##### 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, 2006
 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: 1-13004
 CITIZENS, INC.
  Colorado
    
    84-0755371(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)400 East Anderson Lane, Austin, Texas
    
    78752(Address of principal executive offices)
    
    (Zip Code)
 
  þ o
  þ o
  o þ o
  o þ




---



##### 



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 INDEX
 PageNumberPart I. Financial InformationItem 1. Financial StatementsConsolidated Statements of Financial Position, June 30, 2006 (Unaudited) and December 31, 2005
    
    
    2Consolidated Statements of Operations, Three Months Ended June 30, 2006 and 2005 (Unaudited)
    
    
    4Consolidated Statements of Operations, Six Months Ended June 30, 2006 and 2005 (Unaudited)
    
    
    5Consolidated Statements of Cash Flows, Six Months Ended June 30, 2006 and 2005 (Unaudited)
    
    
    6Notes to Consolidated Financial Statements
    
    
    8Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    17Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    33Item 4. Controls and Procedures
    
    
    35Part II. Other InformationItem 1. Legal Proceedings
    
    
    36Item 1. A Risk Factors
    
    
    37Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    37Item 3. Defaults Upon Senior Securities
    
    
    37Item 4. Submission of Matters to a Vote of Security Holders
    
    
    37Item 5. Other Information
    
    
    37Item 6. Exhibits
    
    
    38Certification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906
  1




---



##### Table of Contents



PART I
FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
 (Unaudited)June 30,
    
    
    December 31,2006
    
    
    2005AssetsInvestments:Fixed maturities held-to-maturity, at
amortized cost (fair value $5,982,017
in 2006 and $9,143,212 in 2005)
    
    $
    5,500,975
    
    
    
    7,639,505Fixed maturities available-for-sale, at
fair value (cost $480,541,905 in
2006 and $457,386,343 in 2005)
    
    
    457,219,911
    
    
    
    449,931,167Equity securities, available-for-sale, at fair value
(cost $344,521 in 2006 and $429,176 in 2005)
    
    
    417,634
    
    
    
    609,760Mortgage loans on real estate (net of allowance
of $50,000 in 2006 and 2005)
    
    
    524,395
    
    
    
    833,464Policy loans
    
    
    23,910,977
    
    
    
    23,918,241Other long-term investments
    
    
    1,615,212
    
    
    
    1,878,886Total investments
    
    
    489,189,104
    
    
    
    484,811,023Cash and cash equivalents
    
    
    12,831,080
    
    
    
    18,311,105Accrued investment income
    
    
    6,992,121
    
    
    
    6,477,499Reinsurance recoverable
    
    
    18,470,631
    
    
    
    19,118,009Federal income tax recoverable
    
    
    2,016,613
    
    
    
    Deferred Federal income tax asset
    
    
    2,958,402
    
    
    
    Deferred policy acquisition costs
    
    
    78,719,850
    
    
    
    70,410,334Other intangible assets
    
    
    1,695,125
    
    
    
    2,095,125Cost of customer relationships acquired
    
    
    38,019,677
    
    
    
    39,259,276Excess of cost over net assets acquired
    
    
    12,401,990
    
    
    
    12,401,990Property and equipment
    
    
    7,891,895
    
    
    
    7,736,623Other assets
    
    
    6,426,650
    
    
    
    1,267,827Total assets
    
    $
    677,613,138
    
    
    
    661,888,811
 See accompanying notes to consolidated financial statements.
    
    (Continued)
 2




---



##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF FINANCIAL POSITION, CONTINUED
 (Unaudited)June 30,
    
    
    December 31,Liabilities and Stockholders Equity
    
    2006
    
    
    2005Liabilities:Future policy benefit reserves:Life insurance
    
    $
    456,442,632
    
    
    
    436,716,912Annuities
    
    
    20,058,685
    
    
    
    19,440,486Accident and health
    
    
    11,174,322
    
    
    
    11,579,870Dividend accumulations
    
    
    5,049,523
    
    
    
    5,066,828Premium deposits
    
    
    11,286,251
    
    
    
    9,942,096Policy claims payable
    
    
    8,208,806
    
    
    
    11,226,907Other policyholders funds
    
    
    5,767,630
    
    
    
    5,473,358Total policy liabilities
    
    
    517,987,849
    
    
    
    499,446,457Commissions payable
    
    
    2,614,800
    
    
    
    2,666,764Federal income tax payable
    
    
    
    
    
    
    447,829Deferred Federal income tax
    
    
    
    
    
    
    1,620,839Payable for securities in the process of settlement
    
    
    3,500,000
    
    
    
    Liabilities for options and warrants
    
    
    1,222,194
    
    
    
    1,587,151Other liabilities
    
    
    11,319,845
    
    
    
    7,611,138Total liabilities
    
    
    536,644,688
    
    
    
    513,380,178Cumulative convertible preferred stockSeries A-1 - $500 stated value per share, 25,000
shares authorized, issued and outstanding in 2006
and 2005; Series A-2 - $935 stated value per
share, 5,000 shares authorized, 4,014 issued and
outstanding in 2006
    
    
    12,214,038
    
    
    
    11,545,543Stockholders Equity:Common stock:Class A, no par value, 100,000,000 shares
authorized, 43,370,168 shares issued
in 2006 and 43,300,934 shares issued
in 2005, including shares in treasury of
3,135,738 in 2006 and 2,930,596 in 2005
    
    
    214,652,863
    
    
    
    214,307,665Class B, no par value, 2,000,000 shares
authorized, 1,001,714 shares issued and
outstanding in 2006 and 936,181 shares
issued and outstanding in 2005
    
    
    3,184,350
    
    
    
    3,184,350Retained deficit
    
    
    (62,727,934
    )
    
    
    (64,717,088
    )Accumulated other comprehensive loss:Unrealized losses on securities, net of tax
    
    
    (15,344,261
    )
    
    
    (4,801,231
    )139,765,018
    
    
    
    147,973,696Treasury stock, at cost
    
    
    (11,010,606
    )
    
    
    (11,010,606
    )Total stockholders equity
    
    
    128,754,412
    
    
    
    136,963,090Total liabilities and stockholders equity
    
    $
    677,613,138
    
    
    
    661,888,811
  3




---



##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 Three Months Ended June 30, 2006 and 2005
 (Unaudited)
 2006
    
    
    2005Revenues:Premiums
    
    $
    30,671,520
    
    
    
    27,932,343Net investment income
    
    
    6,724,424
    
    
    
    5,703,241Realized gains
    
    
    260,243
    
    
    
    546,548Decrease (increase) in fair value of options and warrants
    
    
    174,735
    
    
    
