##### 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 September 30, 2005
 or
 o
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transition period from  to
 Commission File Number: 1-13004
 CITIZENS,
INC.
 (Exact
name of registrant as specified in its charter)
 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
  þ o
  o þ




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 INDEX
 PageNumberPart I. Financial InformationItem 1. Financial StatementsConsolidated Statements of Financial Position,
September 30, 2005 (Unaudited) and December 31,
2004
    
    
    3Consolidated Statements of Operations, Three Months
Ended September 30, 2005 and 2004 (Unaudited)
    
    
    5Consolidated Statements of Operations, Nine Months
Ended September 30, 2005 and 2004 (Unaudited)
    
    
    6Consolidated Statements of Cash Flows, Nine Months
Ended September 30, 2005 and 2004 (Unaudited)
    
    
    7Notes to Consolidated Financial Statements
    
    
    10Item 2. Managements Discussion and Analysis
of Financial Condition and Results of Operations
    
    
    20Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    35Item 4. Controls and Procedures
    
    
    37Part II. Other Information
    
    
    40Certification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906
  2




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
 September 30, 2005 and December 31, 2004
 (Unaudited)September 30,
    
    
    December 31,2005
    
    
    2004AssetsInvestments:Fixed maturities held-to-maturity, at
amortized cost (fair value $9,125,316
in 2005 and $8,826,950 in 2004)
    
    $
    7,608,185
    
    
    
    7,514,224Fixed maturities available-for-sale, at
fair value (cost $441,326,697 in
2005 and $441,528,337 in 2004)
    
    
    437,919,709
    
    
    
    440,052,698Equity securities, available-for-sale, at fair value
(cost $723,410 in 2005 and 2004)
    
    
    1,111,620
    
    
    
    1,063,917Mortgage loans on real estate (net of allowance
of $50,000 in 2005 and $250,000 in 2004)
    
    
    784,042
    
    
    
    349,611Policy loans
    
    
    24,084,768
    
    
    
    24,316,468Other long-term investments
    
    
    1,614,341
    
    
    
    2,505,025Total investments
    
    
    473,122,665
    
    
    
    475,801,943Cash and cash equivalents
    
    
    25,791,866
    
    
    
    31,720,787Accrued investment income
    
    
    5,089,013
    
    
    
    6,113,474Reinsurance recoverable
    
    
    23,496,198
    
    
    
    17,806,573Deferred policy acquisition costs
    
    
    66,114,575
    
    
    
    56,335,361Other intangible assets
    
    
    2,331,069
    
    
    
    2,331,069Federal income tax recoverable
    
    
    805,783
    
    
    
    Cost of customer relationships acquired
    
    
    39,694,398
    
    
    
    44,904,581Excess of cost over net assets acquired
    
    
    12,401,990
    
    
    
    12,401,990Property, plant and equipment
    
    
    7,684,537
    
    
    
    8,797,445Other assets
    
    
    3,882,785
    
    
    
    4,998,339Total assets
    
    $
    660,414,879
    
    
    
    661,211,562
 See accompanying notes to consolidated financial statements.
    
    (Continued)
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION, CONTINUED
September 30, 2005 and December 31, 2004
 (Unaudited)September 30,
    
    
    December 31,Liabilities
and Stockholders Equity
    
    2005
    
    
    2004Liabilities:Future policy benefit reserves:Life insurance
    
    $
    432,017,197
    
    
    
    413,106,928Annuities
    
    
    18,993,638
    
    
    
    16,913,432Accident and health
    
    
    11,800,553
    
    
    
    13,604,150Dividend accumulations
    
    
    5,093,196
    
    
    
    4,932,124Premium deposits
    
    
    9,420,168
    
    
    
    7,938,529Policy claims payable
    
    
    14,309,923
    
    
    
    8,282,508Other policyholders funds
    
    
    5,468,718
    
    
    
    5,689,378Total policy liabilities
    
    
    497,103,393
    
    
    
    470,467,049Commissions payable
    
    
    2,220,900
    
    
    
    2,325,503Federal income tax payable
    
    
    
    
    
    
    1,307,249Payable for securities in the process of settlement
    
    
    6,750,000
    
    
    
    7,052,398Notes payable
    
    
    
    
    
    
    30,000,000Deferred Federal income tax
    
    
    1,941,994
    
    
    
    805,387Liabilities for options and warrants
    
    
    2,497,172
    
    
    
    2,738,062Other liabilities
    
    
    3,075,419
    
    
    
    5,483,564Total liabilities
    
    
    513,588,878
    
    
    
    520,179,212Cumulative
convertible preferred stock (Series A-1  $500 stated value per
share, 50,000 shares authorized, 25,000 shares issued and outstanding
in 2005 and 2004; Series A- 2  $935
stated value per share, 5,352 shares authorized,
2,676 shares issued and outstanding in 2005)
    
    
    9,813,838
    
    
    
    5,901,271Stockholders Equity:Common stock:Class A, no par value, 100,000,000 shares
authorized, 40,429,943 shares issued in 2005
and 40,364,332 in 2004, including shares in
treasury of 2,930,596 in 2005 and 2004
    
    
    198,660,764
    
    
    
    198,266,955Class B, no par value, 2,000,000 shares
authorized, 936,181 shares issued and
outstanding in 2005 and 2004
    
    
    2,827,191
    
    
    
    2,827,191Retained deficit
    
    
    (52,590,818
    )
    
    
    (55,321,287
    )Accumulated other comprehensive loss:Unrealized losses on securities, net of tax
    
