
other-than-temporary impairments in the value of some securities, have had a material
impact on life insurers in the past few years. We have not incurred any significant
losses from bond defaults. The majority of our investment portfolio, including all
mortgage backed securities, is held in debt instruments carrying the full faith and
credit of the U.S. Government, or in U.S. Government-sponsored enterprises. Most of
the municipal bonds we own are privately insured. We intend to manage most of our
investment portfolio conservatively in the future in these types of debt instruments.
    
    Many of the events and trends affecting the life insurance industry have had an
impact on the life reinsurance industry. These events led to a decline in the
availability of reinsurance. While we currently cede a limited amount of our primary
insurance business to reinsurers, we may find it difficult to obtain reinsurance in the
future, forcing us to seek reinsurers who are more expensive to us. If we cannot
obtain affordable reinsurance coverage, either our net exposures will increase or we
would have to reduce our underwriting commitments.
    
    Because of the trends described above coupled with increasing costs of regulatory
compliance such as the Sarbanes-Oxley Act of 2002, we believe there is a trend towards
consolidation of domestic life insurance companies. We believe this should be a
benefit to our acquisition strategy because there should be more complementary
acquisition candidates available for us to consider. Management continues to seek
acquisitions that can add value to our Company, although at this time, we have no
agreements or understandings with respect to any acquisition. Because of the growth in
our asset base and level of capital, management expects to seek opportunities for
larger acquisition transactions (those in the $50 million to $100 million purchase
price range).
 21




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##### Table of Contents



Quarter Ended June 30, 2007 Compared to the Quarter Ended June 30, 2006
 All comparisons below state the 2007 second fiscal quarter first and the 2006 second fiscal quarter
second.
 Overview
   Results of Operations
  Change from
    
    Net Income perThree Months Ended
    
    Net Income
    
    Previous Years
    
    Class A & BJune 30,
    
    (In thousands)
    
    Period
    
    Common Shares2007
    
    $
    3,527
    
    
    
    371.5
    %
    
    $
    0.072006
    
    
    748
    
    
    
    106.6
    %
    
    
    0.01
   Premium Income
 Net Investment Income
 22




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##### Table of Contents



Reserves
 Policyholder Dividends
 Claims and Surrenders
 Three Months Ended June 30,2007
    
    
    2006(In thousands)Death claims
    
    $
    4,931
    
    
    
    5,636Surrender expenses
    
    
    4,203
    
    
    
    4,468Endowments
    
    
    3,128
    
    
    
    2,523Casualty claims
    
    
    302
    
    
    
    1,076Other policy benefits
    
    
    318
    
    
    
    260Accident and health benefits
    
    
    64
    
    
    
    92Total claims and surrenders
    
    $
    12,946
    
    
    
    14,055
    Commissions
 Underwriting, Acquisition and Insurance Expense
 Deferred Policy Acquisition Costs (DAC)
 23




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##### Table of Contents



Federal Income Taxes.
 Six Months Ended June 30, 2007 Compared to Six Months Ended June 30, 2006
 All comparisons below state the 2007 six months first and the 2006 six months second.
 Overview
   Results of Operations
  Change from
    
    Net Income perSix Months
    
    Net Income
    
    Previous Years
    
    Class A & BEnded June 30,
    
    (In thousands)
    
    Period
    
    Common Shares2007
    
    $
    5,966
    
    
    
    237.3
    %
    
    $
    0.122006
    
    
    1,769
    
    
    
    -35.0
    %
    
    
    0.02
  Premium Income
 Net Investment Income
 24




---



##### Table of Contents



Reserves
 Policyholder Dividends
 Claims and Surrenders
 Six Months Ended June 30,2007
    
    
    2006(In thousands)Death claims
    
    $
    10,937
    
    
    
    11,463Surrender expenses
    
    
    8,372
    
    
    
    8,299Endowments
    
    
    6,031
    
    
    
    4,947Casualty claims
    
    
    825
    
    
    
    2,572Other policy benefits
    
    
    766
    
    
    
    635Accident and health benefits
    
    
    171
    
    
    
    287Total claims and surrenders
    
    $
    27,102
    
    
    
    28,203
    Commissions
 Underwriting, Acquisition and Insurance Expense
 25




---



##### Table of Contents



Deferred Policy Acquisition Costs
 Federal Income Taxes.
 Liquidity and Capital Resources
     26




---



##### Table of Contents



Given
the size and location of the tract, management believes the property can be sold at some future
date for a profit.
     27




---



##### Table of Contents



Less than 1
    
    
    
    
    
    
    
    
    