    (491,618
    )Other income
    
    
    365,182
    
    
    
    174,039Total revenues
    
    
    38,196,104
    
    
    
    33,864,553Benefits and expenses:Insurance benefits paid or provided:Claims and surrenders
    
    
    13,979,959
    
    
    
    12,793,789Increase in future policy benefit reserves
    
    
    7,402,909
    
    
    
    6,614,981Policyholders dividends
    
    
    1,306,259
    
    
    
    1,206,932Total insurance benefits paid or provided
    
    
    22,689,127
    
    
    
    20,615,702Commissions
    
    
    8,834,094
    
    
    
    8,157,702Other underwriting, acquisition and insurance expenses
    
    
    8,230,217
    
    
    
    6,342,176Capitalization of deferred policy acquisition costs
    
    
    (6,687,720
    )
    
    
    (5,974,897
    )Amortization of deferred policy acquisition costs
    
    
    3,052,009
    
    
    
    2,653,276Amortization of cost of customer relationships acquired
and other intangible assets
    
    
    881,904
    
    
    
    1,346,005Total benefits and expenses
    
    
    36,999,631
    
    
    
    33,139,964Income before Federal income tax
    
    
    1,196,473
    
    
    
    724,589Federal income tax expense
    
    
    242,408
    
    
    
    362,264Net income
    
    $
    954,065
    
    
    
    362,325Net income (loss) applicable to common stockholders
    
    $
    446,260
    
    
    
    (134,019
    )Per Share Amounts:Basic and diluted income per share of
common stock
    
    $
    0.01
    
    
    
    0.00Weighted average shares outstanding  basic
    
    
    41,201,502
    
    
    
    41,080,995Weighted average shares outstanding  diluted
    
    
    44,665,497
    
    
    
    41,080,995
  4




---



##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Six Months Ended June 30, 2006 and 2005
 (Unaudited)
 2006
    
    
    2005Revenues:Premiums
    
    $
    60,914,630
    
    
    
    55,429,251Net investment income
    
    
    12,994,137
    
    
    
    11,479,198Realized gains
    
    
    1,313,298
    
    
    
    615,675Decrease (increase) in fair value of options and warrants
    
    
    364,957
    
    
    
    (57,212
    )Other income
    
    
    717,131
    
    
    
    381,800Total revenues
    
    
    76,304,153
    
    
    
    67,848,712Benefits and expenses:Insurance benefits paid or provided:Claims and surrenders
    
    
    27,977,686
    
    
    
    25,163,231Increase in future policy benefit reserves
    
    
    14,509,019
    
    
    
    11,471,258Policyholders dividends
    
    
    2,328,539
    
    
    
    2,077,100Total insurance benefits paid or provided
    
    
    44,815,244
    
    
    
    38,711,589Commissions
    
    
    17,630,623
    
    
    
    15,490,093Other underwriting, acquisition and insurance expenses
    
    
    15,303,779
    
    
    
    13,445,894Capitalization of deferred policy acquisition costs
    
    
    (13,013,503
    )
    
    
    (10,995,982
    )Amortization of deferred policy acquisition costs
    
    
    5,673,987
    
    
    
    4,624,376Amortization of cost of customer relationships acquired
and other intangibles
    
    
    1,639,599
    
    
    
    2,495,931Total benefits and expenses
    
    
    72,049,729
    
    
    
    63,771,901Income before Federal income tax
    
    
    4,254,424
    
    
    
    4,076,811Federal income tax expense
    
    
    1,251,577
    
    
    
    1,355,000Net income
    
    $
    3,002,847
    
    
    
    2,721,811Net income applicable to common stockholders
    
    $
    1,989,154
    
    
    
    1,730,707Per Share Amounts:Basic and diluted income per share of
common stock
    
    $
    0.05
    
    
    
    0.04Weighted average shares outstanding  basic
    
    
    41,184,870
    
    
    
    41,068,403Weighted average shares outstanding  diluted
    
    
    42,916,868
    
    
    
    41,068,403
  5




---



##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 Six Months Ended June 30, 2006 and 2005
 (Unaudited)
 2006
    
    
    2005Cash flows from operating activities:Net income
    
    $
    3,002,847
    
    
    
    2,721,811Adjustments to reconcile net income to net cash
provided by operating activities:Realized gains on sale of investments
and other assets
    
    
    (1,313,298
    )
    
    
    (615,675
    )Net deferred policy acquisition costs
    
    
    (8,309,516
    )
    
    
    (6,371,606
    )Increase (decrease) on fair value of
options and warrants
    
    
    (364,957
    )
    
    
    57,212Amortization of cost of customer
relationships acquired and other
intangibles
    
    
    1,639,599
    
    
    
    2,495,931Amortization of net premiums
on fixed maturities
    
    
    808,597
    
    
    
    959,387Depreciation
    
    
    530,935
    
    
    
    491,606Deferred Federal income tax
    
    
    852,018
    
    
    
    257,637Change in:Accrued investment income
    
    
    (514,622
    )
    
    
    446,261Reinsurance recoverable
    
    
    647,378
    
    
    
    94,478Future policy benefit reserves
    
    
    19,817,429
    
    
    
    12,125,948Other policy liabilities
    
    
    (1,396,979
    )
    
    
    1,234,629Federal income tax
    
    
    (2,464,442
    )
    
    
    (1,344,211
    )Commissions payable and other liabilities
    
    
    3,656,743
    
    
    
    (2,221,431
    )Other, net
    
    
    (5,158,821
    )
    
    
    (671,438
    )Net cash provided by
operating activities
    
    
    11,432,911
    
    
    
    9,660,539Cash flows from investing activities:Sale of fixed maturities, available-for-sale
    
    
    16,378,125
    
    
    
    14,379,300Sale of equity securities, available-for-sale
    
    
    175,720
    
    
    
    Maturity of fixed maturities, available-for-sale
    
    
    13,513,552
    
    
    
    72,598,028Purchase of fixed maturities, available-for-sale
    
    
    (46,995,075
    )
    
    
    (69,579,417
    )Principal payments on mortgage loans
    
    
    82,483
    
    
    
    24,878Sale of other long-term investments and property and
equipment
    
    
    90,176
    
    
    
    946,081Mortgage loans funded
    
    
    
    
    
    
    (287,712
    )Decrease in policy loans
    
    
    7,264
    
    
    
    180,648Principal payments on notes receivable
    
    
    474,218
    
    
    
    Purchase of other long-term investments and property
and equipment
    
    
    (760,341
    )
    
    
    Net cash provided by (used in)
investing activities
    
    
    (17,033,878
    )
    
    
    18,261,806
 See accompanying notes to consolidated financial statements.
    