    
    (1,992,393
    )
    
    
    (749,199
    )146,904,744
    
    
    
    145,023,660Treasury stock, at cost
    
    
    (9,892,581
    )
    
    
    (9,892,581
    )Total stockholders equity
    
    
    137,012,163
    
    
    
    135,131,079Total liabilities and stockholders equity
    
    $
    660,414,879
    
    
    
    661,211,562
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 Three Months Ended September 30, 2005 and 2004
 (Unaudited)
 2005
    
    
    2004Revenues:Premiums
    
    $
    29,190,780
    
    
    
    18,309,202Annuity and universal life considerations
    
    
    670,911
    
    
    
    500,230Net investment income
    
    
    6,155,959
    
    
    
    3,444,307Realized gains
    
    
    61,642
    
    
    
    478,923Decrease (increase) in fair value of options and warrants
    
    
    (129,187
    )
    
    
    630,571Other income
    
    
    238,056
    
    
    
    170,720Total revenues
    
    
    36,188,161
    
    
    
    23,533,953Benefits and expenses:Insurance benefits paid or provided:Claims and surrenders
    
    
    12,458,163
    
    
    
    8,351,117Increase in future policy benefit reserves
    
    
    6,686,716
    
    
    
    4,333,921Policyholders dividends
    
    
    1,317,811
    
    
    
    1,141,695Total insurance benefits paid or provided
    
    
    20,462,690
    
    
    
    13,826,733Commissions
    
    
    8,269,384
    
    
    
    4,896,033Other underwriting, acquisition and insurance expenses
    
    
    5,903,568
    
    
    
    4,206,260Capitalization of deferred policy acquisition costs
    
    
    (6,180,211
    )
    
    
    (4,973,716
    )Amortization of deferred policy acquisition costs
    
    
    2,772,603
    
    
    
    2,626,288Amortization of cost of customer relationships acquired
    
    
    2,714,252
    
    
    
    727,875Gain on coinsurance agreements
    
    
    
    
    
    
    (23,846
    )Total benefits and expenses
    
    
    33,942,286
    
    
    
    21,285,627Income before Federal income tax
    
    
    2,245,875
    
    
    
    2,248,326Federal income tax expense
    
    
    759,000
    
    
    
    755,341Net income
    
    $
    1,486,875
    
    
    
    1,492,985Per Share Amounts:Basic and diluted income per share of
common stock (See Note 6)
    
    $
    0.03
    
    
    
    0.03Weighted average shares outstanding
    
    
    38,415,200
    
    
    
    38,317,079
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months Ended September 30, 2005 and 2004
 (Unaudited)
 2005
    
    
    2004Revenues:Premiums
    
    $
    84,567,741
    
    
    
    50,298,907Annuity and universal life considerations
    
    
    2,135,975
    
    
    
    2,270,050Net investment income
    
    
    17,635,157
    
    
    
    11,108,639Realized gains
    
    
    677,317
    
    
    
    735,308Decrease (increase) in fair value of options and warrants
    
    
    (186,399
    )
    
    
    630,571Other income
    
    
    619,856
    
    
    
    481,127Total revenues
    
    
    105,449,647
    
    
    
    65,524,602Benefits and expenses:Insurance benefits paid or provided:Claims and surrenders
    
    
    38,390,871
    
    
    
    24,640,495Increase in future policy benefit reserves
    
    
    18,801,271
    
    
    
    11,573,790Policyholders dividends
    
    
    3,394,911
    
    
    
    2,871,708Total insurance benefits paid or provided
    
    
    60,587,053
    
    
    
    39,085,993Commissions
    
    
    23,759,477
    
    
    
    13,158,566Other underwriting, acquisition and insurance expenses
    
    
    19,349,462
    
    
    
    11,825,431Capitalization of deferred policy acquisition costs
    
    
    (17,176,193
    )
    
    
    (12,972,220
    )Amortization of deferred policy acquisition costs
    
    
    7,396,979
    
    
    
    7,594,592Amortization of cost of customer relationships acquired
    
    
    5,210,183
    
    
    
    2,087,890Loss on coinsurance agreements
    
    
    
    
    
    
    586,767Total benefits and expenses
    
    
    99,126,961
    
    
    
    61,367,019Income before Federal income tax
    
    
    6,322,686
    
    
    
    4,157,583Federal income tax expense
    
    
    2,114,000
    
    
    
    1,407,907Net income
    
    $
    4,208,686
    
    
    
    2,749,676Per Share Amounts:Basic and diluted income per share of
common stock (See Note 6)
    
    $
    0.07
    
    
    
    0.06Weighted average shares outstanding
    
    
    38,392,869
    
    
    
    38,317,079
  6




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2005 and 2004
 (Unaudited)
 2005
    
    
    2004Cash flows from operating activities:Net income
    
    $
    4,208,686
    
    
    
    2,749,676Adjustments to reconcile net income to net cash
provided by operating activities:Realized gains on sale of investments
and other assets
    
    
    (677,317
    )
    
    
    (735,308
    )Loss on coinsurance agreements
    
    
    
    
    
    
    586,767Net deferred policy acquisition costs
    
    
    (9,779,214
    )
    
    
    (5,377,628
    )Decrease (increase) on fair value of
options and warrants
    
    
    186,399
    
    
    
    (630,571
    )Amortization of cost of customer
relationships acquired and other
intangibles
    
    
    5,210,183
    
    
    
    2,087,890Depreciation
    
    
    758,767
    
    
    
