##### 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 March 31, 2011
 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: 000-16509
 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)
 (Registrants telephone number, including area code)
 (Former name, former address and former fiscal year, if changed since last report.)
 þ o
 o o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o
 o þ




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##### 



TABLE OF CONTENTS
 PageNumberPart I. Financial InformationItem 1. Financial StatementsConsolidated Statements of Financial Position, March 31, 2011 (Unaudited) and December 31, 2010
    
    
    2Consolidated Statements of Operations, Three Months Ended March 31, 2011 and 2010 (Unaudited)
    
    
    4Consolidated Statements of Cash Flows, Three Months Ended March 31, 2011 and 2010 (Unaudited)
    
    
    5Notes to Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    22Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    41Item 4. Controls and Procedures
    
    
    42Part II. Other InformationItem 1. Legal Proceedings
    
    
    42Item 1A. Risk Factors
    
    
    43Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    43Item 3. Defaults Upon Senior Securities
    
    
    43Item 4. (Reserved)
    
    
    43Item 5. Other Information
    
    
    43Item 6. Exhibits
    
    
    43Exhibit 21Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2Exhibit 99.1
   1




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1.
    
    FINANCIAL STATEMENTS
 CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 
 Consolidated Statements of Financial Position

(In thousands)
 March 31,
    
    
    December 31,2011
    
    
    2010(Unaudited)AssetsInvestments:Fixed maturities available-for-sale, at fair value

(cost: $622,282 and $578,412 in 2011 and 2010, respectively)
    
    $
    620,614
    
    
    
    575,737Fixed maturities held-to-maturity, at amortized cost

(fair value: $65,611 and $79,103 in 2011 and 2010, respectively)
    
    
    67,078
    
    
    
    80,232Equity securities available-for-sale, at fair value

(cost: $19,729 and $19,844 in 2011 and 2010, respectively)
    
    
    23,815
    
    
    
    23,304Mortgage loans on real estate
    
    
    1,478
    
    
    
    1,489Policy loans
    
    
    36,306
    
    
    
    35,585Real estate held for investment (less $1,049 and $1,017 accumulated
depreciation in 2011 and 2010, respectively)
    
    
    9,168
    
    
    
    9,200Other long-term investments
    
    
    146
    
    
    
    148Total investments
    
    
    758,605
    
    
    
    725,695Cash and cash equivalents
    
    
    37,450
    
    
    
    49,723Accrued investment income
    
    
    8,432
    
    
    
    7,433Reinsurance recoverable
    
    
    9,397
    
    
    
    9,729Deferred policy acquisition costs
    
    
    128,325
    
    
    
    125,684Cost of customer relationships acquired
    
    
    30,962
    
    
    
    31,631Goodwill
    
    
    17,160
    
    
    
    17,160Other intangible assets
    
    
    1,012
    
    
    
    1,019Federal income tax receivable
    
    
    
    
    
    
    1,914Property and equipment, net
    
    
    7,389
    
    
    
    7,101Due premiums, net (less $1,498 and $1,568 allowance for doubtful accounts
in 2011 and 2010, respectively)
    
    
    8,184
    
    
    
    8,537Prepaid expenses
    
    
    1,850
    
    
    
    474Other assets
    
    
    728
    
    
    
    406Total assets
    
    $
    1,009,494
    
    
    
    986,506
 See accompanying notes to consolidated financial statements.
    
    (Continued)
  2




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 Consolidated Statements of Financial Position, Continued
(In thousands, except share amounts)
 March 31,
    
    
    December 31,2011
    
    
    2010(Unaudited)Liabilities and Stockholders EquityLiabilities:Policy liabilities:Future policy benefit reserves:Life insurance
    
    $
    649,030
    
    
    
    637,140Annuities
    
    
    43,071
    
    
    
    42,096Accident and health
    
    
    5,705
    
    
    
    5,910Dividend accumulations
    
    
    9,817
    
    
    
    9,498Premiums paid in advance
    
    
    24,399
    
    
    
    23,675Policy claims payable
    
    
    10,815
    
    
    
    10,540Other policyholders funds
    
    
    8,085
    
    
    
    8,191Total policy liabilities
    
    
    750,922
    
    
    
    737,050Commissions payable
    
    
    2,363
    
    
    
    2,538Federal income tax payable
    
    
    128
    
    
    
    Deferred federal income tax
    
    
    9,806
    
    
    
    9,410Payable for securities in process of settlement
    
    
    5,973
    
    
    
    Warrants outstanding
    
    
    1,188
    
    
    
    1,587Other liabilities
    
    
    8,655
    
    
    
    8,287Total liabilities
    
    
    779,035
    
    
    
    758,872Commitments and contingencies (Note 8)Stockholders equity:Common stock:Class A, no par value, 100,000,000 shares authorized,
51,822,497 shares issued in 2011 and 2010,
including shares in treasury of 3,135,738 in 2011
and 2010
    
    
    256,703
    
    
    
    256,703Class B, no par value, 2,000,000 shares authorized, 1,001,714
shares issued and outstanding in 2011 and 2010
    
    
    3,184
    
    
    
    3,184Accumulated deficit
    
    
    (20,801
    )
    
    
    (22,581
    )Accumulated other comprehensive income:Unrealized gains on securities, net of tax
    
    
    2,384
    
    
    
    1,339241,470
    
    
    
    238,645Treasury stock, at cost
    
    
    (11,011
    )
    
    
    (11,011
    )Total stockholders equity
    
    
    230,459
    
    
    
    227,634Total liabilities and stockholders equity
    
    $
    1,009,494
    
    
    
    986,506
   3




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 
 Consolidated Statements of Operations

Three Months Ended March 31,
(In thousands, except per share amounts)
(Unaudited)
 2011
    
    
    2010Revenues:Premiums:Life insurance
    
    $
    35,611
    
    
    
    33,596Accident and health insurance
    
    
    372
    
    
    
    414Property insurance
    
    
    1,245
    
    
    
    1,180Net investment income
    
    
    7,514
    
    
    
    8,349Realized gains (losses), net
    
    
    19
    
    
    
    59Decrease (increase) in fair value of warrants
    
    
    399
    
    
    
    (114
    )Other income
    
    
    123
    
    
    
    348Total revenues
    
    
    45,283
    
    
    
    43,832Benefits and expenses:Insurance benefits paid or provided:Claims and surrenders
    
    
    14,879
    
    
    
    15,577Increase in future policy benefit reserves
    
    
    12,318
    
    
    
    9,545Policyholders dividends
    
    
    1,662
    
    
    
    1,570Total insurance benefits paid or provided
    
    
    28,859
    
    
    
    26,692Commissions
    
    
    9,072
    
    
    
    8,128Other underwriting, acquisition and insurance expenses
    
    
    6,610
    
    
    
    6,853Capitalization of deferred policy acquisition costs
    
    
    (7,165
    )
    
    
    (5,995
    )Amortization of deferred policy acquisition costs
    
    
    4,520
    
    
    
    4,944Amortization of cost of customer relationships acquired
and other intangibles
    
    
    654
    
    
    
    838Total benefits and expenses
    
    
    42,550
    
    
    
    41,460Income before federal income tax
    
    
    2,733
    
    
    
    2,372Federal income tax expense (benefit)
    
    
    953
    
    
    
    767Net income (loss)
    
    $
    1,780
    
    
    
    1,605Net income (loss) applicable to common stockholders
    
    $
    1,780
    
    
    
    1,605Per Share Amounts:Basic earnings per share of Class A common stock
    
    $
    0.04
    
    
    
    0.03Basic earnings per share of Class B common stock
    
    $
    0.02
    
    
    
    0.02Diluted earnings per share of Class A common stock
    
    $
    0.03
    
    
    
    0.03Diluted earnings per share of Class B common stock
    
    $
    0.01
    
    
    
    0.02
   4




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 
 Consolidated Statements of Cash Flows

Three Months Ended March 31,
(In thousands)
(Unaudited)
 2011
    
    
    2010Cash flows from operating activities:Net income
    
    $
    1,780
    
    
    
    1,605Adjustments to reconcile net income to net cash
provided by operating activities:Net realized losses (gains) on sale of investments
and other assets
    
    
    (19
    )
    
    
    (59
    )Net deferred policy acquisition costs
    
    
    (2,645
    )
    
    
    (1,051
    )Amortization of cost of customer relationships
acquired and other intangibles
    
    
    654
    
    
    
    838Increase (decrease) in fair value of warrants
    
    
    (399
    )
    
    
    114Depreciation
    
    
    205
    
    
    
    274Amortization of premiums and discounts on
fixed maturities and short-term investments
    
    
    1,240
    
    
    
    585Deferred federal income tax benefit
    
    
    (166
    )
    
    
    (995
    )Change in:Accrued investment income
    
    
    (999
    )
    
    
    (1,227
    )Reinsurance recoverable
    
    
    332
    
    
    
    241Due premiums
    
    
    353
    
    
    
    560Future policy benefit reserves
    
    
    12,100
    
    
    
    9,339Other policyholders liabilities
    
    
    1,212
    
    
    
    1,401Federal income tax receivable
    
    
    2,042
    
    
    
    2,633Commissions payable and other liabilities
    
    
    193
    
    
    
    (1,054
    )Other, net
    
    
    (1,554
    )
    
    
    (590
    )Net cash provided by (used in) operating activities
    
    
    14,329
    
    
    
    12,614Cash flows from investing activities:Purchase of fixed maturities, held-to-maturity
    
    
    (5,973
    )
    
    
    (4,095
    )Calls of fixed maturities, held-to-maturity
    
    
    19,000
    
    
    
    8,000Sale of fixed maturities, available-for-sale
    
    
    
    
    
    
    2,126Maturity and calls of fixed maturities, available-for-sale
    
    
    8,871
    
    
    
    29,216Purchase of fixed maturities, available-for-sale
    
    
    (47,922
    )
    
    
    (49,643
    )Sale of equity securities, available-for-sale
    
    
    
    
    
    
    104Calls of equity securities, available-for-sale
    
    
    150
    
    
    
    Purchase of equity securities, available-for-sale
    
    
    
    
    
    
    (49
    )Principal payments on mortgage loans
    
    
    11
    
    
    
    13Increase in policy loans
    
    
    (721
    )
    
    
    (986
    )Sale of other long-term investments and property
and equipment
    
    
    1
    
    
    
    Purchase of other long-term investments and property and
equipment
    
    
    (579
    )
    
    
    (834
    )Maturity of short-term investments
    
    
    
    
    
    
    2,500Net cash provided by (used in) investing activities
    
    
    (27,162
    )
    
    
    (13,648
    )
 See accompanying notes to consolidated financial statements.
    