    
    More than 5Contractual Obligation
    
    Total
    
    
    Year
    
    
    1 to 3 Years
    
    
    3 to 5 Years
    
    
    Years(In Thousands)Operating leases
    
    $
    1,035
    
    
    
    228
    
    
    
    626
    
    
    
    181
    
    
    
    Other
    
    
    86
    
    
    
    42
    
    
    
    44
    
    
    
    
    
    
    
    Total operating and other leases
    
    
    1,121
    
    
    
    270
    
    
    
    670
    
    
    
    181
    
    
    
    Future policy benefit reserves:Life insurance
    
    
    487,738
    
    
    
    181
    
    
    
    1,018
    
    
    
    9,551
    
    
    
    476,988Annuities
    
    
    21,899
    
    
    
    11,456
    
    
    
    5,134
    
    
    
    2,214
    
    
    
    3,095Accident and health
    
    
    8,931
    
    
    
    8,931
    
    
    
    
    
    
    
    
    
    
    
    Total future policy benefit reserves
    
    
    518,568
    
    
    
    20,568
    
    
    
    6,152
    
    
    
    11,765
    
    
    
    480,083Policy claims payable:Life insurance
    
    
    5,556
    
    
    
    5,556
    
    
    
    
    
    
    
    
    
    
    
    Accident and health
    
    
    1,319
    
    
    
    1,319
    
    
    
    
    
    
    
    
    
    
    
    Casualty
    
    
    1,351
    
    
    
    1,351
    
    
    
    
    
    
    
    
    
    
    
    Total policy claims payable
    
    
    8,226
    
    
    
    8,226
    
    
    
    
    
    
    
    
    
    
    
    Convertible Preferred Stock
    
    
    16,251
    
    
    
    
    
    
    
    16,251
    
    
    
    
    
    
    
    Total contractual obligations
    
    $
    544,166
    
    
    
    29,064
    
    
    
    23,073
    
    
    
    11,946
    
    
    
    480,083
  Parent Company Liquidity and Capital Resources
  28




---



##### Table of Contents



Critical Accounting Policies
  Policy Liabilities
   Deferred Policy Acquisition Costs
    29




---



##### Table of Contents



Valuation of Investments in Fixed Maturity and Equity Securities
    30




---



##### Table of Contents



Premium Revenue and Related Expenses
   
 ITEM 3.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK
 General
  Market Risk Related to Interest Rates
    31




---



##### Table of Contents



Change in Interest RatesDecreases in Interest Rates(In thousands)100 Basis
    
    
    200 Basis
    
    
    300 BasisPoints
    
    
    Points
    
    
    PointsJune 30, 2007
    
    $
    14,611
    
    
    
    28,834
    
    
    
    45,558December 31, 2006
    
    $
    20,429
    
    
    
    36,129
    
    
    
    55,312
 Increases in Interest Rates(In thousands)100 Basis
    
    
    200 Basis
    
    
    300 BasisPoints
    
    
    Points
    
    
    PointsJune 30, 2007
    
    $
    (44,740
    )
    
    
    (73,612
    )
    
    
    (107,855
    )December 31, 2006
    
    $
    (32,305
    )
    
    
    (59,302
    )
    
    
    (92,949
    )
   Market Risk Related to Equity Prices
  
 ITEM 4.
    
    CONTROLS AND PROCEDURES
 Disclosure Controls and Procedures
   32




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##### Table of Contents



Internal Control  Integrated Framework
   
    
    Stockholders equity as of January 1, 2006 was reduced by $3.1 million as a result
of the Companys adoption of SAB 108.
    
    Pre-tax income was reduced by $1.7 million due to an impairment of goodwill (excess
cost over net assets acquired) of approximately $1.0 million and additional
amortization of intangible assets (cost of customer relationships acquired) of
approximately $0.7 million for the year ended December 31, 2006.
 Change in Internal Control over Financial Reporting
  
    
    Hired a new Vice President of Accounting, with significant statutory accounting and
U.S. GAAP experience during the third quarter of 2006;
    
    Hired a new Chief Actuary with a background in U.S. GAAP financial reporting during
the third quarter of 2006;
    
    Ensured that all of our financial statement close process journal entries for each
of our subsidiaries were recorded in their general ledgers as of the second quarter of
2007 (previously, many such entries were in Excel only);
    
    Created the position of Vice President of Financial Reporting in the second quarter
of 2007, committing resources to enable the timely review of supporting work papers for
prior and current accounting periods and to prevent and detect misapplications of U.S.
GAAP; and
    
    Are strengthening the process of work paper review by senior members of management,
VP Financial Reporting, CFO, and President to ensure the completeness
and accuracy of supporting work papers and schedules, including formalized sign-off
processes.
 33




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##### Table of Contents



PART II. OTHER INFORMATION
 
 ITEM 1.
    