    625,911Deferred Federal income tax
    
    
    1,777,042
    
    
    
    790,687Change in:Accrued investment income
    
    
    1,024,461
    
    
    
    803,868Reinsurance recoverable
    
    
    (5,689,625
    )
    
    
    (10,711,362
    )Other assets
    
    
    1,115,554
    
    
    
    (387,357
    )Future policy benefit reserves
    
    
    19,186,878
    
    
    
    11,158,672Other policyholder liabilities
    
    
    7,449,466
    
    
    
    316,611Federal income tax
    
    
    (2,113,032
    )
    
    
    (87,747
    )Commissions payable and other liabilities
    
    
    (2,512,748
    )
    
    
    (134,754
    )Other, net
    
    
    339,442
    
    
    
    385,070Net cash provided by operating
activities
    
    
    20,484,942
    
    
    
    1,440,425Cash flows from investing activities:Sale of fixed maturities, available-for-sale
    
    
    14,762,475
    
    
    
    28,543,402Sale of equity securities, available-for-sale
    
    
    
    
    
    
    37,500Maturity of fixed maturities, available-for-sale
    
    
    85,187,799
    
    
    
    75,049,276Purchase of fixed maturities, available-for-sale
    
    
    (99,794,782
    )
    
    
    (61,695,187
    )Principal payments on mortgage loans
    
    
    38,561
    
    
    
    52,247Sale of other long-term investments and property,
plant and equipment
    
    
    989,898
    
    
    
    436,563Decrease in policy loans, net
    
    
    231,700
    
    
    
    878,054Purchase of other long-term investments and property,
plant and equipment
    
    
    (242,917
    )
    
    
    (3,361,442
    )Net cash provided by investing
activities
    
    $
    1,172,734
    
    
    
    39,940,413
 See accompanying notes to consolidated financial statements.
    
    
    
    
    
    
    
    (Continued)
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
Nine Months Ended September 30, 2005 and 2004
 (Unaudited)
 2005
    
    
    2004Cash flows from financing activities:Payoff of note payable
    
    $
    (30,000,000
    )
    
    
    Proceeds from issuance of convertible preferred stock
    
    
    2,500,936
    
    
    
    12,500,000Payment of convertible preferred stock issuance costs
    
    
    (87,533
    )
    
    
    (1,210,655
    )Net cash provided by (used in) financing
activities
    
    
    (27,586,597
    )
    
    
    11,289,345Net increase (decrease) in cash and cash
equivalents
    
    
    (5,928,921
    )
    
    
    52,670,183Cash and cash equivalents at beginning of period
    
    
    31,720,787
    
    
    
    15,016,254Cash and cash equivalents at end of period
    
    $
    25,791,866
    
    
    
    67,686,437Supplemental Disclosures of Cash Flow Information:Cash paid during the period for income taxes
    
    $
    2,449,990
    
    
    
    704,967Cash paid during the period for interest
    
    
    695,408
    
    
    
    
 Supplemental Disclosure of Non-Cash Investing and Financing Activities:
    8




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9




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
 (Unaudited)
 (1)
    
    Financial Statements
      10




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(2) Coinsurance Agreements
  (3) Revolving Line of Credit
    11




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(4) Segment Information
    Geographic
Areas
 Three Months Ended September 30,2005
    
    
    2004Revenues:U.S.
    
    $
    15,474,375
    
    
    
    4,626,996Non-U.S.
    
    
    20,713,786
    
    
    
    18,906,957Total Revenues
    
    $
    36,188,161
    
    
    
    23,533,953
  Three Months Ended September 30,2005
    
    
    2004Revenues:International Life
    
    $
    20,713,786
    
    
    
    18,906,957Home Service Business
    
    
    11,879,742
    
    
    
    Domestic Life
    
    
    3,395,326
    
    
    
    4,554,151Domestic Health
    
    
    199,307
    
    
    
    72,845Total Revenues
    
    $
    36,188,161
    
    
    
    23,533,953
 12




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Three Months Ended September 30,2005
    
    
    2004Revenues, excluding net investment income
and realized gains:International Life
    
    $
    18,035,182
    
    
    
    15,750,916Home Service Business
    
    
    8,805,159
    
    
    
    Domestic Life
    
    
    2,930,912
    
    
    
    3,786,962Domestic Health
    
    
    199,307
    
    
    
    72,845Total consolidated revenues, excluding net
investment income and realized gain on
investments
    
    $
    29,970,560
    
    
    
    19,610,723Net investment income:International Life
    
    $
    2,622,293
    
    
    
    2,773,978Home Service Business
    
    
    3,078,736
    
    
    
    Domestic Life
    
    
    454,930
    
    
    
    670,329Domestic Health
    
    
    
    
    
    
    Total consolidated net investment income
    
    $
    6,155,959
    
    
    
    3,444,307Realized gains (losses) on sale of
investments and other assets:International Life
    
    $
    56,311
    
    
    
    382,063Home Service Business
    
    
    (4,153
    )
    
    
    Domestic Life
    
    
    9,484
    
    
    
    96,860Domestic Health
    
    
    
    
    
    
    Total consolidated realized gains on sale of
investments and other assets
    
    $
    61,642
    
    
    
    478,923Amortization expense:International Life
    
    $
    2,220,268
    
    
    
    2,109,682Home Service Business
    
    
    2,507,056
    
    
    
    Domestic Life
    
    
    759,531
    
    
    
    1,244,481Domestic Health
    
    
    
    
    