    (Continued)
  5




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 Consolidated Statements of Cash Flows, Continued
Three Months Ended March 31,
(In thousands)
(Unaudited)
 2011
    
    
    2010Cash flows from financing activities:Annuity deposits
    
    $
    1,560
    
    
    
    1,197Annuity withdrawals
    
    
    (1,000
    )
    
    
    (765
    )Net cash provided by (used in) financing activities
    
    
    560
    
    
    
    432Net increase (decrease) in cash and cash equivalents
    
    
    (12,273
    )
    
    
    (602
    )Cash and cash equivalents at beginning of year
    
    
    49,723
    
    
    
    48,625Cash and cash equivalents at end of period
    
    $
    37,450
    
    
    
    48,023Supplemental disclosures of operating activities:Cash paid (recovered) during the period for income taxes
    
    $
    (923
    )
    
    
    (871
    )
 Supplemental Disclosures of Non-Cash Investing Activities:
    6




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 
 Notes to Consolidated Financial Statements
 March 31, 2011
 (Unaudited)
 (1)
    
    Financial Statements
 Basis of Presentation and Consolidation
 The accompanying consolidated financial statements of the Company and its wholly owned
subsidiaries have been prepared in conformity with U.S. Generally Accepted Accounting Principles
(U.S. GAAP).
 The consolidated financial statements include the accounts and operations of Citizens, Inc.
(Citizens), a Colorado corporation, and its wholly-owned subsidiaries, CICA Life Insurance
Company of America (CICA), Computing Technology, Inc. (CTI), Insurance Investors, Inc.
(III), Citizens National Life Insurance Company (CNLIC), Integrity Capital Corporation
(ICC), Integrity Capital Insurance Company (ICIC), Security Plan Life Insurance Company
(SPLIC) and Security Plan Fire Insurance Company (SPFIC). All significant inter-company
accounts and transactions have been eliminated. Citizens and its wholly owned consolidated
subsidiaries are collectively referred to as the Company, we, or our.
 The consolidated statements of financial position for March 31, 2011, the consolidated
statements of operations for the three-month periods ended March 31, 2011 and 2010, and the
consolidated statements of cash flows for the three-month period then ended have been prepared
by the Company without audit. In the opinion of management, all adjustments to present fairly
the financial position, results of operations, and changes in cash flows at March 31, 2011 and
for comparative periods have been made.
 We provide primarily, life insurance policies through four of our subsidiaries  CICA, SPLIC,
CNLIC and ICIC as well as a small amount of heath insurance policies through CICA and CNLIC.
CICA, CNLIC and ICIC issue ordinary whole-life policies, burial insurance, pre-need policies,
and accident and health related policies, throughout the midwest and southern United States.
CICA also issues ordinary whole-life policies to non-U.S. residents. SPLIC offers final expense
and home service life insurance in Louisiana, Arkansas and Mississippi and SPFIC, a wholly owned
subsidiary of SPLIC, writes a limited amount of property insurance in Louisiana.
 CTI provides data processing systems and services as well as furniture and equipment to the
Company. III provides aviation transportation to the Company.
 The Company recorded adjustments in the current quarter of 2011 related to the reserve
calculation of certain SPLIC policies as of December 31, 2010 that resulted in a pre-tax
decrease in reserves of $0.2 million. In addition, the Company utilized system generated
information to refine estimates from December 31, 2010, which resulted in a decrease of deferred
acquisition costs of $0.3 million and a reserve decrease of $0.1 million reflected in the
current reporting period. The resulting net income impact totaled $50,237 in the current
period.
 Use of Estimates
 The preparation of financial statements, in conformity with U.S. GAAP, requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
 The most significant estimates include those used in the evaluation of other-than-temporary
impairments on debt and equity securities and valuation allowances on investments, goodwill
impairment, valuation allowance on deferred tax assets, and contingencies relating to litigation
and regulatory matters. Certain of these estimates are particularly sensitive to market
conditions, and deterioration and/or volatility in the worldwide debt or equity markets could
have a material impact on the Consolidated Financial Statements.
  7




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2011
(Unaudited)
 Reclassification
 The Company recorded reclassifications related to DAC amounts capitalized and amortized to
properly reflect the amount used to develop the DAC asset balance and to provide consistent
presentation with the current year. We recorded an increase to DAC capitalized of $0.6 million
and an increase in amortization for the same amount for the first quarter of 2010. The Company
also recorded a reclassification of $0.1 million from other underwriting, acquisitions and
insurance expenses to claims and surrenders relating to a legal settlement on a reinsured
accident and health policy for the first quarter of 2010.
 Significant Accounting Policies
 For a description of significant accounting policies, see Note 1 of the Notes to Consolidated
Financial Statements included in our 2010 Form 10-K Annual Report, which should be read in
conjunction with these accompanying Consolidated Financial Statements.
 (2)
    
    Accounting Pronouncements
 Accounting Standards Not Yet Adopted
 In October 2010, the FASB issued guidance modifying the definition of the types of costs
incurred by insurance entities that can be capitalized in the acquisition of new and renewal
contracts. The guidance specifies that the costs must be based on successful efforts. The
guidance also specifies that advertising costs should be included as deferred acquisition costs
only when the direct-response advertising accounting criteria are met. If application of the
guidance would result in the capitalization of acquisition costs that had not been capitalized
prior to adoption, the entity may elect not to capitalize those additional costs. The new
guidance is effective for reporting periods beginning after December 15, 2011 and should be
applied prospectively, with retrospective application permitted. The Company is in the process
of evaluating the impact of adoption of the guidance on the results of operations and financial
position.
 Accounting Standards Recently Adopted
 In December 2010, the FASB issued disclosure guidance for entities that enter into business
combinations that are material. The guidance specifies that if an entity presents comparative
financial statements, the entity should disclose pro forma revenue and earnings of the combined
entity as though the business combination that occurred during the current year had occurred as
of the beginning of the comparable prior annual reporting period only. The guidance expands the
supplemental pro forma disclosures to include a description of the nature and amount of
material, nonrecurring pro forma adjustments directly attributable to the business combination.
The Company will apply the guidance to any business combinations entered into on or after
January 1, 2011.
  8




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
March 31, 2011
(Unaudited)
 (3)
    
    Segment Information
 The 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 consolidated financial statements.
The Company evaluates profit and loss performance based on U.S. GAAP income before federal
income taxes for its three reportable segments.
 The Company has no reportable differences between segments and consolidated operations.
 Three Months Ended March 31, 2011Home
    
    
    OtherLife
    
    
    Service
    
    
    Non-InsuranceInsurance
    
    
    Insurance
    
    
    Enterprises
    
    
    Consolidated(In thousands)Revenues:Premiums
    
    $
    26,520
    
    
    
    10,708
    
    
    
    
    
    
    
    37,228Net investment income
    
    
    4,081
    
    
    
    3,237
    
    
    
    196
    
    
    
    7,514Realized gains (losses), net
    
    
    
    
    
    
    19
    
    
    
    
    
    
    
    19Decrease (increase) in fair value of warrants
    
    
    
    
    
    
    
    
    
    
    399
    
    
    
    399Other income
    
    
    87
    
    
    
    8
    
    
    
    28
    
    
    
    123Total revenue
    
    
    30,688
    
    
    
    13,972
    
    
    
    623
    
    
    
    45,283Benefits and expenses:Insurance benefits paid or provided:Claims and surrenders
    
    
    9,401
    
    
    
    5,478
    
    
    
    
    
    
    
    14,879Increase in future policy
benefit reserves
    
    
    11,809
    
    
    
    509
    
    
    
    
    
    
    
    12,318Policyholders dividends
    
    
    1,643
    
    
    
    19
    
    
    
    
    
    
    
    1,662Total insurance benefits paid or provided
    
    
    22,853
    
    
    
    6,006
    
    
    
    
    
    
    
    28,859Commissions
    
    
    5,342
    
    
    
    3,730
    
    
    
    
    
    
    
    9,072Other underwriting, acquisition and insurance
expenses
    
    
    2,954
    
    
    
    3,082
    
    
    
    574
    
    
    
    6,610Capitalization of deferred policy acquisition costs
    
    
    (5,427
    )
    
    
    (1,738
    )
    
    
    
    
    
    
    (7,165
    )Amortization of deferred policy acquisition costs
    
    
    3,838
    
    
    
    682
    
    
    
    
    
    
    
    4,520Amortization of cost of customer relationships
acquired and other intangibles
    
    
    223
    
    
    
    431
    
    
    
    
    
    
    
    654Total benefits and expenses
    
    
    29,783
    
    
    
    12,193
    
    
    
    574
    
    
    
    42,550Income (loss) before income tax expense
    
    $
    905
    
    
    
    1,779
    
    
    
    49
    
    
    
    2,733
  9




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
March 31, 2011
(Unaudited)
 Three Months Ended March 31, 2010Home
    
    
    OtherLife
    
    
    Service
    
    
    Non-InsuranceInsurance
    
    
    Insurance
    
    
    Enterprises
    
    
    Consolidated(In thousands)Revenues:Premiums
    
    $
    24,769
    
    
    