    (Continued)
 6




---



##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
Six Months Ended June 30, 2006 and 2005
 (Unaudited)
 2006
    
    
    2005Cash flows from financing activities:Annuity and universal life deposits
    
    
    1,254,973
    
    
    
    1,465,064Annuity and universal life withdrawals
    
    
    (1,134,031
    )
    
    
    (769,477
    )Payoff of notes payable
    
    
    
    
    
    
    (30,000,000
    )Net cash provided by (used in)
financing
activities
    
    
    120,942
    
    
    
    (29,304,413
    )Net decrease in cash and cash equivalents
    
    
    (5,480,025
    )
    
    
    (1,382,068
    )Cash and cash equivalents at beginning of period
    
    
    18,311,105
    
    
    
    31,720,787Cash and cash equivalents at end of period
    
    $
    12,831,080
    
    
    
    30,338,719Supplemental Disclosure of Operating Activities:Cash paid during the period for income taxes
    
    $
    2,864,001
    
    
    
    2,441,574Cash paid during the period for interest
    
    $
    
    
    
    
    695,408
 Supplemental Disclosure of Non-Cash Investing and Financing Activities:
     7




---



##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 June 30, 2006
 (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) (fka Citizens Insurance Company of America), Computing Technology, Inc.,
Funeral Homes of America, Inc., Insurance Investors, Inc., Citizens National Life
Insurance Company (CNLIC), KYWIDE Insurance Management, Inc., Security Alliance Insurance
Company, Security Plan Life Insurance Company (Security Plan or SPLIC), Security Plan
Fire Insurance Company (SPFIC), and Mid-American Associates Agency, Inc. (MAAAI).
Citizens and its consolidated subsidiaries are collectively referred to as the Company,
we, or our.On March 15, 2006, MAAAI was dissolved. In addition, Citizens USA Life Insurance Company
was merged into CICA effective March 31, 2006.The statement of financial position for June 30, 2006, the statements of operations for
the three-month and six-month periods ended June 30, 2006 and 2005, and the statements of
cash flows for the six-month periods then ended have been prepared by the Company without
audit. In the opinion of management, all adjustments and reclassifications to present
fairly the financial position, results of operations and changes in cash flows at June
30, 2006, and for comparative periods presented have been made.Certain 2005 amounts have been reclassified to conform to current year presentation.
Specifically, $1,465,064 of annuity and universal life considerations, net of $769,477 of
annuity and universal life payments, have been netted against an equal amount included in
insurance benefits paid or provided. Also, $52,290 of expense included in the increase
in future policy benefit reserves has been reclassified to premium revenue. In addition,
effective with the three-month period ended March 31, 2006, the Company began accruing
premium revenue based on the gross amount due from policyholders, rather than just a
portion of that amount. As a result, premium revenue for the first quarter of 2006 was
increased $954,951. When considered together with other corrections recorded in the
first quarter of 2006, which were individually immaterial, the net effect is also not
material.During the second quarter of 2006, assumptions were revised for SPLIC 2006 policy issues.
Specifically, commissions capitalized as deferred acquisition costs
were increased, by $467,000 to
reflect the higher commission SPLIC is paying for new business.The Company wrote off $400,000 of other intangible assets in the first quarter of 2006,
as the subsidiaries to which the intangibles relate no longer exist.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
 8




---



##### Table of Contents



read in conjunction with the financial statements and notes thereto
included in the Companys Annual Report on Form 10-K for the year ended December 31, 2005
filed with the Securities and Exchange Commission. The results of operations for the
period ended June 30, 2006, are not necessarily indicative of the operating results for
the full year.(2)
    
    Sale of CNLICA formal contract was signed with a third party in the first quarter of 2006 to sell our
primary accident and health insurance subsidiary, CNLIC, but is
subject to regulatory approval before closing. CNLIC represents approximately 70% of our accident and health business. The
remaining 30% of the accident and health business will continue to be ceded under an
existing coinsurance agreement with the acquirer of CNLIC.(3)
    
    Revolving Line of CreditThe Company has entered into a $75 million line of credit with Regions Bank that
terminates October 2006. 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
at June 30, 2006.(4)
    
    Segment InformationThe Company has four reportable segments: International Life Business, Home Service
Business, Domestic Life Business and Domestic Health Business. The accounting policies
of the segments are in accordance with U.S. GAAP and are the same as those described in
the summary of significant accounting policies in the Companys December 31, 2005 Report
on Form 10-K. The Company evaluates performance based on U.S. GAAP net income before
federal income taxes for its four reportable segments.International Life Business, consisting of ordinary whole-life policies, is sold
primarily throughout Central and South America and Taiwan. 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 business segment focuses on writing final expense ordinary
life insurance utilizing the home service marketing distribution method, whereby
employee-agents work on a route system to collect premiums and service policyholders.
The Company also uses the home service method to write small fire policies on Louisiana
residents. The Company utilizes approximately 350 field representatives to write and
collect premiums.The Domestic Life Business, consisting of traditional ordinary life, credit life and
final expense policies, is marketed through the Midwest and southern U.S. A majority of
revenue in this segment is also comprised of blocks of business acquired in acquisitions.
At June 30, 2006, the Company assumed a 50% share of a block of domestic policies from
an unafilliated insurer.
 9




---



##### Table of Contents



Prior to 2004, the Company actively operated a fourth segment, Domestic Health. The
Company transferred a majority of such business to a third party in 2004 with a
coinsurance agreement effective January 1, 2004. The Company continues to have an
insignificant amount of revenue in this area.Geographic Areas- The following summary represents quarterly financial data of the
Companys continuing operations based on their location:
 Three Months Ended June 30,2006
    
    
    2005Revenues:U.S.
    
    $
    15,390,122
    
    
    
    14,058,331Non-U.S.
    