    
    Total consolidated amortization expense
    
    $
    5,486,855
    
    
    
    3,354,163Income (loss) before Federal income tax:International Life
    
    $
    1,743,227
    
    
    
    2,133,921Home Service Business
    
    
    113,089
    
    
    
    Domestic Life
    
    
    431,839
    
    
    
    207,997Domestic Health
    
    
    (42,280
    )
    
    
    (93,592
    )Total consolidated income before
Federal income tax
    
    $
    2,245,875
    
    
    
    2,248,326
 13




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Three Months Ended September 30,2005
    
    
    2004Premiums and annuity and
universal life considerations:Ordinary Life
    
    $
    20,028,066
    
    
    
    18,120,450Annuity and Universal Life
    
    
    670,911
    
    
    
    500,230Group Life
    
    
    159,090
    
    
    
    115,907Accident and Health
    
    
    199,307
    
    
    
    72,845Home Service Business
    
    
    8,804,317
    
    
    
    Total premiums
    
    $
    29,861,691
    
    
    
    18,809,432
 Geographic
Areas
 Nine Months Ended September 30,2005
    
    
    2004Revenues:U.S.
    
    $
    47,607,655
    
    
    
    13,410,319Non-U.S.
    
    
    57,841,992
    
    
    
    52,114,283Total Revenues
    
    $
    105,449,647
    
    
    
    65,524,602
  Nine Months Ended September 30,2005
    
    
    2004Revenues:International Life
    
    $
    57,841,992
    
    
    
    52,114,283Home Service Business
    
    
    37,475,348
    
    
    
    Domestic Life
    
    
    9,481,806
    
    
    
    12,889,503Domestic Health
    
    
    650,501
    
    
    
    520,816Total consolidated revenues
    
    $
    105,449,647
    
    
    
    65,524,602Revenue, excluding net investment income
and realized gains:International Life
    
    $
    49,894,735
    
    
    
    42,694,328Home Service Business
    
    
    28,502,269
    
    
    
    Domestic Life
    
    
    8,089,668
    
    
    
    10,465,511Domestic Health
    
    
    650,501
    
    
    
    520,816Total consolidated revenue, excluding net
investment income and realized gains on
investments
    
    $
    87,137,173
    
    
    
    53,680,655
 14




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Nine Months Ended September 30,2005
    
    
    2005Net investment income:International Life
    
    $
    7,473,702
    
    
    
    8,835,136Home Service Business
    
    
    8,852,271
    
    
    
    Domestic Life
    
    
    1,309,184
    
    
    
    2,273,503Domestic Health
    
    
    
    
    
    
    Total consolidated net investment income
    
    $
    17,635,157
    
    
    
    11,108,639Realized gains on sale of investments and
other assets:International Life
    
    $
    473,555
    
    
    
    584,819Home Service Business
    
    
    120,808
    
    
    
    Domestic Life
    
    
    82,954
    
    
    
    150,489Domestic Health
    
    
    
    
    
    
    Total consolidated realized gains on sale of
investments and other assets
    
    $
    677,317
    
    
    
    735,308Amortization expense:International Life
    
    $
    6,142,067
    
    
    
    6,688,453Home Service Business
    
    
    4,234,103
    
    
    
    Domestic Life
    
    
    2,230,992
    
    
    
    2,994,029Domestic Health
    
    
    
    
    
    
    Total consolidated amortization expense
    
    $
    12,607,162
    
    
    
    9,682,482Income (loss) before Federal income tax:International Life
    
    $
    4,585,191
    
    
    
    5,126,997Home Service Business
    
    
    2,149,490
    
    
    
    Domestic Life
    
    
    (511,563
    )
    
    
    (254,923
    )Domestic Health
    
    
    99,568
    
    
    
    (714,491
    )Total consolidated income before
Federal income tax
    
    $
    6,322,686
    
    
    
    4,157,583
 September 30,
    
    
    December 31,2005
    
    
    2004Assets:International Life
    
    $
    252,448,676
    
    
    
    225,359,680Home Service Business
    
    
    277,321,743
    
    
    
    298,396,206Domestic Life
    
    
    118,625,170
    
    
    
    123,160,286Domestic Health
    
    
    12,019,290
    
    
    
    14,295,390Total
    
    $
    660,414,879
    
    
    
    661,211,562
 15




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##### Table of Contents



Nine Months Ended September 30,2005
    
    
    2004Premiums and annuity and
universal life considerations:Ordinary Life
    
    $
    54,940,534
    
    
    
    49,430,369Annuity and Universal Life
    
    
    2,135,975
    
    
    
    2,270,050Group Life
    
    
    477,270
    
    
    
    347,722Accident and Health
    
    
    650,501
    
    
    
    520,816Home Service Business
    
    
    28,499,436
    
    
    
    Total premiums
    
    $
    86,703,716
    
    
    
    52,568,957
 (5) Accumulated Other Comprehensive Income (Loss)
  (6) Earnings Per Share
   16




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##### Table of Contents



Three Months EndedSeptember 30,2005
    
    2004Basic and diluted income per share:Numerator:Net income
    
    $
    1,486,875
    
    
    
    1,492,985Less: Preferred stock dividend
    
    
    (130,506
    )
    
    
    (115,794
    )Accretion of deferred
issuance costs and
discounts
on
preferred stock
    
    
    (356,607
    )
    
    
    (315,381
    )Net income to common stockholders
    
    $
    999,762
    
    
    
    1,061,810Denominator:Weighted average shares
outstanding
    
    
    38,415,200
    
    
    