    10,421
    
    
    
    
    
    
    
    35,190Net investment income
    
    
    4,711
    
    
    
    3,532
    
    
    
    106
    
    
    
    8,349Realized gains (losses), net
    
    
    (29
    )
    
    
    133
    
    
    
    (45
    )
    
    
    59Decrease (increase) in fair value of warrants
    
    
    
    
    
    
    
    
    
    
    (114
    )
    
    
    (114
    )Other income
    
    
    277
    
    
    
    49
    
    
    
    22
    
    
    
    348Total revenue
    
    
    29,728
    
    
    
    14,135
    
    
    
    (31
    )
    
    
    43,832Benefits and expenses:Insurance benefits paid or provided:Claims and surrenders
    
    
    9,899
    
    
    
    5,678
    
    
    
    
    
    
    
    15,577Increase in future policy
benefit reserves
    
    
    8,662
    
    
    
    883
    
    
    
    
    
    
    
    9,545Policyholders dividends
    
    
    1,542
    
    
    
    28
    
    
    
    
    
    
    
    1,570Total insurance benefits paid or provided
    
    
    20,103
    
    
    
    6,589
    
    
    
    
    
    
    
    26,692Commissions
    
    
    4,505
    
    
    
    3,623
    
    
    
    
    
    
    
    8,128Other underwriting, acquisition and insurance
expenses
    
    
    2,977
    
    
    
    3,641
    
    
    
    235
    
    
    
    6,853Capitalization of deferred policy acquisition costs
    
    
    (4,464
    )
    
    
    (1,531
    )
    
    
    
    
    
    
    (5,995
    )Amortization of deferred policy acquisition costs
    
    
    4,659
    
    
    
    285
    
    
    
    
    
    
    
    4,944Amortization of cost of customer relationships
acquired and other intangibles
    
    
    330
    
    
    
    508
    
    
    
    
    
    
    
    838Total benefits and expenses
    
    
    28,110
    
    
    
    13,115
    
    
    
    235
    
    
    
    41,460Income (loss) before income tax expense
    
    $
    1,618
    
    
    
    1,020
    
    
    
    (266
    )
    
    
    2,372
 (4)
    
    Total Comprehensive Income
 Three Months Ended March 31,2011
    
    
    2010(In thousands)Net income (loss)
    
    $
    1,780
    
    
    
    1,605Other comprehensive income net of effects
of deferred acquisition costs and taxes:Unrealized gains (losses) on
available-for-sale securities
    
    
    1,607
    
    
    
    6,451Tax (expense) benefit
    
    
    (562
    )
    
    
    (1,789
    )Other comprehensive income (loss)
    
    
    1,045
    
    
    
    4,662Total comprehensive income (loss)
    
    $
    2,825
    
    
    
    6,267
  10




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
March 31, 2011
(Unaudited)
 (5)
    
    Earnings per Share
 The following table sets forth the computation of basic and diluted earnings per share for
the period indicated.
 Three Months Ended March 31,2011
    
    
    2010(In thousands, except per share amounts)Basic and diluted earnings per share:Numerator:Net income allocated to Class A common stock
    
    $
    1,762
    
    
    
    1,589Net income allocated to Class B common stock
    
    
    18
    
    
    
    16Net income available to common stockholders
    
    $
    1,780
    
    
    
    1,605Denominator:Weighted average shares of Class A outstanding -
basic
    
    
    48,687
    
    
    
    48,686Weighted average shares of Class B outstanding -
basic and diluted
    
    
    1,002
    
    
    
    1,002Total weighted average shares outstanding - basic
    
    
    49,689
    
    
    
    49,688Basic earnings per share of Class A common stock
    
    $
    0.04
    
    
    
    0.03Basic earnings per share of Class B common stock
    
    $
    0.02
    
    
    
    0.02Diluted earnings per share of Class A common stock
    
    $
    0.03
    
    
    
    0.03Diluted earnings per share of Class B common stock
    
    $
    0.01
    
    
    
    0.02
 For the three months ended March 31, 2011, certain warrants associated with the Convertible
Preferred Stock portfolio became dilutive. As such, the diluted weighted average shares of
Class A common stock outstanding for the period was 48,731,000.
 For the three months ended March 31, 2010, the warrants associated with the Convertible
Preferred Stock portfolio were anti-dilutive. As such, the diluted weighted average shares
of Class A common stock for the period was 48,686,000.
  11




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
March 31, 2011
(Unaudited)
 (6)
    
    Investments
 The Company invests primarily in fixed maturity securities, which totaled 86.3% of total
investments and cash and cash equivalents at March 31, 2011.
 March 31, 2011
    
    
    December 31, 2010Carrying
    
    
    % of Total
    
    
    Carrying
    
    
    % of TotalValue
    
    
    Carrying Value
    
    
    Value
    
    
    Carrying Value(In thousands)
    
    
    
    
    
    
    (In thousands)Fixed maturity securities
    
    $
    687,692
    
    
    
    86.3
    %
    
    $
    655,969
    
    
    
    84.6
    %Equity securities
    
    
    23,815
    
    
    
    3.0
    
    
    
    23,304
    
    
    
    3.0Mortgage loans
    
    
    1,478
    
    
    
    0.2
    
    
    
    1,489
    
    
    
    0.2Policy loans
    
    
    36,306
    
    
    
    4.6
    
    
    
    35,585
    
    
    
    4.6Real estate and other long-term
investments
    
    
    9,314
    
    
    
    1.2
    
    
    
    9,348
    
    
    
    1.2Cash and cash equivalents
    
    
    37,450
    
    
    
    4.7
    
    
    
    49,723
    
    
    
    6.4Total cash, cash equivalents and
investments
    
    $
    796,055
    
    
    
    100.0
    %
    
    $
    775,418
    
    
    
    100.0
    %
 Cash balances decreased in 2011 compared to December 31, 2010 as available funds were
invested into fixed maturity securities.
  12




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
March 31, 2011
(Unaudited)
 The following tables represent gross unrealized gains and losses for fixed maturities and
equity securities as of the periods indicated.
 March 31, 2011Cost or
    
    
    Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    Value(In thousands)Fixed maturities available-for-sale:U.S. Treasury securities
    
    $
    10,469
    
    
    
    1,759
    
    
    
    1
    
    
    
    12,227U.S. Government-sponsored enterprises
    
    
    312,801
    
    
    
    372
    
    
    
    6,911
    
    
    
    306,262States of the United States and political
subdivisions of the states
    
    
    127,659
    
    
    
    817
    
    
    
    4,748
    
    
    
    123,728Foreign governments
    
    
    105
    
    
    
    25
    
    
    
    
    
    
    
    130Corporate
    
    
    158,591
    
    
    
    7,187
    
    
    
    926
    
    
    
    164,852Securities not due at a single maturity date
    
    
    12,657
    
    
    
    776
    
    
    
    18
    
    
    
    13,415Total fixed maturities available-for-sale
    
    
    622,282
    
    
    
    10,936
    
    
    
    12,604
    
    
    
    620,614Fixed maturities held-to-maturity:U.S. Government-sponsored enterprises
    
    
    67,078
    
    
    
    118
    
    
    
    1,585
    
    
    
    65,611Total fixed maturities
    
    $
    689,360
    
    
    
    11,054
    
    
    
    14,189
    
    
    
    686,225Total equity securities
    
    $
    19,729
    
    
    
    4,086
    
    
    
    
    
    
    
    23,815
 December 31, 2010Cost or
    
    
    Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    Value(In thousands)Fixed maturities available-for-sale:U.S. Treasury securities
    
    $
    10,908
    
    
    
    1,917
    
    
    
    
    
    
    
    12,825U.S. Government-sponsored enterprises
    
    
    290,904
    
    
    
    441
    
    
    
    6,390
    
    
    
    284,955States of the United States and political
subdivisions of the states
    
    
    107,214
    
    
    
    539
    
    
    
    6,034
    
    
    
    101,719Foreign governments
    
    
    106
    
    
    
    26
    
    
    
    
    
    
    
    132Corporate
    
    
    155,277
    
    
    
    7,237
    
    
    
    1,216
    
    
    
    161,298Securities not due at a single maturity date
    
    
    14,003
    
    
    
    833
    
    
    
    28
    
    
    
    14,808Total fixed maturities available-for-sale
    
    
    578,412
    
    
    
    10,993
    
    
    
    13,668
    
    
    
    575,737Fixed maturities held-to-maturity:U.S. Government-sponsored enterprises
    
    
    80,232
    
    
    
    272
    
    
    
    1,401
    
    
    
    79,103Total fixed maturities
    
    $
    658,644
    
    
    
    11,265
    
    
    
    15,069
    
    
    
    654,840Total equity securities
    
    $
    19,844
    
    
    
    3,460
    
    
    
    
    
    
    