    LEGAL PROCEEDINGS
 Abadie, et al v. Aegis Security Insurance Co.,
et al Abadie In Re: Katrina Canal Breaches Consolidated Litigation Abadie case) Abadie Abadie
 34




---



##### Table of Contents



Citizens Insurance Company of America,
Citizens, Inc., Harold E. Riley and Mark A. Oliver, Petitioners v. Fernando Hakim
Daccach, Respondent
  
 ITEM 1.A
    
    RISK FACTORS
  Loss of the services of our senior management team would likely hinder development of
our operating and marketing programs and our strategy for expanding our business.
  35




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##### Table of Contents



ITEM 2.
    
    UNREGISTERED SALES OF EQUITY SECURITIESAND USE OF PROCEEDS
  
 ITEM 3.
    
    DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4.
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
   
 ITEM 5.
    
    OTHER INFORMATION
  
 ITEM 6.
    
    EXHIBITS
 Exhibit Number
    
    The following exhibits are filed herewith:3.1
    
    Restated and Amended Articles of Incorporation (a)3.2
    
    Amended and Restated Bylaws (b)4.1
    
    Amendment to State Series A-1 and A-2 Senior Convertible Preferred Stock (c)10.1
    
    Self-Administered Automatic Reinsurance Agreement  Citizens Insurance Company of America and
Riunione Adriatica di Sicurta, S.p.A. (d)10.2
    
    Bulk Accidental Death Benefit Reinsurance Agreement between Connecticut General Life
Insurance Company and Citizens Insurance Company of America, as amended (e)10.3
    
    Coinsurance Reinsurance Agreement, Assumption Reinsurance Agreement, Administrative Services
Agreement dated March 9, 2004, between Citizens Insurance Company of America and Texas
International Life Insurance Company, Reinsurance Trust Agreement dated March 9, 2004, by and
among Citizens Insurance Company of America, Texas International Life Insurance Company and
Wells Fargo Bank, N.A. (f)
 36




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##### Table of Contents



Exhibit Number
    
    The following exhibits are filed herewith:10.4
    
    Coinsurance Reinsurance Agreement, Assumption Reinsurance Agreement, Administrative Services
Agreement dated March 9, 2004, between Combined Underwriters Life Insurance Company and Texas
International Life Insurance Company, Reinsurance Trust Agreement dated March 9, 2004, by and
among Combined Underwriters Life Insurance Company, Texas International Life Insurance Company
and Wells Fargo Bank, N.A. (g)10.5(a)
    
    Securities Purchase Agreement dated July 12, 2004 among Citizens, Inc., Mainfield
Enterprises, Inc., Steelhead Investments Ltd., Portside Growth and Opportunity Fund, and
Smithfield Fiduciary LLC (h)10.5(b)
    
    Registration Rights Agreement dated July 12, 2004 among Citizens, Inc., Mainfield
Enterprises, Inc., Steelhead Investments Ltd., Portside Growth and Opportunity Fund, and
Smithfield Fiduciary LLC (h)10.5(c)
    
    Unit Warrant dated July 12, 2004, to Mainfield Enterprises, Inc. (h)10.5(d)
    
    Unit Warrant dated July 12, 2004, to Steelhead Investments Ltd. (h)10.5(e)
    
    Unit Warrant dated July 12, 2004, to Portside Growth and Opportunity Fund (h)10.5(f)
    
    Unit Warrant dated July 12, 2004, to Smithfield Fiduciary LLC (h)10.5(g)
    
    Warrant to Purchase Class A Common Stock to Mainfield Enterprises, Inc. (h)10.5(h)
    
    Warrant to Purchase Class A Common Stock to Steelhead Investments Ltd. (h)10.5(i)
    
    Warrant to Purchase Class A Common Stock to Portside Growth and Opportunity Fund (h)10.5(j)
    
    Warrant to Purchase Class A Common Stock to Smithfield Fiduciary LLC (h)10.5(k)
    
    Subordination Agreement among Regions Bank, the Purchasers and Citizens, Inc. dated July
12, 2004 (h)10.5(l)
    
    Non-Exclusive Finders Agreement dated September 29, 2003, between Citizens, Inc. and the
Shemano Group, Inc. (h)10.6
    
    Self-Administered Automatic Reinsurance Agreement between Citizens Insurance Company of
America and Converium Reinsurance (Germany) Ltd.(i)10.7
    
    Self-Administered Automatic Reinsurance Agreement between Citizens Insurance Company of
America and Scottish Re Worldwide (England) (j)10.8
    