    
    22,805,982
    
    
    
    19,806,222Total revenues
    
    $
    38,196,104
    
    
    
    33,864,553
  Three Months Ended June 30,2006
    
    
    2005Revenue:International Life
    
    $
    22,805,982
    
    
    
    19,806,222Home Service Business
    
    
    12,583,426
    
    
    
    12,705,414Domestic Life
    
    
    2,667,248
    
    
    
    1,082,418Domestic Health
    
    
    139,448
    
    
    
    270,499Total consolidated revenue
    
    $
    38,196,104
    
    
    
    33,864,553Premiums:International Life
    
    $
    18,814,426
    
    
    
    17,000,635Home Service Business
    
    
    9,561,665
    
    
    
    9,851,417Domestic Life
    
    
    2,155,981
    
    
    
    809,792Domestic Health
    
    
    139,448
    
    
    
    270,499Total premiums
    
    $
    30,671,520
    
    
    
    27,932,343Net investment income:International Life
    
    $
    3,280,369
    
    
    
    2,717,827Home Service Business
    
    
    3,048,422
    
    
    
    2,782,898Domestic Life
    
    
    395,633
    
    
    
    202,516Domestic Health
    
    
    
    
    
    
    Total consolidated net investment income
    
    $
    6,724,424
    
    
    
    5,703,241
 Three Months Ended June 30,2006
    
    
    2005Amortization expense:International Life
    
    $
    2,772,329
    
    
    
    2,116,559Home Service Business
    
    
    901,341
    
    
    
    914,221Domestic Life
    
    
    260,243
    
    
    
    968,501Domestic Health
    
    
    
    
    
    
    Total consolidated amortization expense
    
    $
    3,933,913
    
    
    
    3,999,281
 10




---



##### Table of Contents



Three Months Ended June 30,2006
    
    
    2005Realized gains (losses) on sale of
investments and other assets:International Life
    
    $
    14,873
    
    
    
    406,244Home Service Business
    
    
    (27,431
    )
    
    
    70,194Domestic Life
    
    
    272,801
    
    
    
    70,110Domestic Health
    
    
    
    
    
    
    Total consolidated realized gains on sale of
investments and other assets
    
    $
    260,243
    
    
    
    546,548Income (loss) before Federal income tax:International Life
    
    $
    2,168,091
    
    
    
    506,155Home Service Business
    
    
    168,060
    
    
    
    1,124,452Domestic Life
    
    
    (979,598
    )
    
    
    (1,015,725
    )Domestic Health
    
    
    (160,080
    )
    
    
    109,707Total consolidated income before
Federal income tax
    
    $
    1,196,473
    
    
    
    724,589
  Three Months Ended June 30,2006
    
    
    2005Ordinary Life
    
    $
    29,280,603
    
    
    
    26,251,764Group Life
    
    
    141,866
    
    
    
    159,090Accident and Health
    
    
    306,971
    
    
    
    434,285Casualty
    
    
    942,080
    
    
    
    1,087,204Total premiums
    
    $
    30,671,520
    
    
    
    27,932,343
 Geographic Areas
 Six Months Ended June 30,2006
    
    
    2005Revenues:U.S.
    
    $
    31,700,506
    
    
    
    30,610,006Non-U.S.
    
    
    44,603,647
    
    
    
    37,238,706Total Revenues
    
    $
    76,304,153
    
    
    
    67,848,712
  Six Months Ended June 30,2006
    
    
    2005Revenues:International Life
    
    $
    44,603,647
    
    
    
    37,238,706Home Service Business
    
    
    25,903,222
    
    
    
    25,595,606
 11




---



##### Table of Contents



Six Months Ended June 30,2006
    
    
    2005Domestic Life
    
    
    5,424,619
    
    
    
    4,563,206Domestic Health
    
    
    372,665
    
    
    
    451,194Total consolidated revenues
    
    $
    76,304,153
    
    
    
    67,848,712Premiums:International Life
    
    $
    37,262,265
    
    
    
    31,647,456Home Service Business
    
    
    19,030,938
    
    
    
    19,695,119Domestic Life
    
    
    4,248,762
    
    
    
    3,635,482Domestic Health
    
    
    372,665
    
    
    
    451,194Total premiums
    
    $
    60,914,630
    
    
    
    55,429,251Net investment income:International Life
    
    $
    6,324,994
    
    
    
    4,851,409Home Service Business
    
    
    5,889,628
    
    
    
    5,773,535Domestic Life
    
    
    779,515
    
    
    
    854,254Domestic Health
    
    
    
    
    
    
    Total consolidated net investment income
    
    $
    12,994,137
    
    
    
    11,479,198Amortization expense:International Life
    
    $
    5,315,996
    
    
    
    3,921,799Home Service Business
    
    
    1,022,540
    
    
    
    1,727,047Domestic Life
    
    
    975,050
    
    
    
    1,471,461Domestic Health
    
    
    
    
    
    
    Total consolidated amortization expense
    
    $
    7,313,586
    
    
    
    7,120,307Realized gains on sale of investments and
other assets:International Life
    
    $
    54,244
    
    
    
    417,244Home Service Business
    
    
    981,289
    
    
    
    124,961Domestic Life
    
    
    277,765
    
    
    
    73,470Domestic Health
    
    
    
    
    
    
    Total consolidated realized gains on sale of
investments and other assets
    
    $
    1,313,298
    
    
    
    615,675Income (loss) before Federal income tax:International Life
    
    $
    4,933,686
    
    
    
    2,841,964Home Service Business
    
    
    890,556
    
    
    
    2,036,401Domestic Life
    
    
    (1,563,339
    )
    
    
    (943,402
    )Domestic Health
    
    
    (6,479
    )
    
    
    141,848Total consolidated income before
Federal income tax
    
    $
    4,254,424
    
    
    
    4,076,811
 June 30,
    
    
    December 31,2006
    
    
    2005Assets:International Life
    
    $
    251,129,588
    
    
    
    233,529,849Home Service Business
    
    
    294,126,066
    
    
    
    300,946,232Domestic Life
    
    
    121,278,017
    
    
    
    115,320,962Domestic Health
    
    
    11,079,467
    
    
    
    12,091,768Total
    
    $
    677,613,138
    
    
    
    661,888,811
 12




---



##### Table of Contents



Six Months Ended June 30,2006
    
    
    2005Ordinary Life
    
    $
    58,134,054
    
    
    
    52,184,937Group Life
    
    
    283,732
    
    
    
    318,180Accident and Health
    
    
    732,258
    
    
    
    781,939Casualty
    
    
    1,764,586
    
    
    
    2,144,195Total premiums
    
    $
    60,914,630
    
    
    
    55,429,251
 (5)
    
    Accumulated Other Comprehensive LossFor the three and six months ended June 30, 2006, the other comprehensive loss amounts
included in total comprehensive loss consisted of unrealized losses on investments in
fixed maturities and equity securities available-for-sale of $3,838,338 and $10,543,030,
respectively, net of tax, and for the same period in 2005 unrealized gains of $6,830,250
and $4,109,563, respectively, net of tax. Total comprehensive loss for the three and six
months ended June 30, 2006, was $2,884,273 and $7,540,183, respectively, net of tax, and
for the same period in 2005, total comprehensive gains were $7,192,575 and $6,831,374,
respectively, net of tax.(6)
    