    23,304
 Almost 93% or $11.7 million of the Companys
mortgage-backed security holdings totaling $12.7 million are residential U.S. Government-sponsored
issues. Mortgage-backed securities are also referred to as securities not due at a single maturity
date throughout this report. The majority of the Companys equity securities are diversified
mutual funds.
 Valuation of Investments in Fixed Maturity and Equity Securities
 The Company monitors all debt and equity securities on an on-going basis relative to changes
in credit ratings, market prices, earnings trends and financial performance, in addition to
specific region or industry reviews. The assessment of whether impairments have occurred is
based on a case-by-case evaluation of underlying reasons for the decline in fair value. The
Company determines other-than-temporary impairment by reviewing relevant evidence related to
the specific security issuer as well as the Companys intent to sell the security, or if it
is more likely than not that the Company would be required to sell a security before recovery
of its amortized cost.
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
March 31, 2011
(Unaudited)
 When an other-than-temporary impairment has occurred, the amount of the other-than-temporary
impairment recognized in earnings depends on whether the Company intends to sell the security
or more likely than not will be required to sell the security before recovery of its
amortized cost basis. If the Company intends to sell the security or more likely than not
will be required to sell the security before recovery of its amortized cost basis, the
other-than-temporary impairment is recognized in earnings equal to the entire difference
between the investments cost and its fair value at the balance sheet date. If the Company
does not intend to sell the security and it is not more likely than not that the Company will
be required to sell the security before recovery of its amortized cost basis, the
other-than-temporary impairment is separated into the following: a) the amount representing
the credit loss, and b) the amount related to all other factors. The amount of the total
other-than-temporary impairment related to the credit loss is recognized in earnings. The
amount of the total other-than-temporary impairment related to other factors is recognized in
other comprehensive income, net of applicable taxes. The previous amortized cost basis less
the other-than-temporary impairment recognized in earnings becomes the new amortized cost
basis of the investment. The new amortized cost basis is not adjusted for subsequent
recoveries in fair value.
 The Company evaluates whether a credit impairment exists for debt securities by considering
primarily the following factors: (a) changes in the financial condition of the securitys
underlying collateral, (b) whether the issuer is current on contractually obligated interest
and principal payments, (c) changes in the financial condition, credit rating and near-term
prospects of the issuer, (d) the extent to which the fair value has been less than the
amortized cost of the security and (e) the payment structure of the security. The Companys
best estimate of expected future cash flows used to determine the credit loss amount is a
quantitative and qualitative process. Quantitative review includes information received from
third party sources such as financial statements, pricing and rating changes, liquidity and
other statistical information. Qualitative factors include judgments related to business
strategies, economic impacts on the issuers and overall judgment related to estimates and
industry factors. The Companys best estimate of future cash flows involves assumptions
including, but not limited to, various performance indicators, such as historical and
projected default and recovery rates, credit ratings, and current delinquency rates. These
assumptions require the use of significant management judgment and include the probability of
issuer default and estimates regarding timing and amount of expected recoveries, which may
include estimating the underlying collateral value. In addition, projections of expected
future debt security cash flows may change based upon new information regarding the
performance of the issuer.
 The primary factors considered in evaluating whether an impairment exists for an equity
security include, but are not limited to: (a) the length of time and the extent to which the
fair value has been less than the cost of the security, (b) changes in the financial
condition, credit rating and near-term prospects of the issuer, (c) whether the issuer is
current on contractually obligated payments, and (d) the intent and ability of the Company to
retain the investment for a period of time sufficient to allow for recovery.
 The Company did not recognize any other-than-temporary impairments (OTTI) items during the
quarters ended March 31, 2011 and March 31, 2010.
  14




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
March 31, 2011
(Unaudited)
 The tables below present the fair values and gross unrealized losses of fixed maturities and
equity securities that have remained in a continuous unrealized loss position for the periods
indicated.
 March 31, 2011Less than 12 months
    
    
    Greater than 12 months
    
    
    TotalFair
    
    
    Unrealized
    
    
    # of
    
    
    Fair
    
    
    Unrealized
    
    
    # of
    
    
    Fair
    
    
    Unrealized
    
    
    # ofValue
    
    
    Losses
    
    
    Securities
    
    
    Value
    
    
    Losses
    
    
    Securities
    
    
    Value
    
    
    Losses
    
    
    Securities(In thousands, except for # of securities)Available-for-sale securities:U.S. Treasury securities
    
    $
    101
    
    
    
    1
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    101
    
    
    
    1
    
    
    
    1U.S. Government-sponsored
enterprises
    
    
    258,396
    
    
    
    6,911
    
    
    
    185
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    258,396
    
    
    
    6,911
    
    
    
    185Securities issued by states and
political subdivisions
    
    
    66,177
    
    
    
    2,113
    
    
    
    56
    
    
    
    9,753
    
    
    
    2,635
    
    
    
    8
    
    
    
    75,930
    
    
    
    4,748
    
    
    
    64Corporate
    
    
    21,417
    
    
    
    743
    
    
    
    17
    
    
    
    3,070
    
    
    
    183
    
    
    
    3
    
    
    
    24,487
    
    
    
    926
    
    
    
    20Securities not due at a single
maturity date
    
    
    86
    
    
    
    
    
    
    
    1
    
    
    
    186
    
    
    
    18
    
    
    
    4
    
    
    
    272
    
    
    
    18
    
    
    
    5Total available-for-sale
    
    
    346,177
    
    
    
    9,768
    
    
    
    260
    
    
    
    13,009
    
    
    
    2,836
    
    
    
    15
    
    
    
    359,186
    
    
    
    12,604
    
    
    
    275Held-to-maturity securities:U.S. Government-sponsored
enterprises
    
    
    49,462
    
    
    
    1,585
    
    
    
    24
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    49,462
    
    
    
    1,585
    
    
    
    24Total fixed maturities
    
    $
    395,639
    
    
    
    11,353
    
    
    
    284
    
    
    
    13,009
    
    
    
    2,836
    
    
    
    15
    
    
    
    408,648
    
    
    
    14,189
    
    
    
    299
 December 31, 2010Less than 12 months
    
    
    Greater than 12 months
    
    
    TotalFair
    
    
    Unrealized
    
    
    # of
    
    
    Fair
    
    
    Unrealized
    
    
    # of
    
    
    Fair
    
    
    Unrealized
    
    
    # ofValue
    
    
    Losses
    
    
    Securities
    
    
    Value
    
    
    Losses
    
    
    Securities
    
    
    Value
    
    
    Losses
    
    
    Securities(In thousands, except for # of securities)Available-for-sale securities:U.S. Government-sponsored
enterprises
    
    $
    234,994
    
    
    
    6,390
    
    
    
    170
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    234,994
    
    
    
    6,390
    
    
    
    170Securities issued by states and
political subdivisions
    
    
    66,836
    
    
    
    3,270
    
    
    
    60
    
    
    
    9,626
    
    
    
    2,764
    
    
    
    8
    
    
    
    76,462
    
    
    
    6,034
    
    
    
    68Corporate
    
    
    28,072
    
    
    
    1,040
    
    
    
    21
    
    
    
    2,443
    
    
    
    176
    
    
    
    7
    
    
    
    30,515
    
    
    
    1,216
    
    
    
    28Securities not due at a single
maturity date
    
    
    569
    
    
    
    8
    
    
    
    2
    
    
    
    201
    
    
    
    20
    
    
    
    5
    
    
    
    770
    
    
    
    28
    
    
    
    7Total available-for-sale
    
    
    330,471
    
    
    
    10,708
    
    
    
    253
    
    
    
    12,270
    
    
    
    2,960
    
    
    
    20
    
    
    
    342,741
    
    
    
    13,668
    
    
    
    273Held-to-maturity securities:U.S. Government-sponsored
enterprises
    
    
    45,699
    
    
    
    1,401
    
    
    
    18
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    45,699
    
    
    
    1,401
    
    
    
    18Total fixed maturities
    
    $
    376,170
    
    
    
    12,109
    
    
    
    271
    
    
    
    12,270
    
    
    
    2,960
    
    
    
    20
    
    
    
    388,440
    
    
    
    15,069
    
    
    
    291
 As of March 31, 2011 and December 31, 2010, there are no unrealized losses on the
Companys equity securities.
  15




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
March 31, 2011
(Unaudited)
 As of March 31, 2011, the Company had 15 available-for-sale securities in an unrealized loss
position for greater than 12 months, which were municipal, corporate and mortgage-backed
securities. The Company has reviewed these securities and determined that no
other-than-temporary impairment exists based on our evaluations of the credit worthiness of
the issuers and due to the fact that we do not intend to sell the investments, nor is it
likely that we would be required to sell these investments before recovery of their amortized
cost bases, which may be maturity.
 The amortized cost and fair value of fixed maturity securities at March 31, 2011 by
contractual maturity are shown below. Actual maturities may differ from contractual
maturities because borrowers may have the right to call or prepay obligations with or without
call or prepayment penalties. The Company has experienced significant issuer calls over the
past two years as a result of the declining interest rate environment.
 March 31,
2011Amortized
    
    
    FairCost
    
    
    Value(In thousands)Available-for-sale securities:Due in one year or less
    
    $
    61,192
    
    
    
    60,053Due after one year through five years
    
    
    40,264
    
    
    
    41,690Due after five years through ten years
    
    
    113,821
    
    
    
    115,003Due after ten years
    
    
    394,348
    
    
    
    390,453Total available-for-sale securities
    
    
    609,625
    
    
    
    607,199Held-to-maturity securities:Due after ten years
    
    
    67,078
    
    
    
    65,611Securities not due at a single maturity date
    
    
    12,657
    
    
    
    13,415Total fixed maturities
    
    $
    689,360
    
    
    
    686,225
 The securities not due at a single maturity date are primarily mortgage-backed obligations of
U.S. Government-sponsored enterprises and corporate securities.
 The Company uses the specific identification method to determine the cost basis used in the
calculation of realized gains and losses related to security sales. Proceeds and gross
realized gains from sales of securities for the three months ended March 31, 2011 and 2010
are summarized as follows:
 Fixed Maturities Available-for-Sale
    
    
    Equity SecuritiesThree Months Ended
    
    
    Three Months EndedMarch 31,
    
    
    March 31,2011
    
    
    2010
    
    
    2011
    
    
    2010(In thousands)
    
    
    (In thousands)Proceeds
    
    $
    
    
    
    
    2,126
    
    
    $
    
    
    
    
    104Gross realized gains
    
    $
    
    
    
    
    127
    
    
    $
    
    
    
    
    25
 No securities were sold for realized losses or sold from the held-to-maturity portfolio
during the three months ended March 31, 2011 or 2010.
  16




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
March 31, 2011
(Unaudited)
 (7)
    
    Fair Value Measurements
 Fair value is the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date. We
hold available-for-sale fixed maturity securities and equity securities, which are carried at
fair value.
 Fair value measurements are generally based upon observable and unobservable inputs.
Observable inputs reflect market data obtained from independent sources, while unobservable
inputs reflect our view of market assumptions in the absence of observable market
information. We utilize valuation techniques that maximize the use of observable inputs and
minimize the use of unobservable inputs. All assets and liabilities carried at fair value
are required to be classified and disclosed in one of the following three categories:
 
    
    Level 1  Quoted prices for identical instruments in active markets.
 