    38,317,079Basic and diluted income per share
    
    $
    0.03
    
    
    
    0.03
 17




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##### Table of Contents



Nine Months EndedSeptember 30,2005
    
    2004Basic and diluted income per share:Numerator:Net income
    
    $
    4,208,686
    
    
    
    2,749,676Less: Preferred stock dividend
    
    
    (393,809
    )
    
    
    (115,794
    )Accretion of deferred
issuance costs and
discounts
on preferred
stock
    
    
    (1,084,408
    )
    
    
    (315,381
    )Net income to common stockholders
    
    $
    2,730,469
    
    
    
    2,318,501Denominator:Weighted average shares
outstanding
    
    
    38,392,869
    
    
    
    38,317,079Basic and diluted income per share
    
    $
    0.07
    
    
    
    0.06
  (7) Accounting Pronouncements
   18




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##### Table of Contents



(8) Legal Proceedings
 Delia Bolanos Andrade, et al v. Citizens Insurance Company of America,
Citizens, Inc., Negocios Savoy, S.A., Harold E. Riley, and Mark A. Oliver, Case Number 99-09099
   19




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##### Table of Contents



ITEM 2
 MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Overview
  
    
    the issuance of ordinary life insurance in U.S. dollar denominated amounts to
foreign nationals with significant net worth; and
    
    offering final expense ordinary life insurance through the home service distribution
channel in Louisiana.
  International Life.
  Home Service Life.
 20




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##### Table of Contents



Domestic Life.
   21




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##### Table of Contents



Marketplace Conditions and Trends
  
    
    As an increasing percentage of the world population reaches retirement age, we
believe we will benefit from increased demand for living products rather than death
products, as aging baby boomers will require cash accumulation to provide expenses to
meet their lifetime needs. Our ordinary life products are designed for our
policyowners to accumulate cash values to provide for living expenses in the insureds
later years while continuously providing a death benefit.
    
    The volatility in the equity markets over the past few years has posed a number of
problems for some companies in the life insurance industry. Even though the capital
markets have recovered, not all companies have participated evenly in the recovery. We
historically have had minimal equity exposure, including less than 1% of total invested
assets as of September 30, 2005 and December 31, 2004, and we plan to continue to have
minimal assets in equity investments in the future.
    
    Corporate bond defaults and credit downgrades, which have resulted in other-than-
temporary impairment in the value of many securities, have had a material impact on
life insurers in the past few years. We have not incurred losses from bond defaults
for many years. The majority of our investment portfolio is held in debt instruments
carrying the implied full faith and credit of the U.S. Government. We intend to manage
our investment portfolio conservatively in the future in these type of debt
instruments.
    
    Some life insurance companies have recently suffered significant reductions in
capital and will have to improve their capital adequacy ratios to support their
business or divest a portion of their business. We have not experienced any capital
reductions and do not anticipate this trend will affect us.
    
    Because of the trends described above coupled with increasing costs of regulatory
compliance such as the Sarbanes-Oxley Act of 2002, we believe there is a trend towards
consolidation of domestic life insurance companies. We believe this should be a
benefit to our acquisition strategy because there should be more complementary
acquisition candidates available for us to consider acquiring.
    
    Many of the events and trends affecting the life insurance industry have had an
impact on the life reinsurance industry. These events led to a decline in the
availability of reinsurance. While we currently cede a limited amount of our primary
insurance business to reinsurers, we may find it difficult to obtain reinsurance in the
future, forcing us to seek reinsurers who are more expensive to us. If we cannot obtain
affordable reinsurance coverage, either our net exposures will increase or we would
have to reduce our underwriting commitments.
 
 22




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##### Table of Contents



Significant Recent Transactions
 Cessation of Accident and Health Business
  Acquisition of Security Plan
   Quarter Ended September 30, 2005 Compared to the Quarter Ended September 30, 2004
 Overview
  23




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##### Table of Contents



Consolidated Results
  Quarter
    
    
    
    Net IncomeEnded
    
    Net Income
    
    Per Class A and BSeptember 30
    
    (In thousands)
    
    Common Share2005
    
    $1,487
    
    $0.032004
    
    $1,493
    
    $0.03
   Premium Income
 Net Investment Income
 Reserves
 Policy Dividends
 24




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##### Table of Contents



Claims and Surrenders
 Three Months Ended Sept. 30,2005
    
    
    2004(In thousands)Death claims
    
    $
    4,290
    
    
    
    1,431Surrender benefits
    
    
    4,436
    
    
    
    4,765Endowments
    
    
    2,366
    
    
    
    1,943Casualty claims
    
    
    1,046
    
    
    
    Accident and health benefits
    
    
    90
    
    
    
    56Other policy benefits
    
    
    230
    
    
    
    156Total claims and surrenders
    
    $
    12,458
    
    
    
    8,351
      25




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##### Table of Contents



Commissions
 Underwriting, Acquisition and Insurance Expense
 Deferred Policy Acquisition Costs
 Cost
of Customer Relationships Acquired.
 Nine Months Ended September 30, 2005 Compared to Nine Months Ended September 30, 2004
 Overview
  26




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##### Table of Contents



Consolidated Results
  Nine Months
    
    
    
    Net IncomeEnded
    
    Net Income
    
    Per Class A and BSeptember 30
    
    (In thousands)
    
    Common Share2005
    
    $4,209
    
    $0.072004
    
    $2,750
    
    $0.06
  Premium Income
 Net Investment Income
 Reserves
 Policy Dividends
 Claims and Surrenders
 27