    Earnings Per ShareBasic and diluted earnings per share have been computed using the weighted average
number of shares of common stock outstanding during each period. The basic weighted
average shares outstanding for the three and six months ended June 30, 2006, were
41,201,502 and 41,184,870, respectively. The diluted weighted average shares
outstanding for the three and six months outstanding ended June 30, 2006 were 44,665,497
and 42,916,868, respectively. The weighted average shares outstanding for both the
three and six months ended June 30, 2005, were 41,080,995 and 41,068,403, respectively.
The per share amounts have been adjusted retroactively for all periods presented to
reflect the change in capital structure resulting from a 7% stock dividend paid in 2005.
The 2005 stock dividend resulted in the issuance of
2,840,821 Class A shares (including 205,142 shares in treasury) and 65,533 Class B
            shares.The following table sets forth the computation of basic and dilutive earnings per share:
 Three Months Ended June 30,2006
    
    
    2005Basic and diluted income per share:Numerator:Net income
    
    $
    954,065
    
    
    
    362,325Less: Preferred stock dividend
    
    
    (173,556
    )
    
    
    (132,443
    )Accretion of deferred
issuance costs and discounts
on preferred stock
    
    
    (334,249
    )
    
    
    (363,901
    )
 13




---



##### Table of Contents



Three Months Ended June 30,2006
    
    
    2005Net income (loss) to common stockholders
    
    $
    446,260
    
    
    
    (134,019
    )Basic and diluted income per share
    
    $
    0.01
    
    
    
    0.00Denominator:Weighted average shares outstanding  basic
    
    
    41,201,502
    
    
    
    41,080,995Weighted average shares outstanding  diluted
    
    
    44,665,497
    
    
    
    41,080,995
 Six Months Ended June 30,2006
    
    
    2005Basic and diluted income per share:Numerator:Net income
    
    $
    3,002,847
    
    
    
    2,721,811Less: Preferred stock dividend
    
    
    (345,198
    )
    
    
    (263,303
    )Accretion of deferred
issuance costs and discounts
on preferred stock
    
    
    (668,495
    )
    
    
    (727,801
    )Net income to common stockholders
    
    $
    1,989,154
    
    
    $
    1,730,707Basic and diluted income per share
    
    $
    0.05
    
    
    
    0.04Denominator:Weighted average shares outstanding  basic
    
    
    41,184,870
    
    
    
    41,068,403Weighted average shares outstanding  diluted
    
    
    42,916,868
    
    
    
    41,068,403
 The effects of Series A Convertible Preferred Stock are dilutive because the holders
of the Companys Series A Preferred Stock now have redemption rights. The
warrants are antidilutive because the exercise price is in excess of the average Class A
common stock market price for the three and six months ended June 30, 2006.(7)
    
    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 Statement of Financial
Accounting Standard (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. The guidance in SOP 05-1 will
 14




---



##### Table of Contents



be applied prospectively and is
effective for internal replacements occurring in fiscal years beginning after December
15, 2006. The Company is currently evaluating the impact of SOP 05-1 and does not expect
that the pronouncement will have a material impact on the Companys consolidated
financial statements.In June 2006, the FASB issued FASB Interpretation 48 (FIN 48), Accounting for
Uncertainty in Income Taxes. FIN 48 clarifies the accounting for uncertainty in income
taxes recognized in an enterprises financial statements in accordance with SFAS 109,
Accounting for Income Taxes. This Interpretation defines the minimum recognition
threshold a tax position is required to meet before being recognized in the financial
statements. FIN 48 is effective for fiscal years beginning after December 15, 2006. The
Company is currently evaluating the effect that the adoption of FIN 48 will have on its
financial position and results of operations.(8)
    
    Legal ProceedingsCause Number 03-0505; Citizens Insurance Company of America, Citizens, Inc., Harold E.
Riley and Mark A. Oliver, Petitioners v. Fernando Hakim Daccach, Respondent, in the
Supreme Court of Texas.This lawsuit has been certified as a class action by the Texas District Court, Austin,
Texas, and affirmed by the Court of Appeals for the Third District of Texas. The
Company appealed the grant of class status to the Texas Supreme Court, with oral
arguments occurring on October 21, 2004. The Company has not yet received a decision
from the Texas Supreme Court.The suit names as a class all non-U.S. residents who purchased insurance policies or
made premium payments since August 1996 and assigned policy dividends to two non-U.S.
trusts for the purchase of the Companys class A common stock. It alleges that the life
insurance policies the Company made available to these non-U.S. residents, when combined
with a policy feature which allows policy dividends to be assigned to the trusts for the
purpose of accumulating ownership of the Companys 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 Texas securities laws. The remedy sought is
rescission and return of the insurance premium payments.The Company asserts that, among other things, U.S. law, including Texas law, does not
apply to the operations of the trusts, and therefore, no securities registration
provisions apply, nor do laws relating to broker-dealer registration apply. Further, it
is the Companys position that the Plaintiffs securities claims, based on Texas
securities laws, are not valid, that no broker registration is required by the Company
or its marketing consultants, and the class as defined is not appropriate for class
certification because it does not meet the legal requirements for class treatment under
Texas law. To date, no hearing on the case merits has been held.The Company intends to vigorously defend against the class certification, as well as
against the other securities related claims in this case. However, it is unable to
determine the potential financial magnitude of the claims in the event of a final class
certification and the
 15




---



##### Table of Contents



Plaintiffs prevailing on the substantive action, although the
Company would expect a significant adverse financial impact from an adverse class action
judgment.The Company is a party to various legal proceedings incidental to its business.
The Company has been named as a defendant in various legal actions seeking payments for
claims denied by the Company and other monetary damages. In the opinion of management,
the ultimate liability, if any, resulting from any contingent liabilities that might
arise from litigation are not considered material in relation to the financial position
or results of operations of the Company. Reserves for claims payable are based on the
expected claim amount to be paid after a case-by-case review of the facts and
circumstances relating to each claim. A contingency exists with regard to these
reserves until the claims are adjudicated and paid.
 16




---



##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 FORWARD-LOOKING STATEMENTS
 Certain statements contained in this Quarterly Report on Form 10-Q 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 italicized statements and 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 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, market and monetary fluctuations and volatility; (iv) the
timely development of and acceptance of new 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 business from persons residing in Latin
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 Chairman of the Board; (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; and (xv) the success of the Company at managing the risks involved in
the foregoing.
 Such forward-looking statements speak only as of the date on which such statements are made, and
the Company undertakes no obligation to update any forward-looking statement to reflect events or
circumstances after the date on which 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,
 17




---



##### Table of Contents



Section 16
reports filed by officers and directors, news releases, and, if applicable, amendments to those
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended, 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
Quarterly Report on Form 10-Q.
 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.
  International Life.
   18




---



##### Table of Contents



Home Service Life.
    Domestic Life.
  19




---



##### 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 policyowners to accumulate
cash values to provide for living expenses in the insureds later years while continuously
providing a death benefit.
    