    
    Level 2  Quoted prices for similar instruments in active markets; quoted prices
for identical or similar instruments in markets that are not active; and
model-derived valuations whose inputs or whose significant value drivers are
observable.
 
    
    Level 3  Instruments whose significant value drivers are unobservable.
 Level 1 primarily consists of financial instruments whose value is based on quoted
market prices such as U.S. Treasury securities and actively traded stock and mutual fund
investments.
 Level 2 includes those financial instruments that are valued by independent pricing services
or broker quotes. These models are primarily industry-standard models that consider various
inputs, such as interest rates, credit spreads and foreign exchange rates for the underlying
financial instruments. All significant inputs are observable, or derived from observable
information in the marketplace or are supported by observable levels at which transactions
are executed in the marketplace. Financial instruments in this category primarily include
corporate fixed maturity securities, U.S. Government-sponsored enterprise securities,
municipal securities and certain mortgage and asset-backed securities.
 Level 3 is comprised of financial instruments whose fair value is estimated based on
non-binding broker prices utilizing significant inputs not based on or corroborated by
readily available market information. This category consists of two private placement
mortgage-backed securities where we cannot corroborate the significant valuation inputs with
market observable data.
  17




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)

March 31, 2011
(Unaudited)
 The following table sets forth our assets and liabilities that are measured at fair value on
a recurring basis as of the date indicated.
 Fair Value MeasurementsMarch 31, 2011TotalLevel 1
    
    
    Level 2
    
    
    Level 3
    
    
    Fair Value(In thousands)Financial assets:Fixed maturities available-for-sale:U.S. Treasury and U.S.
Government-sponsored enterprises
    
    $
    12,227
    
    
    
    306,262
    
    
    
    
    
    
    
    318,489Corporate
    
    
    
    
    
    
    164,852
    
    
    
    
    
    
    
    164,852Municipal bonds
    
    
    
    
    
    
    123,728
    
    
    
    
    
    
    
    123,728Mortgage-backed
    
    
    
    
    
    
    12,917
    
    
    
    498
    
    
    
    13,415Foreign governments
    
    
    
    
    
    
    130
    
    
    
    
    
    
    
    130Total fixed maturities,
available-for-sale
    
    
    12,227
    
    
    
    607,889
    
    
    
    498
    
    
    
    620,614Total equity securities,
available-for-sale
    
    
    23,815
    
    
    
    
    
    
    
    
    
    
    
    23,815Total financial assets
    
    $
    36,042
    
    
    
    607,889
    
    
    
    498
    
    
    
    644,429Financial liabilities:Warrants outstanding
    
    $
    
    
    
    
    1,188
    
    
    
    
    
    
    
    1,188
 The following table sets forth our assets and liabilities that are measured at fair
value on a recurring basis as of the date indicated.
 Fair Value MeasurementsDecember 31, 2010TotalLevel 1
    
    
    Level 2
    
    
    Level 3
    
    
    Fair Value(In thousands)Financial assets:Fixed maturities available-for-sale:U.S. Treasury and U.S.
Government-sponsored enterprises
    
    $
    12,825
    
    
    
    284,955
    
    
    
    
    
    
    
    297,780Corporate
    
    
    
    
    
    
    161,298
    
    
    
    
    
    
    
    161,298Municipal bonds
    
    
    
    
    
    
    101,719
    
    
    
    
    
    
    
    101,719Mortgage-backed
    
    
    
    
    
    
    14,289
    
    
    
    519
    
    
    
    14,808Foreign governments
    
    
    
    
    
    
    132
    
    
    
    
    
    
    
    132Total fixed maturities, available-for-sale
    
    
    12,825
    
    
    
    562,393
    
    
    
    519
    
    
    
    575,737Total equity securities, available-for-sale
    
    
    23,304
    
    
    
    
    
    
    
    
    
    
    
    23,304Total financial assets
    
    $
    36,129
    
    
    
    562,393
    
    
    
    519
    
    
    
    599,041Financial liabilities:Warrants outstanding
    
    $
    
    
    
    
    1,587
    
    
    
    
    
    
    
    1,587
 Financial Instruments Valuation
 Fixed maturity securities, available-for-sale. At March 31, 2011, the fixed maturities,
valued using a third-party pricing source, totaled $607.9 million for Level 2 assets and
comprised 94.3% of total reported fair value. Fair values for Level 3 assets are based upon
unadjusted broker quotes that are non-binding. The valuations are reviewed and validated
quarterly through random testing by comparisons to separate pricing models, other third party
pricing services, and back tested to recent trades. For the three months ended March 31,
2011, there were no material changes to the valuation methods or assumptions used to
determine fair values, and no broker or third party prices were changed from the values
received.
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
March 31, 2011
(Unaudited)
 Equity securities, available-for-sale. Fair values of these securities are based upon quoted
market price and are classified as Level 1 assets.
 Warrants outstanding.Fair value of our warrants are based upon industry standard models
that consider various observable inputs and are classified as Level 2.
 The following table presents additional information about fixed maturity securities measured
at fair value on a recurring basis and for which we have utilized significant unobservable
(Level 3) inputs to determine fair value:
 Three Months Ended March 31,2011
    
    
    2010(In thousands)Balance at beginning of period
    
    $
    519
    
    
    
    577Total realized and unrealized losses:Included in net income
    
    
    
    
    
    
    Included in other comprehensive income
    
    
    (1
    )
    
    
    (1
    )Principal paydowns
    
    
    (20
    )
    
    
    (14
    )Transfer in and (out) of Level 3
    
    
    
    
    
    
    Balance at end of period
    
    $
    498
    
    
    
    562
 We review the fair value hierarchy classifications each reporting period. Changes in the
observability of the valuation attributes may result in a reclassification of certain
financial assets. Such reclassifications are reported as transfers in and out of Level 3 at
the beginning fair value for the reporting period in which the changes occur.
 Financial Instruments not Carried at Fair Value
 Estimates of fair values are made at a specific point in time, based on relevant market
prices and information about the financial instruments. The estimated fair values of
financial instruments presented below are not necessarily indicative of the amounts the
Company might realize in actual market transactions.
 The carrying amount and fair value for the financial assets and liabilities on the
consolidated balance sheets for the periods indicated are as follows:
 March 31, 2011
    
    
    December 31, 2010Carrying
    
    
    Fair
    
    
    Carrying
    
    
    FairValue
    
    
    Value
    
    
    Value
    
    
    Value(In thousands)Financial assets:Fixed maturities, held-to-maturity
    
    $
    67,078
    
    
    
    65,611
    
    
    
    80,232
    
    
    
    79,103Mortgage loans
    
    
    1,478
    
    
    
    1,430
    
    
    
    1,489
    
    
    
    1,433Policy loans
    
    
    36,306
    
    
    
    36,306
    
    
    
    35,585
    
    
    
    35,585Cash and cash equivalents
    
    
    37,450
    
    
    
    37,450
    
    
    
    49,723
    
    
    
    49,723Financial liabilities:Annuities
    
    
    43,071
    
    
    
    40,893
    
    
    
    42,096
    
    
    
    38,619
 Fair values for fixed income securities are based on quoted market prices. In cases
where quoted market prices are not available, fair values are based on estimates using
present value or other assumptions, including the discount rate and estimates of future cash
flows.
  19




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
March 31, 2011
(Unaudited)
 Mortgage loans are secured principally by residential and commercial properties.
Weighted average interest rates for these loans were approximately 6.7% per year as of March
31, 2011 and December 31, 2010, with maturities ranging from one to thirty years.
 Policy loans have a weighted average annual interest rate of 7.7% as of March 31, 2011 and
December 31, 2010, respectively, and have no specified maturity dates. The aggregate fair
value of policy loans approximates the carrying value reflected on the consolidated balance
sheet. These loans typically carry an interest rate that is at or above the crediting rate
applied to the related policy and contract reserves. Policy loans are an integral part of
the life insurance policies we have in force and cannot be valued separately and are not
marketable; therefore, the fair value of policy loans approximates the carrying value.
 For cash and cash equivalents, accrued investment income, reinsurance recoverable, other
assets, federal income tax payable and receivable, dividend accumulations, commissions
payable, amounts held on deposit, and other liabilities, the carrying amounts approximate
fair value because of the short maturity of such financial instruments.
 The fair value of the Companys liabilities under annuity contract policies was estimated at
March 31, 2011 using discounted cash flows. The fair value of liabilities under all
insurance contracts are taken into consideration in the overall management of interest rate
risk, which seeks to minimize exposure to changing interest rates through the matching of
investment maturities with amounts due under insurance contracts.
 (8)
    