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##### Table of Contents



Nine Months Ended Sept. 30,2005
    
    
    2004(In thousands)Death claims
    
    $
    16,432
    
    
    
    4,733Surrender benefits
    
    
    12,584
    
    
    
    13,930Endowments
    
    
    6,413
    
    
    
    5,301Casualty claims
    
    
    2,033
    
    
    
    Accident and health benefits
    
    
    336
    
    
    
    195Other policy benefits
    
    
    593
    
    
    
    481Total claims and surrenders
    
    $
    38,391
    
    
    
    24,640
      Commissions
 28




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##### Table of Contents



Underwriting, Acquisition and Insurance Expense
 Deferred Policy Acquisition Costs
 Cost of Customer Relationships Acquired
 Liquidity and Capital Resources
     29




---



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30




---



##### Table of Contents



Contractual
    
    
    
    
    
    Less than
    
    
    1 to 3
    
    
    3 to 5
    
    
    More thanObligation
    
    Total
    
    
    1 year
    
    
    years
    
    
    years
    
    
    5 years(In Thousands)Operating leases
    
    $
    840
    
    
    
    445
    
    
    
    360
    
    
    
    35
    
    
    
    Other
    
    
    351
    
    
    
    265
    
    
    
    86
    
    
    
    
    
    
    
    Total operating
leases and other
    
    $
    1,191
    
    
    
    710
    
    
    
    446
    
    
    
    35
    
    
    
    Future policy benefit reserves:Life insurance
    
    $
    432,017
    
    
    
    161
    
    
    
    902
    
    
    
    8,462
    
    
    
    422,492Annuities
    
    
    18,994
    
    
    
    4,696
    
    
    
    2,864
    
    
    
    5,222
    
    
    
    6,212Accident and health
    
    
    11,801
    
    
    
    11,801
    
    
    
    
    
    
    
    
    
    
    
    Total future policy
benefit reserves
    
    $
    462,812
    
    
    
    16,658
    
    
    
    3,766
    
    
    
    13,684
    
    
    
    428,704Policy claims payable:Life insurance
    
    $
    5,494
    
    
    
    5,494
    
    
    
    
    
    
    
    
    
    
    
    Accident and health
    
    
    2,213
    
    
    
    2,213
    
    
    
    
    
    
    
    
    
    
    
    Casualty
    
    
    6,603
    
    
    
    6,603
    
    
    
    
    
    
    
    
    
    
    
    Total policy
claims payable
    
    $
    14,310
    
    
    
    14,310
    
    
    
    
    
    
    
    
    
    
    
    Convertible preferred stock
    
    $
    9,814
    
    
    
    
    
    
    
    
    
    
    
    9,814
    
    
    
    Total contractual obligations
    
    $
    488,127
    
    
    
    31,678
    
    
    
    4,212
    
    
    
    23,533
    
    
    
    428,704
  31




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##### Table of Contents



Parent Company Liquidity and Capital Resources
   Critical Accounting Policies
  Policy Liabilities
   Deferred Policy Acquisition Costs
  32




---



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Valuation of Investments in Fixed Maturity and Equity Securities
  33




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34




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##### Table of Contents



ITEM 3
 QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
   September 30, 2005
(In thousands)
 Decreases in Interest Rates
    
    
    
    
    
    
    Increases in Interest Rates300 Basis
    
    200 Basis
    
    
    100 Basis
    
    
    
    
    
    
    100 Basis
    
    
    200 Basis
    
    
    300 BasisPoints
    
    Points
    
    
    Points
    
    
    
    
    
    
    Points
    
    
    Points
    
    
    Points$66,579
    
    $
    44,026
    
    
    $
    25,502
    
    
    
    
    
    
    $
    (33,123
    )
    
    $
    (62,736
    )
    
    $
    (89,104
    )
 December 31, 2004
(In thousands)
 Decreases in Interest Rates
    
    
    
    
    
    
    Increases in Interest Rates300 Basis
    
    200 Basis
    
    
    100 Basis
    
    
    
    
    
    
    100 Basis
    
    
    200 Basis
    
    
    300 BasisPoints
    
    Points
    
    
    Points
    
    
    
    
    
    
    Points
    
    
    Points
    
    
    Points$69,321
    
    $
    47,412
    
    
    $
    28,368
    
    
    
    
    
    
    $
    (20,298
    )
    
    $
    (48,702
    )
    
    $
    (74,613
    )
   35




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##### Table of Contents



Market Risk Related to Equity Price
  36




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##### Table of Contents



ITEM 4
 CONTROLS AND PROCEDURES
 (a) Disclosure Controls and Procedures
       37




---



##### Table of Contents




    
    failure to evaluate the valuation allowance on our deferred tax account;
    
    failure to maintain end user controls over the Excel file for payment of certain
insurance commissions;
    
    failure to document and test certain reinsurance processes;
    
    failure to adequately review market values of certain fixed income securities;
    
    failure to maintain end user controls relating to market value adjustments of
certain investment securities provided by a broker-dealer; and
    
    failure to maintain adequate documentation and controls regarding certain payroll
procedures.
 (b) Change in Internal Control over Financial Reporting
    
    
    In June 2005, we hired a new Vice President, Financial Reporting and Tax, with
significant experience in U.S. GAAP and SEC reporting who will be responsible for the
preparation and supervision of the Companys financial statements. This individual
reports directly to the Chief Executive Officer. In addition, we plan on assuring that
at least one other person is fully trained and experienced to step in and perform the
duties of the Vice President, Financial Reporting and Tax if he should, for any
reason, be unable to do so.
 38




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##### Table of Contents




    
    Hiring new personnel to work with the Vice President, Financial Reporting and Tax
to develop additional expertise in U.S. GAAP and SEC reporting and to insure that
adequate depth is developed in the Companys financial reporting area.
    