    First Amended and Restated Loan Agreement  Regions Bank, dated December 5, 2005(k)
 37




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##### Table of Contents



Exhibit Number
    
    The following exhibits are filed herewith:10.9
    
    First Amendment to First Amended and Restated Loan Agreement  Regions Bank, dated December
8, 2006 (l)11
    
    Statement re: Computation of per share earnings (see financial statements)31.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act*31.2
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act*32.1
    
    Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act*32.2
    
    Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act*
 
 *
    
    Filed herewith.(a)
    
    Filed on March 15, 2004 with the Registrants Annual Report on Form 10-K for the Year Ended
December 31, 2003 as Exhibit 3.1, and incorporated herein by reference.(b)
    
    Filed on March 31, 1999 with the Registrants Annual Report on Form 10-K for the Year Ended
December 31, 1998, as Exhibit 3.2, and incorporated herein by reference.(c)
    
    Filed on July 15, 2004, with the Registrants Current Report on Form 8-K as Exhibit 4.1, and
incorporated herein by reference.(d)
    
    Filed on November 11, 1996 with the Registration Statement on Form S-4, SEC File No.
333-16163, as Exhibit 10.8, and incorporated herein by reference.(e)
    
    Filed on April 9, 1997 as Exhibit 10.9 with the Registrants Annual Report on Form 10-K for
the Year Ended December 31, 1996, Amendment No. I, and incorporated herein by reference.(f)
    
    Filed on March 22, 2004 as Exhibit 10.8 of the Registrants Current Report on Form 8-K, and
incorporated herein by reference.(g)
    
    Filed on March 22, 2004 as Exhibit 10.9 of the Registrants Current Report on Form 8-K, and
incorporated herein by reference.(h)
    
    Filed on July 15, 2004 as part of Exhibit 10.12 with the Registrants Current Report on Form
8-K, and incorporated herein by reference.(i)
    
    Filed on March 31, 2005, with the Registrants Annual Report on Form 10-K for the Year Ended
December 31, 2004, as Exhibit 10.10(m), and incorporated herein by reference.(j)
    
    Filed on March 31, 2005, with the Registrants Annual Report on Form 10-K for the Year Ended
December 31, 2004, as Exhibit 10.10(n), and incorporated herein by reference.(k)
    
    Filed on or about March 16, 2006, with the Registrants Annual Report on Form 10-K for the
Year Ended December 31, 2005, as Exhibit 10.10(o), and incorporated herein by reference.(l)
    
    Filed on March 30, 2007, with the Registrants Annual Report on Form 10-K for the Year Ended
December 31, 2006, as Exhibit 10.9, and incorporated herein by reference. 38




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##### Table of Contents



SIGNATURES
  CITIZENS, INC.By:
    /s/ Harold E. RileyHarold E. RileyChief Executive Officer and Chairman By:
    /s/ Thomas F. KopeticThomas F. KopeticVice President, Chief Financial Officer
and Treasurer  39




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##### Table of Contents



EXHIBIT INDEX
 Exhibit Number
    
    The following exhibits are filed herewith:3.1
    
    Restated and Amended Articles of Incorporation (a)3.2
    
    Amended and Restated Bylaws (b)4.1
    
    Amendment to State Series A-1 and A-2 Senior Convertible Preferred Stock (c)10.1
    
    Self-Administered Automatic Reinsurance Agreement  Citizens Insurance Company of America and
Riunione Adriatica di Sicurta, S.p.A. (d)10.2
    
    Bulk Accidental Death Benefit Reinsurance Agreement between Connecticut General Life
Insurance Company and Citizens Insurance Company of America, as amended (e)10.3
    
    Coinsurance Reinsurance Agreement, Assumption Reinsurance Agreement, Administrative Services
Agreement dated March 9, 2004, between Citizens Insurance Company of America and Texas
International Life Insurance Company, Reinsurance Trust Agreement dated March 9, 2004, by and
among Citizens Insurance Company of America, Texas International Life Insurance Company and
Wells Fargo Bank, N.A. (f)
 40




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##### Table of Contents



Exhibit Number
    
    The following exhibits are filed herewith:10.4
    
    Coinsurance Reinsurance Agreement, Assumption Reinsurance Agreement, Administrative Services
Agreement dated March 9, 2004, between Combined Underwriters Life Insurance Company and Texas
International Life Insurance Company, Reinsurance Trust Agreement dated March 9, 2004, by and
among Combined Underwriters Life Insurance Company, Texas International Life Insurance Company
and Wells Fargo Bank, N.A. (g)10.5(a)
    