    Legal Proceedings
 We are a defendant in a lawsuit filed on August 6, 1999 in the Texas District Court, Austin,
Texas, now styled Delia Bolanos Andrade, et al., Plaintiffs, v. Citizens Insurance Company of
America, et al., Defendantsin which a class was originally certified by the trial court and
reversed by the Texas Supreme Court in 2007 with an order to the trial court to conduct
further proceedings consistent with its ruling. The underlying lawsuit alleged that certain
life insurance policies CICA made available to non-U.S. residents, when combined with a
policy feature that allowed certain cash benefits 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 Texas securities laws. The remedy sought was rescission and return of the insurance
premium payments. On December 9, 2009, the trial court denied the recertification of the
class after conducting additional proceedings in accordance with the Texas Supreme Courts
ruling. The remaining plaintiffs must now proceed individually, and not as a class, if they
intend to pursue their cases against us. We intend to maintain a vigorous defense in any
remaining proceedings.
 In addition to the legal proceeding described above, we may from time to time be subject to a
variety of legal and regulatory actions relating to our future, current and past business
operations, including, but not limited to:
 
    
    disputes over insurance coverage or claims adjudication;
 
    
    regulatory compliance with insurance and securities laws in the United States
and in foreign countries;
 
    
    disputes with our marketing firms, consultants and employee agents over
compensation and termination of contracts and related claims;
 
    
    disputes regarding our tax liabilities;
 
    
    disputes relative to reinsurance and coinsurance agreements; and
 
    
    disputes relating to businesses acquired and operated by us.
 In the absence of countervailing considerations, we would expect to defend any such claims
vigorously. However, in doing so, we could incur significant defense costs, including not
only attorneys fees and other direct litigation costs, but also the expenditure of
substantial amounts of management time that otherwise would be devoted to our business. If
we suffer an adverse judgment as a result of any claim, it could have a material adverse
effect on our business, results of operations and financial condition.
  20




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
March 31, 2011
(Unaudited)
 (9)
    
    Convertible Preferred Stock
 In July 2004, the Company completed a private
placement of Series A-1 Convertible Preferred Stock (Series A-1 Preferred) to
four unaffiliated institutional investors. The investors were also issued unit warrants to purchase
Series A-2 Convertible Preferred Stock. In 2005, three of the four investors exercised their right
to purchase the Series A-2 Convertible Preferred Stock. We also issued to the investors warrants to purchase
shares of our Class A common stock at various exercise prices that range from $6.72 to $7.93,
with most of them striking at $6.95. The conversion, exercise and redemption prices, along with
the number of shares and warrants, were adjusted for stock dividends paid on December 31, 2004
and 2005.
 On July 13, 2009, the Company converted all of its outstanding Series A-1 and Series A-2
Convertible Preferred Stock into Class A common shares in accordance with the mandatory
redemption provision of the preferred shareholder agreement dated July 12, 2004. The total
amount of Class A common shares issued as part of the conversion was 1,706,682, inclusive of
pro rata dividends due through the conversion date. Warrants to purchase shares of Class A
common stock are still outstanding until July 2011 and 2012.
 There are outstanding warrants to purchase the Companys stock at prices ranging from $6.72
to $7.93, which were issued to investors of the Class A-1 and A-2 preferred stock. There are
1,022,471 warrants to purchase stock that expire, if not exercised, on July 12, 2011 and
178,969 that expire, if not exercised, at various dates in the third quarter of 2012. The fair value of the
warrants is calculated using the Black-Scholes option pricing model and is classified as a
liability on the balance sheet in the amount of $1.2 million and $1.6 million at March 31,
2011 and December 31, 2010, respectively. The change in fair value of warrants is reported
as a component of revenue in the income statement. The change in fair value of warrants for
the three months ended March 31 caused an increase in revenues of $0.4 million and a decrease
of $0.1 million in 2011 and 2010, respectively.
 (10)
    
    Income Taxes
 The effective tax rate was 34.9% and 32.3% for the first quarter of 2011 and 2010,
respectively. The 2011 and 2010 rates were lower than the statutory rate of 35%, primarily
due to gains and losses from the change in fair value of outstanding warrants for the
purchase of Class A common stock. The change in fair value of outstanding warrants, which is
not taxable, resulted in an increase to income of $0.4 million and a decrease of $0.1 million
for the three months ended March 31, 2011 and 2010, respectively.
 (11)
    
    Related Party Transactions
 The Company has filed a plan of merger with the Departments of Insurance of Colorado and
Indiana related to the planned dissolution of ICC and the merger of the down-line subsidiary
ICIC into CICA. Currently, ICC is owned 87% by Citizens, Inc. and 13% by CICA. This merger
will not impact the overall consolidated financials of the Company. The Company does
anticipate the elimination of duplicative overhead and annual regulatory reporting expenses
once the merger is completed.
  21




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
March 31, 2011
 
 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, 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
us 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 by 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,  assumes, estimates, plans, projects, could, " 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 are subject to known and unknown risks, uncertainties and other factors
that may cause actual results to differ materially from those contemplated by the forward-looking
statements. Factors that could cause the Companys future results to differ materially from
expected results include, but are not limited to:
 
    
    Changes in foreign and U.S. general economic, market, and political conditions, including the
performance of financial markets and interest rates;
 
    
    Changes in consumer behavior, which may affect the Companys ability to sell its products and
retain business;
 
    
    The timely development of and acceptance of new products of the Company and perceived overall
value of these products and services by existing potential customers;
 
    
    Fluctuations in experience regarding current mortality, morbidity, persistency and interest
rates relative to expected amounts used in pricing the Companys products;
 
    
    The performance of our investment portfolio, which may be adversely affected by changes in
interest rates, adverse developments and ratings of issuers whose debt securities we may hold,
and other adverse macroeconomic events;
 
    
    Results of litigation we may be involved in;
 
    
    Changes in assumptions related to deferred acquisition costs and the value of any businesses
we may acquire;
 
    
    Regulatory, accounting or tax changes that may affect the cost of, or the demand for, the
Companys products or services;
 
    
    Our concentration of business from persons residing in Latin America and the Pacific Rim;
 
    
    Our success at managing risks involved in the foregoing;
 
    
    Changes in tax laws;
    
    Effects of acquisitions and restructuring, including possible difficulties in integrating
and realizing the projected results of acquisitions; and
 
    
    Changes in statutory or U.S. GAAP accounting principles, policies or practices.
 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, 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 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.
  22




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
March 31, 2011
 Overview
  
    
    U.S. Dollar-denominated ordinary whole life insurance and endowment policies
predominantly to high net worth, high income foreign residents, principally in Latin
America and the Pacific Rim, through independent marketing consultants;
 
    
    ordinary whole life insurance policies to middle income households concentrated in the
midwest and southern United States through independent marketing consultants; and
 
    
    final expense and limited liability property policies to middle and lower income
households in Louisiana, Arkansas, and Mississippi through employee and independent agents
in our home service distribution channel.
  Current Financial Results
  Our Operating Segments
  
    
    Life Insurance
 
    
    Home Service Insurance
 
    
    Other Non-insurance Enterprises
  Three Months Ended March 31,2011
    
    
    2010Amount of
    
    
    Number of
    
    
    Average Policy
    
    
    Amount of
    
    
    Number of
    
    
    Average PolicyInsurance
    
    
    Policies
    
    
    Face Amount
    
    
    Insurance
    
    
    Policies
    
    
    Face AmountIssued
    
    
    Issued
    
    
    Issued
    
    
    Issued
    
    
    Issued
    
    
    IssuedInternational Life
    
    
    85,479,318
    
    
    
    1,258
    
    
    $
    67,900
    
    
    
    66,221,613
    
    
    
    970
    
    
    $
    69,519Domestic Life
    
    
    2,116,239
    
    
    
    105
    
    
    
    20,543
    
    
    
    2,453,817
    
    
    
    123
    
    
    
    20,483Home Service
    
    
    59,463,098
    
    
    
    8,065
    
    
    
    7,221
    
    
    
    55,988,544
    
    
    
    7,252
    
    
    
    7,495
  23




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
March 31, 2011
 Note: All discussion below compares or states 2011 results for the first quarter compared to 2010
results.
 Consolidated Results of Operations
 Revenues
  Three Months Ended March 31,2011
    
    
    2010(In thousands)Revenues:Premiums:Life insurance
    
    $
    35,611
    
    
    
    33,596Accident and health insurance
    
    
    372
    
    
    
    414Property insurance
    
    
    1,245
    
    
    
    1,180Net investment income
    
    
    7,514
    
    
    
    8,349Realized gains, net
    
    
    19
    
    
    
    59Decrease (increase) in fair value of warrants
    
    
    399
    
    
    
    (114
    )Other income
    
    
    123
    
    
    
    348Total revenues
    
    
    45,283
    
    
    
    43,832Exclude increase (decrease) in fair value
of warrants
    
    
    (399
    )
    
    
    114Total revenues excluding fair value adjustments
    
    $
    44,884
    
    
    
    43,946
 Premium Income
 Net Investment Income
  Three Months Ended
    
    
    Year Ended
    
    
    Three Months EndedMarch 31,
    
    
    December 31,
    
    
    March 31,2011
    
    
    2010
    
    
    2010(In thousands, except for %)Net investment income, annualized
    
    $
    30,056
    
    
    
    30,077
    
    
    
    33,396Average invested assets, at amortized cost
    
    $
    740,549
    
    
    
    696,134
    
    
    
    671,389Annualized yield on average invested assets
    
    
    4.06
    %
    
    
    4.32
    %
    
    
    4.97
    %
   24




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 March 31, 2011
  Three Months EndedMarch 31,2011
    
    
    2010(In thousands)Gross investment income:Fixed maturity securities
    
    $
    6,517
    
    
    
    7,386Equity securities
    
    
    197
    
    
    
    149Mortgage loans
    
    
    27
    
    
    
    18Policy loans
    
    
    710
    
    
    
    656Long-term investments
    
    
    53
    
    
    
    68Other investment income
    
    
    75
    
    
    
    197Total investment income
    
    
    7,579
    
    
    
    8,474Investment expenses
    
    
    (65
    )
    
    
    (125
    )Net investment income
    
    $
    7,514
    
    
    
    8,349
  Realized Gains (Losses), Net
 Change in Fair Value of Warrants
  25




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 March 31, 2011
 Benefits and Expenses
 Three Months Ended March 31,2011
    
    
    2010(In thousands)Benefits and expenses:Insurance benefits paid or provided:Claims and surrenders
    
    $
    14,879
    
    
    
    15,577Increase in future policy benefit reserves
    
    
    12,318
    
    
    
    9,545Policyholders dividends
    
    
    1,662
    
    
    