    The volatility in the equity markets over the past few years has posed a number of
problems for some companies in the life insurance industry. Even though the capital
markets have recovered, not all companies have participated evenly in the recovery. We
historically have had minimal equity exposure, including less than 1% of total invested
assets as of June 30, 2006 and December 31, 2005, and we plan to continue to have minimal
assets in equity investments in the future.
    
    Corporate bond defaults and credit downgrades, which have resulted in other-than-
temporary impairment in the value of many securities, have had a material impact on life
insurers in the past few years. We have not incurred significant losses from bond defaults
for many years. The majority of our investment portfolio is held in debt instruments
carrying the full faith and credit of the U.S. Government, or U.S. Government-sponsored
enterprises. As interest rates rise, we may elect to diversify beyond such instruments;
however, we do not expect to make radical changes to the risk profile of the portfolio.
    
    Some life insurance companies have recently suffered significant reductions in capital
due to losses, and will have to improve their capital adequacy ratios to support their
business
or divest a portion of their business. We have not experienced any capital reductions in our
life business and do not anticipate this trend will affect us. We did reduce capital on a
regulatory basis by approximately $20 million when we acquired Security Plan; however, we
maintain more than adequate levels of capital, and with the earnings of Security Plan on a
regulatory basis, expect to replenish regulatory capital from our life insurance
subsidiaries.
    
    Some property/casualty insurance companies, including SPFIC, have recently suffered
significant reductions in capital due to weather-related losses. We have compensated for
those
 20




---



##### Table of Contents



losses through an additional capital contribution from Security Plan and through
increased catastrophic reinsurance coverage.
    
    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 acquiring.
    
    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.
 Recent Transactions
    Quarter Ended June 30, 2006 Compared to the Quarter Ended June 30, 2005
 Overview
  21




---



##### Table of Contents



Consolidated Results
  Quarter
    
    
    
    Net IncomeEnded
    
    Net Income
    
    Per Class A and BJune 30
    
    (In thousands)
    
    Common Share2006
    
    $954
    
    $0.012005
    
    362
    
    0.00
   Premium Income
 Net Investment Income
 22




---



##### Table of Contents



Reserves
 Policyholder Dividends
 Claims and Surrenders
 Three Months Ended June 30,2006
    
    
    2005(In thousands)Death claims
    
    $
    5,636
    
    
    
    5,837Surrender benefits
    
    
    4,468
    
    
    
    4,011Endowments
    
    
    2,523
    
    
    
    2,138Casualty claims
    
    
    1,076
    
    
    
    534Other policy benefits
    
    
    185
    
    
    
    149Accident and health benefits
    
    
    92
    
    
    
    125Total claims and surrenders
    
    $
    13,980
    
    
    
    12,794
    23




---



##### Table of Contents



Commissions
 Underwriting, Acquisition and Insurance Expense
 Deferred Policy Acquisition Costs
 Cost of Customer Relationships Acquired and Other Intangibles.
 Six Months Ended June 30, 2006 Compared to Six Months Ended June 30, 2005
 Overview
   24




---



##### Table of Contents



Consolidated Results
  Six Months
    
    
    
    
    
    Net IncomeEnded
    
    Net Income
    
    Per Class A and BJune 30
    
    (In thousands)
    
    Common Share2006
    
    
    $
    3,003
    
    
    $
    0.052005
    
    
    
    2,722
    
    
    
    0.04
  Premium Income
 Net Investment Income
 Reserves
 Policyholder Dividends
 Claims and Surrenders
 25




---



##### Table of Contents



Six Months Ended June 30,2006
    
    
    2005(In thousands)Death claims
    
    $
    11,463
    
    
    
    12,142Surrender benefits
    
    
    8,299
    
    
    
    7,384Endowments
    
    
    4,947
    
    
    
    4,047Casualty claims
    
    
    2,572
    
    
    
    987Other policy benefits
    
    
    410
    
    
    
    357Accident and health benefits
    
    
    287
    
    
    
    246Total claims and surrenders
    
    $
    27,978
    
    
    
    25,163
    Commissions
 Underwriting, Acquisition and Insurance Expense
 Deferred Policy Acquisition Costs
 26




---



##### Table of Contents



Cost of Customer Relationships Acquired and Other Intangibles
 Liquidity and Capital Resources
      27




---



##### Table of Contents



28




---



##### Table of Contents



Contractual
    
    
    
    
    
    Less than
    
    
    1 to 3
    
    
    3 to 5
    
    
    More thanObligation
    
    Total
    
    
    1 year
    
    
    years
    
    
    years
    
    
    5 years(In Thousands)Operating leases
    
    $
    849
    
    
    
    313
    
    
    
    370
    
    
    
    166
    
    
    
    Other
    
    
    201
    
    
    
    115
    
    
    
    86
    
    
    
    
    
    
    
    Total operatingleases and other
    
    
    1,050
    
    
    
    428
    
    
    
    456
    
    
    
    166
    
    
    
    Future policy benefit reserves:Life insurance
    
    
    456,443
    
    
    
    168
    
    
    
    945
    
    
    
    8,865
    
    
    
    446,465Annuities
    
    
    20,059
    
    
    
    7,983
    
    
    
    5,515
    
    
    
    3,571
    
    
    
    2,990Accident and health
    
    
    11,174
    
    
    
    11,174
    
    
    
    
    
    
    
    
    
    
    
    Total future policybenefit reserves
    
    
    487,676
    
    
    
    19,325
    
    
    
    6,460
    
    
    
    12,436
    
    
    
    449,455Policy claims payable:Life insurance
    
    
    6,265
    
    
    
    6,265
    
    
    
    
    
    
    
    
    
    
    
    Accident and health
    
    
    933
    
    
    
    933
    
    
    
    
    
    
    
    
    
    
    
    Casualty
    
    
    1,011
    
    
    
    1,011
    
    
    
    
    
    
    
    
    
    
    
    Total policyclaims payable
    
    
    8,209
    
    
    
    8,209
    
    
    
    
    
    
    
    
    
    
    
    Series A-1preferred stock
    
    
    16,251
    
    
    
    
    
    
    
    
    
    
    
    16,251
    
    
    
    Tatal contractual
obligations
    
    $
    513,186
    
    
    
    27,962
    
    
    
    6,916
    
    
    
    28,853
    
    
    