    Strengthening the process of work paper review by senior members of management to
ensure the completeness and accuracy of supporting work papers and schedules,
including formalized sign-off processes.
    
    Additional training of accounting department personnel in U.S. GAAP and SEC
reporting. This is ongoing during 2005.
    
    Adopting procedures to seek a more thorough and timely review process by senior
management of the financial statement process.
  39




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##### Table of Contents



PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
 Delia Bolanos Andrade, et al v. Citizens Insurance Company of America,
Citizens, Inc., Negocios Savoy, S.A., Harold E. Riley, and Mark A. Oliver, Case Number 99-09099
   40




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##### Table of Contents



Item 2. Changes in Securities
  
 Item 3. Defaults upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  41




---



##### Table of Contents



Item 6. Exhibits
 3.1
    
    Restated and Amended Articles of Incorporation (a)3.2
    
    Bylaws (b)3.3
    
    Amendment to State Series A-1 and A-2 Senior Convertible Preferred Stock (j)10.1
    
    Self-Administered Automatic Reinsurance Agreement  Citizens Insurance Company of
America and Riunione Adriatica di Sicurta, S.p.A. (c)10.2
    
    Bulk Accidental Death Benefit Reinsurance Agreement between Connecticut General Life
Insurance Company and Citizens Insurance Company of America, as amended (d)10.3
    
    Plan and Agreement of Exchange between Citizens, Inc. and Combined Underwriters Life
Insurance Company (e)10.4
    
    Plan and Agreement of Exchange between Citizens, Inc. and Lifeline Underwriters Life
Insurance Company (f)10.5
    
    Plan and Agreement of Merger by and among Citizens, Inc., Citizens Acquisition, Inc.
and First Alliance Corporation (g)10.6
    
    Plan and Agreement of Merger by and among Citizens, Inc., Citizens Acquisition, Inc.
and Mid-American Alliance Corporation. (h)10.9
    
    Loan Agreement, Security Agreement and Note dated March 22,2004 between Citizens,
Inc. and Regions Bank (k)10.9(a)
    
    Second Amendment to Loan Agreement between Citizens, Inc. and Regions Bank dated
October 1, 2004 (l)10.9(b)
    
    Security Agreement between Citizens Insurance Company of America and Regions Bank dated
October 1, 2004 (l)10.12(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 (j)10.12(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 (j)10.12(c)
    
    Unit Warrant dated July 12, 2004, to Mainfield Enterprises, Inc. (j)10.12(d)
    
    Unit Warrant dated July 12, 2004, to Steelhead Investments Ltd. (j)10.12(e)
    
    Unit Warrant dated July 12, 2004, to Portside Growth and Opportunity Fund (j)10.12(f)
    
    Unit Warrant dated July 12, 2004, to Smithfield Fiduciary LLC (j)10.12(g)
    
    Warrant to Purchase Class A Common Stock to Mainfield Enterprises, Inc. (j)10.12(h)
    
    Warrant to Purchase Class A Common Stock to Steelhead Investments Ltd. (j)10.12(i)
    
    Warrant to Purchase Class A Common Stock to Portside Growth and Opportunity Fund (j)10.12(j)
    
    Warrant to Purchase Class A Common Stock to Smithfield Fiduciary LLC (j)10.12(k)
    
    Subordination Agreement among Regions Bank, the Purchasers and Citizens, Inc. dated July 12, 2004 (j)10.12(l)
    
    Non-Exclusive Finders Agreement dated September 29, 2003, between Citizens, Inc. and
the Shemano Group, Inc. (j)11.0
    
    Statement re: Computation of per share earnings (j)31.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act*31.2
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act*32.1
    
    Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act*32.2
    
    Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act*
 
 *
    
    Filed herewith.(a)
    
    Filed with the Registrants Annual Report on Form 10-K for the year ended December 31,
2003.(b)
    
    Filed with the Registrants Registration Statement on Form S-4, Registration No.
33-59039, filed with the Commission on May 2, 1995.(c)
    
    Filed as Exhibit 10.8 with the Registration Statement on Form S-4, SEC File No.
333-16163, filed on or about November 4, 1996.(d)
    
    Filed as Exhibit 10.9 with the Registrants Annual Report on Form 10-K for the year
ended December 31, 1996 and incorporated herein by reference.(e)
    
    Filed as Appendix A with the Registrants Registration Statement on Form S-4,
Registration No. 333-76926 dated January 18, 2002 and incorporated herein by reference.(f)
    
    Filed as Appendix B with the Registrants Registration Statement on Form S-4,
Registration No. 333-76926 dated January 18, 2002, and incorporated herein by reference.(g)
    
    Filed as Appendix A with the Registrants Registration Statement on Form S-4,
Registration No. 333-102016 dated December 19, 2002, and incorporated herein by reference.(h)
    
    Filed as Appendix A with the Registrants Registration Statement on Form S-4,
Registration No. 333-106128 dated June 13, 2003, and incorporated herein by reference.(i)
    
    See Note 6 to the Notes to Consolidated Financial Statements included in Item 1 of Part
1 of this Form 10-Q.(j)
    