    1,570Total insurance benefits paid or provided
    
    
    28,859
    
    
    
    26,692Commissions
    
    
    9,072
    
    
    
    8,128Other underwriting, acquisition and insurance expenses
    
    
    6,610
    
    
    
    6,853Capitalization of deferred policy acquisition costs
    
    
    (7,165
    )
    
    
    (5,995
    )Amortization of deferred policy acquisition costs
    
    
    4,520
    
    
    
    4,944Amortization of cost of customer relationships
acquired and other intangibles
    
    
    654
    
    
    
    838Total benefits and expenses
    
    $
    42,550
    
    
    
    41,460
  Three Months EndedMarch 31,2011
    
    
    2010(In thousands)Death claims
    
    $
    6,026
    
    
    
    6,135Surrender benefits
    
    
    4,362
    
    
    
    4,894Endowment benefits
    
    
    3,401
    
    
    
    3,291Property claims
    
    
    553
    
    
    
    564Accident and health benefits
    
    
    105
    
    
    
    260Other policy benefits
    
    
    432
    
    
    
    433Total claims and surrenders
    
    $
    14,879
    
    
    
    15,577
 Increase in Future Policy Benefit Reserves
 Policyholder Dividends
 Commissions
  26




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 March 31, 2011
 Other Underwriting, Acquisition and Insurance Expenses
 Capitalized Deferred Policy Acquisition Costs
 Amortization of Deferred Policy Acquisition Costs.
 Federal Income Tax
 Segment Operations
  Income (Loss) Before Income TaxesThree Months Ended March 31,2011
    
    
    2010(In thousands)Life Insurance
    
    $
    905
    
    
    
    1,618Home Service Insurance
    
    
    1,779
    
    
    
    1,020Other Non-Insurance Enterprises
    
    
    49
    
    
    
    (266
    )Total
    
    $
    2,733
    
    
    
    2,372
  27




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 March 31, 2011
 Life Insurance
  International Sales
  
    
    larger face amount policies typically issued when compared to our U.S. operations, which
results in lower underwriting and administrative costs per unit of coverage;
 
    
    premiums are typically paid annually rather than monthly or quarterly, which saves us
administrative expenses, accelerates cash flow and results in lower policy lapse rates than
premiums with more frequently scheduled payments;
 
    
    favorable persistency levels and mortality rates comparable to our U.S. policies.
 International Products
  
    
    U.S. Dollar-denominated cash values that accumulate, beginning in the first policy year,
to a policyholder during his or her lifetime;
 
    
    premium rates that are competitive with or better than most foreign local companies;
 
    
    a hedge against local currency inflation;
 
    
    protection against devaluation of foreign currency;
 
    
    capital investment in a more secure economic environment (i.e., the United States); and
 
    
    lifetime income guarantees for an insured or for surviving beneficiaries.
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 March 31, 2011
  Three Months Ended March 31,2011
    
    
    2010(In thousands)CountryColombia
    
    $
    5,022
    
    
    
    19.6
    %
    
    $
    5,057
    
    
    
    21.6
    %Venezuela
    
    
    4,596
    
    
    
    17.9
    
    
    
    3,442
    
    
    
    14.7Taiwan
    
    
    4,448
    
    
    
    17.4
    
    
    
    4,194
    
    
    
    17.9Ecuador
    
    
    3,029
    
    
    
    11.8
    
    
    
    2,799
    
    
    
    11.9Argentina
    
    
    1,886
    
    
    
    7.4
    
    
    
    1,848
    
    
    
    7.9Other Non-U.S.
    
    
    6,643
    
    
    
    25.9
    
    
    
    6,080
    
    
    
    26.0Total
    
    $
    25,624
    
    
    
    100.0
    %
    
    $
    23,420
    
    
    
    100.0
    %
 Domestic Sales
  Domestic Products
  
    
    cash accumulation/living benefits;
 
    
    tax-deferred interest earnings;
 
    
    guaranteed lifetime income or monthly income options for the policyowner or surviving
family members;
 
    
    accidental death benefit coverage options; and
 
    
    an option to waive premium payments in the event of disability.
   29




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 March 31, 2011
  Three Months Ended March 31,2011
    
    
    2010(In thousands)StateTexas
    
    $
    1,293
    
    
    
    35.6
    %
    
    $
    1,565
    
    
    
    36.9
    %Indiana
    
    
    503
    
    
    
    13.8
    
    
    
    535
    
    
    
    12.6Missouri
    
    
    388
    
    
    
    10.7
    
    
    
    435
    
    
    
    10.3Kentucky
    
    
    335
    
    
    
    9.2
    
    
    
    413
    
    
    
    9.8Mississippi
    
    
    282
    
    
    
    7.7
    
    
    
    334
    
    
    
    7.9Other States
    
    
    839
    
    
    
    23.0
    
    
    
    953
    
    
    
    22.5Total
    
    $
    3,640
    
    
    
    100.0
    %
    
    $
    4,235
    
    
    
    100.0
    %
   Three Months Ended March 31,2011
    
    
    2010(In thousands)Revenue:Premiums
    
    $
    26,520
    
    
    
    24,769Net investment income
    
    
    4,081
    
    
    
    4,711Realized gains (losses), net
    
    
    
    
    
    
    (29
    )Other income
    
    
    87
    
    
    
    277Total revenue
    
    
    30,688
    
    
    
    29,728Benefits and expenses:Insurance benefits paid or provided:Claims and surrenders
    
    
    9,401
    
    
    
    9,899Increase in future policy benefit reserves
    
    
    11,809
    
    
    
    8,662Policyholders dividends
    
    
    1,643
    
    
    
    1,542Total insurance benefits paid or provided
    
    
    22,853
    
    
    
    20,103Commissions
    
    
    5,342
    
    
    
    4,505Other underwriting, acquisition and insurance
expenses
    
    
    2,954
    
    
    
    2,977Capitalization of deferred policy acquisition costs
    
    
    (5,427
    )
    
    
    (4,464
    )Amortization of deferred policy acquisition costs
    
    
    3,838
    
    
    
    4,659Amortization of cost of customer relationship
acquired and other intangibles
    
    
    223
    
    
    
    330Total benefits and expenses
    
    
    29,783
    
    
    
    28,110Income before income tax expense
    
    $
    905
    
    
    
    1,618
  30




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 March 31, 2011
 Premiums
  Three Months Ended March 31,2011
    
    
    2010(In thousands)Premiums:First year
    
    $
    4,098
    
    
    $
    3,212Renewal
    
    
    22,422
    
    
    
    21,557Total premiums
    
    $
    26,520
    
    
    $
    24,769
 Net Investment Income
 Three Months Ended
    
    
    Year Ended
    
    
    Three Months EndedMarch 31,
    
    
    December 31,
    
    
    March 31,2011
    
    
    2010
    
    
    2010(In thousands, except for %)Net investment income, annualized
    
    $
    16,324
    
    
    
    16,523
    
    
    
    18,844Average invested assets, at amortized cost
    
    $
    424,226
    
    
    
    396,360
    
    
    
    379,217Annualized yield on average invested assets
    
    
    3.85
    %
    
    
    4.17
    %
    
    
    4.97
    %
 Claims and Surrenders
 Three Months Ended March 31,2011
    
    
    2010(In thousands)Death claims
    
    $
    1,848
    
    
    
    1,743Surrender benefits
    
    
    3,746
    
    
    
    4,363Endowment benefits
    
    
    3,395
    
    
    
    3,284Accident and health benefits
    
    
    71
    
    
    
    194Other policy benefits
    
    
    341
    
    
    
    315Total claims and surrenders
    
    $
    9,401
    
    
    
    9,899
 
    
    Surrender benefits decreased for the three months ended March 31, 2011 compared to the
same period in 2010. Surrenders as a percent of ordinary whole life insurance in force
decreased from 0.4% at December 31, 2010 to 0.3% in the first three months of 2011. The
majority of policy surrender benefits paid is attributable to our international business
and was related to policies that have been in force over fifteen years, where surrender
charges are no longer applicable.
 
    
    Endowment benefit expense has increased due to the election by policyholders of a
product feature that provides an annual benefit. This is a fixed benefit over the life of
the contract and as persistency improves this expense will increase.
  31




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 March 31, 2011
 
 Increase in Future Policy Benefit Reserves
 Commissions
 Amortization of Deferred Policy Acquisition Costs (DAC)
 Home Service Insurance
   Three Months Ended March 31,2011
    
    
    2010(In thousands)StateLouisiana
    
    $
    10,198
    
    
    
    88.2
    %
    
    $
    9,970
    
    
    
    87.5
    %Arkansas
    
    
    1,017
    
    
    
    8.8
    
    
    
    1,059
    
    
    
    9.3Mississippi
    
    
    91
    
    
    
    0.8
    
    
    
    85
    
    
    
    0.7Other States
    
    
    257
    
    
    
    2.2
    
    
    
    283
    
    
    
    2.5Total
    
    $
    11,563
    
    
    
    100.0
    %
    
    $
    11,397
    
    
    
    100.0
    %
 Home Service Products
    32




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 March 31, 2011
  Three Months Ended March 31,2011
    
    
    2010(In thousands)Revenue:Premiums
    
    $
    10,708
    
    
    
    10,421Net investment income
    
    
    3,237
    
    
    
    3,532Realized gains (losses), net
    
    
    19
    
    
    
    133Other income
    
    
    8
    
    
    
    49Total revenue
    
    
    13,972
    
    
    
    14,135Benefits and expenses:Insurance benefits paid or provided:Claims and surrenders
    
    
    5,478
    
    
    
    5,678Increase in future policy benefit reserves
    
    
    509
    
    
    
    883Policyholders dividends
    
    
    19
    
    
    
    28Total insurance benefits paid or provided
    
    
    6,006
    
    
    
    6,589Commissions
    
    
    3,730
    
    
    