    449,455
  Parent Company Liquidity and Capital Resources
  29




---



##### Table of Contents



Critical Accounting Policies
  Policy Liabilities
   Deferred Policy Acquisition Costs
    30




---



##### Table of Contents



Valuation of Investments in Fixed Maturity and Equity Securities
    31




---



##### Table of Contents



Premium Revenue and Related Expenses
   Accounting Pronouncements
 Accounting by Insurance Enterprises for Deferred Acquisition Costs in
Connection with Modifications or Exchanges of Insurance Contracts Accounting and Reporting by Insurance
Enterprises for Certain Long-Duration Contracts and For Realized Gains and Losses from the Sale of
Investments
  32




---



##### Table of Contents



ITEM 3.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES
 ABOUT MARKET RISK
 General
  Market Risk Related to Interest Rates
   June 30, 2006
(In thousands)
 Decreases in Interest Rates
    
    
    Increases in Interest Rates300 Basis
    
    
    200 Basis
    
    
    100 Basis
    
    
    100 Basis
    
    
    200 Basis
    
    
    300 BasisPoints
    
    
    Points
    
    
    Points
    
    
    Points
    
    
    Points
    
    
    Points$
    40,557
    
    
    $
    24,420
    
    
    $
    8,718
    
    
    $
    (60,288
    )
    
    $
    (90,559
    )
    
    $
    (117,719
    )
 December 31, 2005
(In thousands)
 Decreases in Interest Rates
    
    
    Increases in Interest Rates300 Basis
    
    
    200 Basis
    
    
    100 Basis
    
    
    100 Basis
    
    
    200 Basis
    
    
    300 BasisPoints
    
    
    Points
    
    
    Points
    
    
    Points
    
    
    Points
    
    
    Points$
    65,930
    
    
    $
    42,730
    
    
    $
    23,279
    
    
    $
    (42,198
    )
    
    $
    (73,921
    )
    
    $
    (102,269
    )
 33




---



##### Table of Contents



Market Risk Related to Equity Prices
  34




---



##### Table of Contents



ITEM 4.
    
    CONTROLS AND PROCEDURES
 (a) Disclosure Controls and Procedures
   (b) Management Report on Internal Control over Financial Reporting
 Internal Control  Integrated Framework
 (c) Change in Internal Control over Financial Reporting
  35




---



##### Table of Contents



PART II
 OTHER INFORMATION
 
 Item 1. Legal Proceedings
 Cause Number 03-0505; Citizens Insurance Company of America, Citizens, Inc., Harold E.
Riley and Mark A. Oliver, Petitioners v. Fernando Hakim Daccach, Respondent, in the
Supreme Court of Texas.
      36




---



##### Table of Contents



Item 1. A Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
    
    we considered and approved a proposal to elect the following Class B
Directors for the ensuing year, or until their successors are elected and qualified:
 
 
    
    we considered and approved a proposal to elect the following Class A
Directors for the ensuing year, or until their successors are elected and qualified:
 
 
    
    we considered and ratified the appointment of Ernst & Young LLP as the
independent auditor for the Company for 2006.
 
 Item 5. Other Information
  37




---



##### Table of Contents



Item 6. Exhibits
 3.1
    
    Restated and Amended Articles of Incorporation (a)3.2
    
    Bylaws (b)4.1
    
    Amendment to State Series A-1 and A-2 Senior Convertible Preferred Stock (j)10.1
    
    Self-Administered Automatic Reinsurance Agreement  Citizens Insurance Company of
America and Riunione Adriatica di Sicurta, S.p.A. (c)10.2
    
    Bulk Accidental Death Benefit Reinsurance Agreement between Connecticut General Life
Insurance Company and Citizens Insurance Company of America, as amended (d)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. (e)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. (f)10.5
    
    Loan Agreement, Security Agreement and Note dated March 22,2004 between Citizens,
Inc. and Regions Bank (h)10.5(a)
    
    Second Amendment to Loan Agreement between Citizens, Inc. and Regions Bank dated
October 1, 2004 (j)10.5(b)
    
    Security Agreement between Citizens Insurance Company of America and Regions Bank dated
October 1, 2004 (j)10.5(c)
    
    Subordinated Debenture dated October 1, 2004, issued by Citizens Insurance Company of
America to Citizens, Inc. (o)10.6(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)10.6(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)10.6(c)
    
    Unit Warrant dated July 12, 2004, to Mainfield Enterprises, Inc. (h)10.6(d)
    
    Unit Warrant dated July 12, 2004, to Steelhead Investments Ltd. (h)10.6(e)
    
    Unit Warrant dated July 12, 2004, to Portside Growth and Opportunity Fund (h)10.6(f)
    
    Unit Warrant dated July 12, 2004, to Smithfield Fiduciary LLC (h)10.6(g)
    
    Warrant to Purchase Class A Common Stock to Mainfield Enterprises, Inc. (h)10.6(h)
    
    Warrant to Purchase Class A Common Stock to Steelhead Investments Ltd. (h)10.6(i)
    
    Warrant to Purchase Class A Common Stock to Portside Growth and Opportunity Fund (h)10.6(j)
    
    Warrant to Purchase Class A Common Stock to Smithfield Fiduciary LLC (h)10.6(k)
    
    Subordination Agreement among Regions Bank, the Purchasers and Citizens, Inc. dated
July 12, 2004 (h)10.6(l)
    
    Non-Exclusive Finders Agreement dated September 29, 2003, between Citizens, Inc. and
the Shemano Group, Inc. (h)10.7
    
    Self-Administered Automatic Reinsurance Agreement between Citizens Insurance Company
of America and Converium Reinsurance (Germany) Ltd. (l)10.8
    
    Self-Administered Automatic Reinsurance Agreement between Citizens Insurance Company
of America and Scottish Re Worldwide (England) (m)10.9
    
    First Amended and Restated Loan Agreement  Regions Bank, dated December 5, 2005 (n)11.0
    
    Statement re: Computation of per share earnings (i)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.Table of Contents(a)
    
    Filed with the Registrants Annual Report on Form 10-K for the year ended December 31,
2003. 38




---



##### Table of Contents



(b)
    
    Filed with the Registrants Registration Statement on Form S-4, Registration No.
33-59039, filed with the Commission on May 2, 1995, and incorporated herein by reference.(c)
    
    Filed as Exhibit 10.8 with the Registration Statement on Form S-4, SEC File No.
333-16163, filed on or about November 4, 1996, and incorporated herein by reference.(d)
    
    Filed as Exhibit 10.9 with the Registrants Annual Report on Form 10-K for the year
ended December 31, 1996 and incorporated herein by reference.(e)
    