    Filed with the Registrants Periodic Report on Form 8-K on July 15, 2004 and
incorporated herein by reference.(k)
    
    Filed on March 26, 2004 as Exhibit 10.10 with the Registrants Current Report on Form
8-K and incorporated herein by reference.(l)
    
    Filed on October 1, 2004 as Exhibit 10.11 with the Registrants Current Report o Form
8-K and incorporated herein by reference. 42




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##### Table of Contents



SIGNATURES
  CITIZENS, INC.By:
    
    /s/ Mark A. OliverMark A. OliverChief Executive Officer and PresidentBy:
    
    /s/ Larry E. CarsonLarry E. CarsonVice President, Chief Financial Officer andTreasurer
  43




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##### Table of Contents



Item 6. Exhibit Index
 3.1
    
    Restated and Amended Articles of Incorporation (a)3.2
    
    Bylaws (b)3.3
    
    Amendment to State Series A-1 and A-2 Senior Convertible Preferred Stock (j)10.1
    
    Self-Administered Automatic Reinsurance Agreement  Citizens Insurance Company of
America and Riunione Adriatica di Sicurta, S.p.A. (c)10.2
    
    Bulk Accidental Death Benefit Reinsurance Agreement between Connecticut General Life
Insurance Company and Citizens Insurance Company of America, as amended (d)10.3
    
    Plan and Agreement of Exchange between Citizens, Inc. and Combined Underwriters Life
Insurance Company (e)10.4
    
    Plan and Agreement of Exchange between Citizens, Inc. and Lifeline Underwriters Life
Insurance Company (f)10.5
    
    Plan and Agreement of Merger by and among Citizens, Inc., Citizens Acquisition, Inc.
and First Alliance Corporation (g)10.6
    
    Plan and Agreement of Merger by and among Citizens, Inc., Citizens Acquisition, Inc.
and Mid-American Alliance Corporation. (h)10.9
    
    Loan Agreement, Security Agreement and Note dated March 22,2004 between Citizens,
Inc. and Regions Bank (k)10.9(a)
    
    Second Amendment to Loan Agreement between Citizens, Inc. and Regions Bank dated
October 1, 2004 (l)10.9(b)
    
    Security Agreement between Citizens Insurance Company of America and Regions Bank dated
October 1, 2004 (l)10.12(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 (j)10.12(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 (j)10.12(c)
    
    Unit Warrant dated July 12, 2004, to Mainfield Enterprises, Inc. (j)10.12(d)
    
    Unit Warrant dated July 12, 2004, to Steelhead Investments Ltd. (j)10.12(e)
    
    Unit Warrant dated July 12, 2004, to Portside Growth and Opportunity Fund (j)10.12(f)
    
    Unit Warrant dated July 12, 2004, to Smithfield Fiduciary LLC (j)10.12(g)
    
    Warrant to Purchase Class A Common Stock to Mainfield Enterprises, Inc. (j)10.12(h)
    
    Warrant to Purchase Class A Common Stock to Steelhead Investments Ltd. (j)10.12(i)
    
    Warrant to Purchase Class A Common Stock to Portside Growth and Opportunity Fund (j)10.12(j)
    
    Warrant to Purchase Class A Common Stock to Smithfield Fiduciary LLC (j)10.12(k)
    
    Subordination Agreement among Regions Bank, the Purchasers and Citizens, Inc. dated July 12, 2004 (j)10.12(l)
    
    Non-Exclusive Finders Agreement dated September 29, 2003, between Citizens, Inc. and
the Shemano Group, Inc. (j)11.0
    
    Statement re: Computation of per share earnings (j)31.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act*31.2
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act*32.1
    
    Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act*32.2
    
    Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act*
 
 *
    
    Filed herewith.(a)
    
    Filed with the Registrants Annual Report on Form 10-K for the year ended December 31,
2003.(b)
    
    Filed with the Registrants Registration Statement on Form S-4, Registration No.
33-59039, filed with the Commission on May 2, 1995.(c)
    
    Filed as Exhibit 10.8 with the Registration Statement on Form S-4, SEC File No.
333-16163, filed on or about November 4, 1996.(d)
    
    Filed as Exhibit 10.9 with the Registrants Annual Report on Form 10-K for the year
ended December 31, 1996 and incorporated herein by reference.(e)
    
    Filed as Appendix A with the Registrants Registration Statement on Form S-4,
Registration No. 333-76926 dated January 18, 2002 and incorporated herein by reference.(f)
    
    Filed as Appendix B with the Registrants Registration Statement on Form S-4,
Registration No. 333-76926 dated January 18, 2002, and incorporated herein by reference.(g)
    
    Filed as Appendix A with the Registrants Registration Statement on Form S-4,
Registration No. 333-102016 dated December 19, 2002, and incorporated herein by reference.(h)
    
    Filed as Appendix A with the Registrants Registration Statement on Form S-4,
Registration No. 333-106128 dated June 13, 2003, and incorporated herein by reference.(i)
    
    See Note 6 to the Notes to Consolidated Financial Statements included in Item 1 of Part
1 of this Form 10-Q.(j)
    
    Filed with the Registrants Periodic Report on Form 8-K on July 15, 2004 and
incorporated herein by reference.(k)
    
    Filed on March 26, 2004 as Exhibit 10.10 with the Registrants Current Report on Form
8-K and incorporated herein by reference.(l)
    
    Filed on October 1, 2004 as Exhibit 10.11 with the Registrants Current Report o Form
8-K and incorporated herein by reference. 44