    3,623Other underwriting, acquisition and insurance
expenses
    
    
    3,082
    
    
    
    3,641Capitalization of deferred policy acquisition costs
    
    
    (1,738
    )
    
    
    (1,531
    )Amortization of deferred policy acquisition costs
    
    
    682
    
    
    
    285Amortization of cost of customer relationship
acquired and other intangibles
    
    
    431
    
    
    
    508Total benefits and expenses
    
    
    12,193
    
    
    
    13,115Income before income tax expense
    
    $
    1,779
    
    
    
    1,020
 Premiums
 Net Investment Income
 Three Months Ended
    
    
    Year Ended
    
    
    Three Months EndedMarch 31,
    
    
    December 31,
    
    
    March 31,2011
    
    
    2010
    
    
    2010(In thousands, except for %)Net investment income, annualized
    
    $
    12,948
    
    
    
    13,008
    
    
    
    14,128Average invested assets, at amortized cost
    
    $
    284,171
    
    
    
    279,682
    
    
    
    275,421Annualized yield on average invested assets
    
    
    4.56
    %
    
    
    4.65
    %
    
    
    5.13
    %
  33




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 March 31, 2011
 Realized Gains, Net
 Claims and Surrenders
 For the Three Months Ended March 31,2011
    
    
    2010(In thousands)Death claims
    
    $
    4,178
    
    
    
    4,392Surrender benefits
    
    
    616
    
    
    
    531Endowment benefits
    
    
    6
    
    
    
    7Property claims
    
    
    553
    
    
    
    564Accident and health benefits
    
    
    34
    
    
    
    66Other policy benefits
    
    
    91
    
    
    
    118Total claims and surrenders
    
    $
    5,478
    
    
    
    5,678
 
    
    Death claims decreased 4.9% for the three months ended March 31, 2011 compared to the
same period in 2010. Mortality experience is closely monitored by the Company as a key
performance indicator and these amounts were within expected levels.
 
    
    Surrender benefits have increased in the three months ended March 31, 2011 compared to
the same period in 2010, which is consistent with a growing block of business.
 Other Underwriting, Acquisition and Insurance Expenses
 Amortization of Deferred Policy Acquisition Costs
 Other Non-Insurance Enterprises
  Investments
   34




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 March 31, 2011
  March 31, 2011
    
    
    December 31, 2010Carrying
    
    
    % of Total
    
    
    Carrying
    
    
    % of TotalValue
    
    
    Carrying Value
    
    
    Value
    
    
    Carrying Value(In thousands)
    
    
    
    
    
    (In thousands)Fixed maturity securities:U.S. Treasury and U.S. Government-sponsored enterprises
    
    $
    385,567
    
    
    
    48.4
    %
    
    $
    378,012
    
    
    
    48.8
    %Mortgage-backed (1)
    
    
    13,415
    
    
    
    1.7
    
    
    
    14,808
    
    
    
    1.9Municipal bonds
    
    
    123,728
    
    
    
    15.5
    
    
    
    101,719
    
    
    
    13.1Corporate
    
    
    164,852
    
    
    
    20.7
    
    
    
    161,298
    
    
    
    20.8Foreign governments
    
    
    130
    
    
    
    
    
    
    
    132
    
    
    
    Total fixed maturity securities
    
    
    687,692
    
    
    
    86.3
    
    
    
    655,969
    
    
    
    84.6Cash and cash equivalents
    
    
    37,450
    
    
    
    4.7
    
    
    
    49,723
    
    
    
    6.4Other investments:Policy loans
    
    
    36,306
    
    
    
    4.6
    
    
    
    35,585
    
    
    
    4.6Equity securities
    
    
    23,815
    
    
    
    3.0
    
    
    
    23,304
    
    
    
    3.0Mortgage loans
    
    
    1,478
    
    
    
    0.2
    
    
    
    1,489
    
    
    
    0.2Real estate and other long-term investments
    
    
    9,314
    
    
    
    1.2
    
    
    
    9,348
    
    
    
    1.2Total cash, cash equivalents and investments
    
    $
    796,055
    
    
    
    100.0
    %
    
    $
    775,418
    
    
    
    100.0
    %
 (1)
    
    Includes $12.5 million and $13.2 million of U.S. Government-sponsored enterprises at March
31, 2011 and December, 2010, respectively.    35




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 March 31, 2011
  March 31, 2011
    
    
    December 31, 2010Carrying Value
    
    
    %
    
    
    Carrying Value
    
    
    %(In thousands)
    
    
    
    
    
    (In thousands)AAA and U.S. Government
    
    $
    420,094
    
    
    
    61.1
    %
    
    $
    428,194
    
    
    
    65.3
    %AA
    
    
    97,840
    
    
    
    14.2
    
    
    
    59,454
    
    
    
    9.1A
    
    
    73,274
    
    
    
    10.7
    
    
    
    73,341
    
    
    
    11.2BBB
    
    
    84,861
    
    
    
    12.3
    
    
    
    84,489
    
    
    
    12.9BB and other
    
    
    11,623
    
    
    
    1.7
    
    
    
    10,491
    
    
    
    1.5Totals
    
    $
    687,692
    
    
    
    100.0
    %
    
    $
    655,969
    
    
    
    100.0
    %
  Valuation of Investments
     36




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 March 31, 2011
 Liquidity and Capital Resources
       March 31,2011CICA
    
    
    890
    %SPLIC
    
    
    1,270
    %CNLIC
    
    
    2,754
    %SPFIC
    
    
    324
    %ICIC
    
    
    4,373
    %
 Contractual Obligations and Off-balance Sheet Arrangements
   37




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 March 31, 2011
 Parent Company Liquidity and Capital Resources
  Critical Accounting Policies
  Policy Liabilities
    Deferred Policy Acquisition Costs
     38




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 March 31, 2011
  Cost of Customer Relationships Acquired
   Goodwill
    Valuation of Investments in Fixed Maturity and Equity Securities
   39




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 March 31, 2011
     Premium Revenue and Related Expenses
    40




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 March 31, 2011
 
 Item 3 . QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 General
   March 31, 2011
    
    
    December 31, 2010Net
    
    
    
    
    
    
    
    
    
    
    NetUnrealized
    
    
    
    
    
    
    
    
    
    
    UnrealizedAmortized
    
    
    Fair
    
    
    Gains
    
    
    Amortized
    
    
    Fair
    
    
    GainsCost
    
    
    Value
    
    
    (Losses)
    
    
    Cost
    
    
    Value
    
    
    (Losses)(In thousands)Fixed maturities,
available-for-sale
    
    $
    622,282
    
    
    
    620,614
    
    
    
    (1,668
    )
    
    
    578,412
    
    
    
    575,737
    
    
    
    (2,675
    )Fixed maturities,
held-to-maturity
    
    
    67,078
    
    
    
    65,611
    
    
    
    (1,467
    )
    
    
    80,232
    
    
    
    79,103
    
    
    
    (1,129
    )Total fixed maturities
    
    $
    689,360
    
    
    
    686,225
    
    
    
    (3,135
    )
    
    
    658,644
    
    
    
    654,840
    
    
    
    (3,804
    )Total equity securities
    
    $
    19,729
    
    
    
    23,815
    
    
    
    4,086
    
    
    
    19,844
    
    
    
    23,304
    
    
    
    3,460
 Market Risk Related to Interest Rates
       41




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 March 31, 2011
 Market Risk Related to Equity Prices
  
 Item 4 . CONTROLS AND PROCEDURES
    
 PART II. OTHER INFORMATION
 
 Item 1 . LEGAL PROCEEDINGS
 Delia Bolanos Andrade, et al., Plaintiffs, v. Citizens Insurance Company of America, et
al., Defendants
  
    
    disputes over insurance coverage or claims adjudication;
    
    regulatory compliance with insurance and securities laws in the United States and in
foreign countries;
 
    
    disputes with our marketing firms, consultants and employee agents over compensation
and termination of contracts and related claims;
 
    
    disputes regarding our tax liabilities;
    
    disputes relative to reinsurance and coinsurance agreements; and
    
    disputes relating to businesses acquired and operated by us.
   42




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 March 31, 2011
 
 Item 1A . RISK FACTORS
  
 Item 2 . UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 Item 3 . DEFAULTS UPON SENIOR SECURITIES
  
 Item 4 . (RESERVED)
 
 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
    
    
    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)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)
  43




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 March 31, 2011
 Exhibit Number
    
    The following exhibits are filed herewith: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
    
    
    Self-Administered Automatic Reinsurance Agreement  CICA Life Insurance Company of America
and Scor Global Life U.S. Re Insurance Company (k)10.9
    
    
    Self-Administered Automatic Reinsurance Agreement  CICA Life Insurance Company of America
and Mapfre Re Compania de Reaseguros, S.A. (l)11
    
    
    Statement re: Computation of per share earnings (see financial statements)21
    
    
    Subsidiaries of the Registrant*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*99.1
    
    
    News Release reporting first quarter results issued on May 5, 2011 (furnished herewith).
 
 *
    
    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.  44




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 March 31, 2011
 (d)
    
    Filed as Exhibit 10.8 with the Registration Statement on Form S-4, SEC File No. 333-16163, on
November 14, 1996 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. 1, 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 November 6, 2009, with the Registrants Quarterly Report on Form 10-Q for the
Quarter Ended September 30, 2009, as Exhibit 10.8(k), and incorporated herein by reference.(l)
    
    Filed on November 6, 2009, with the Registrants Quarterly Report on Form 10-Q for the
Quarter Ended September 30, 2009, as Exhibit 10.9(l), and incorporated herein by reference.  45




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##### Table of Contents



SIGNATURES
  CITIZENS, INC.By:
    /s/ Harold E. RileyHarold E. RileyChairman and Chief Executive Officer By:
    /s/ Kay E. OsbournKay E. OsbournExecutive Vice President, Chief Financial Officer and Treasurer   46