    Securities Purchase Agreement dated July 12, 2004 among Citizens, Inc., Mainfield
Enterprises, Inc., Steelhead Investments Ltd., Portside Growth and Opportunity Fund, and
Smithfield Fiduciary LLC (h)10.5(b)
    
    Registration Rights Agreement dated July 12, 2004 among Citizens, Inc., Mainfield
Enterprises, Inc., Steelhead Investments Ltd., Portside Growth and Opportunity Fund, and
Smithfield Fiduciary LLC (h)10.5(c)
    
    Unit Warrant dated July 12, 2004, to Mainfield Enterprises, Inc. (h)10.5(d)
    
    Unit Warrant dated July 12, 2004, to Steelhead Investments Ltd. (h)10.5(e)
    
    Unit Warrant dated July 12, 2004, to Portside Growth and Opportunity Fund (h)10.5(f)
    
    Unit Warrant dated July 12, 2004, to Smithfield Fiduciary LLC (h)10.5(g)
    
    Warrant to Purchase Class A Common Stock to Mainfield Enterprises, Inc. (h)10.5(h)
    
    Warrant to Purchase Class A Common Stock to Steelhead Investments Ltd. (h)10.5(i)
    
    Warrant to Purchase Class A Common Stock to Portside Growth and Opportunity Fund (h)10.5(j)
    
    Warrant to Purchase Class A Common Stock to Smithfield Fiduciary LLC (h)10.5(k)
    
    Subordination Agreement among Regions Bank, the Purchasers and Citizens, Inc. dated July
12, 2004 (h)10.5(l)
    
    Non-Exclusive Finders Agreement dated September 29, 2003, between Citizens, Inc. and the
Shemano Group, Inc. (h)10.6
    
    Self-Administered Automatic Reinsurance Agreement between Citizens Insurance Company of
America and Converium Reinsurance (Germany) Ltd.(i)10.7
    
    Self-Administered Automatic Reinsurance Agreement between Citizens Insurance Company of
America and Scottish Re Worldwide (England) (j)10.8
    
    First Amended and Restated Loan Agreement  Regions Bank, dated December 5, 2005(k)
 41




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##### Table of Contents



Exhibit Number
    
    The following exhibits are filed herewith:10.9
    
    First Amendment to First Amended and Restated Loan Agreement  Regions Bank, dated December
8, 2006 (l)11
    
    Statement re: Computation of per share earnings (see financial statements)31.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act*31.2
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act*32.1
    
    Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act*32.2
    
    Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act*
 
 *
    
    Filed herewith.(a)
    
    Filed on March 15, 2004 with the Registrants Annual Report on Form 10-K for the Year Ended
December 31, 2003 as Exhibit 3.1, and incorporated herein by reference.(b)
    
    Filed on March 31, 1999 with the Registrants Annual Report on Form 10-K for the Year Ended
December 31, 1998, as Exhibit 3.2, and incorporated herein by reference.(c)
    
    Filed on July 15, 2004, with the Registrants Current Report on Form 8-K as Exhibit 4.1, and
incorporated herein by reference.(d)
    
    Filed on November 11, 1996 with the Registration Statement on Form S-4, SEC File No.
333-16163, as Exhibit 10.8, and incorporated herein by reference.(e)
    
    Filed on April 9, 1997 as Exhibit 10.9 with the Registrants Annual Report on Form 10-K for
the Year Ended December 31, 1996, Amendment No. I, and incorporated herein by reference.(f)
    
    Filed on March 22, 2004 as Exhibit 10.8 of the Registrants Current Report on Form 8-K, and
incorporated herein by reference.(g)
    
    Filed on March 22, 2004 as Exhibit 10.9 of the Registrants Current Report on Form 8-K, and
incorporated herein by reference.(h)
    
    Filed on July 15, 2004 as part of Exhibit 10.12 with the Registrants Current Report on Form
8-K, and incorporated herein by reference.(i)
    
    Filed on March 31, 2005, with the Registrants Annual Report on Form 10-K for the Year Ended
December 31, 2004, as Exhibit 10.10(m), and incorporated herein by reference.(j)
    
    Filed on March 31, 2005, with the Registrants Annual Report on Form 10-K for the Year Ended
December 31, 2004, as Exhibit 10.10(n), and incorporated herein by reference.(k)
    
    Filed on or about March 16, 2006, with the Registrants Annual Report on Form 10-K for the
Year Ended December 31, 2005, as Exhibit 10.10(o), and incorporated herein by reference.(l)
    
    Filed on March 30, 2007, with the Registrants Annual Report on Form 10-K for the Year Ended
December 31, 2006, as Exhibit 10.9, and incorporated herein by reference. 42