    Filed on March 22, 2004 as Exhibit 10.8 with the Registrants Current Report on Form
8-K and incorporated herein by reference.(f)
    
    Filed on March 22, 2004 as Exhibit 10.9 with the Registrants Current Report on Form
8-K and incorporated herein by reference.(g)
    
    See Note 6 to the Notes to Consolidated Financial Statements included in Item 1 of Part
1 of this Form 10-Q.(h)
    
    Filed with the Registrants Periodic Report on Form 8-K on July 15, 2004 and
incorporated herein by reference.(i)
    
    Filed on March 26, 2004 as Exhibit 10.10 with the Registrants Current Report on Form
8-K and incorporated herein by reference.(j)
    
    Filed on October 1, 2004 as Exhibit 10.11 with the Registrants Current Report on Form
8-K and incorporated herein by reference.(k)
    
    Filed on October 1, 2004 as Exhibit 10.11 with the Registrants current Report on Form
8-K and incorporated herein by reference.(l)
    
    Filed on March 31, 2005, as Exhibit 10.10(m) with the Registrants Annual Report on
Form 10-K for the year ended December 31, 2004 and incorporated herein by reference.(m)
    
    Filed on March 31, 2005 as Exhibit 10.10(n) with the Registrants Annual Report on
Form 10-K for the year ended December 31, 2004 and incorporated herein by reference.(n)
    
    Filed on 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. 39




---



##### Table of Contents



SIGNATURES
  CITIZENS, INC.By:
    /s/ Harold E. RileyHarold E. RileyChief Executive Officer and ChairmanBy:
    /s/ Larry E. CarsonLarry E. CarsonVice President, Chief Financial Officer and
Treasurer  40




---



##### Table of Contents



EXHIBIT INDEX
 Exhibit No.
 3.1
    
    Restated and Amended Articles of Incorporation (a)3.2
    
    Bylaws (b)4.1
    
    Amendment to State Series A-1 and A-2 Senior Convertible Preferred Stock (j)10.1
    
    Self-Administered Automatic Reinsurance Agreement  Citizens Insurance Company of
America and Riunione Adriatica di Sicurta, S.p.A. (c)10.2
    
    Bulk Accidental Death Benefit Reinsurance Agreement between Connecticut General Life
Insurance Company and Citizens Insurance Company of America, as amended (d)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. (e)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. (f)10.5
    
    Loan Agreement, Security Agreement and Note dated March 22,2004 between Citizens,
Inc. and Regions Bank (h)10.5(a)
    
    Second Amendment to Loan Agreement between Citizens, Inc. and Regions Bank dated
October 1, 2004 (j)10.5(b)
    
    Security Agreement between Citizens Insurance Company of America and Regions Bank dated
October 1, 2004 (j)10.5(c)
    
    Subordinated Debenture dated October 1, 2004, issued by Citizens Insurance Company of
America to Citizens, Inc. (o)10.6(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)10.6(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)10.6(c)
    
    Unit Warrant dated July 12, 2004, to Mainfield Enterprises, Inc. (h)10.6(d)
    
    Unit Warrant dated July 12, 2004, to Steelhead Investments Ltd. (h)10.6(e)
    
    Unit Warrant dated July 12, 2004, to Portside Growth and Opportunity Fund (h)10.6(f)
    
    Unit Warrant dated July 12, 2004, to Smithfield Fiduciary LLC (h)10.6(g)
    
    Warrant to Purchase Class A Common Stock to Mainfield Enterprises, Inc. (h)10.6(h)
    
    Warrant to Purchase Class A Common Stock to Steelhead Investments Ltd. (h)10.6(i)
    
    Warrant to Purchase Class A Common Stock to Portside Growth and Opportunity Fund (h)10.6(j)
    
    Warrant to Purchase Class A Common Stock to Smithfield Fiduciary LLC (h)10.6(k)
    
    Subordination Agreement among Regions Bank, the Purchasers and Citizens, Inc. dated
July 12, 2004 (h)10.6(l)
    
    Non-Exclusive Finders Agreement dated September 29, 2003, between Citizens, Inc. and
the Shemano Group, Inc. (h)10.7
    
    Self-Administered Automatic Reinsurance Agreement between Citizens Insurance Company
of America and Converium Reinsurance (Germany) Ltd. (l)10.8
    
    Self-Administered Automatic Reinsurance Agreement between Citizens Insurance Company
of America and Scottish Re Worldwide (England) (m)10.9
    
    First Amended and Restated Loan Agreement  Regions Bank, dated December 5, 2005 (n)11.0
    
    Statement re: Computation of per share earnings (i)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.Table of Contents 41




---



##### Table of Contents



(a)
    
    Filed with the Registrants Annual Report on Form 10-K for the year ended December 31,
2003.(b)
    
    Filed with the Registrants Registration Statement on Form S-4, Registration No.
33-59039, filed with the Commission on May 2, 1995, and incorporated herein by reference.(c)
    
    Filed as Exhibit 10.8 with the Registration Statement on Form S-4, SEC File No.
333-16163, filed on or about November 4, 1996, and incorporated herein by reference.(d)
    
    Filed as Exhibit 10.9 with the Registrants Annual Report on Form 10-K for the year
ended December 31, 1996 and incorporated herein by reference.(e)
    
    Filed on March 22, 2004 as Exhibit 10.8 with the Registrants Current Report on Form
8-K and incorporated herein by reference.(f)
    
    Filed on March 22, 2004 as Exhibit 10.9 with the Registrants Current Report on Form
8-K and incorporated herein by reference.(g)
    
    See Note 6 to the Notes to Consolidated Financial Statements included in Item 1 of Part
1 of this Form 10-Q.(h)
    
    Filed with the Registrants Periodic Report on Form 8-K on July 15, 2004 and
incorporated herein by reference.(i)
    
    Filed on March 26, 2004 as Exhibit 10.10 with the Registrants Current Report on Form
8-K and incorporated herein by reference.(j)
    
    Filed on October 1, 2004 as Exhibit 10.11 with the Registrants Current Report on Form
8-K and incorporated herein by reference.(k)
    
    Filed on October 1, 2004 as Exhibit 10.11 with the Registrants current Report on Form
8-K and incorporated herein by reference.(l)
    
    Filed on March 31, 2005, as Exhibit 10.10(m) with the Registrants Annual Report on
Form 10-K for the year ended December 31, 2004 and incorporated herein by reference.(m)
    
    Filed on March 31, 2005 as Exhibit 10.10(n) with the Registrants Annual Report on
Form 10-K for the year ended December 31, 2004 and incorporated herein by reference.(n)
    
    Filed on 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. 42