##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended June 30, 2010
 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.
 (Exact name of registrant as specified in its charter)
 Colorado
    
    84-0755371(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)400 East Anderson Lane, Austin, Texas
    
    78752(Address of principal executive offices)
    
    (Zip Code)
 (Registrants telephone number, including area code)
 (Former name, former address and former fiscal year, if changed since last report.)
 þ o
 o
Yes o No
  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, June 30,
2010 (Unaudited) and December 31, 2009
    
    
    2Consolidated Statements of Operations, Three Months
Ended June 30, 2010 and 2009 (Unaudited)
    
    
    4Consolidated Statements of Operations, Six Months
Ended June 30, 2010 and 2009 (Unaudited)
    
    
    5Consolidated Statements of Cash Flows, Six Months
Ended June 30, 2010 and 2009 (Unaudited)
    
    
    6Notes to Consolidated Financial Statements
    
    
    8Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    25Item 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)
 June 30,
    
    
    December 31,Assets
    
    2010
    
    
    2009(Unaudited)Investments:Fixed maturities available-for-sale, at fair value

(cost: $411,937 and $389,195 in 2010 and 2009, respectively)
    
    $
    421,127
    
    
    
    385,579Fixed maturities held-to-maturity, at amortized cost

(fair value: $187,641 and $199,676 in 2010 and 2009, respectively)
    
    
    186,640
    
    
    
    206,909Equity securities available-for-sale, at fair value

(cost: $25,577 and $25,899 in 2010 and 2009, respectively)
    
    
    30,809
    
    
    
    33,477Mortgage loans on real estate
    
    
    1,612
    
    
    
    1,533Policy loans
    
    
    33,973
    
    
    
    32,096Real estate held for sale
    
    
    2,712
    
    
    
    2,825Real estate held for investment

(less $420 and $374 accumulated depreciation in 2010 and 2009,
respectively)
    
    
    6,514
    
    
    
    6,305Other long-term investments
    
    
    41
    
    
    
    86Short-term investments
    
    
    
    
    
    
    2,510Total investments
    
    
    683,428
    
    
    
    671,320Cash and cash equivalents
    
    
    81,325
    
    
    
    48,625Accrued investment income
    
    
    7,179
    
    
    
    7,455Reinsurance recoverable
    
    
    10,402
    
    
    
    11,587Deferred policy acquisition costs
    
    
    118,372
    
    
    
    115,570Cost of customer relationships acquired
    
    
    32,949
    
    
    
    34,728Goodwill
    
    
    17,160
    
    
    
    17,160Other intangible assets
    
    
    1,033
    
    
    
    1,046Federal income tax receivable
    
    
    3,277
    
    
    
    4,023Property and equipment, net
    
    
    6,626
    
    
    
    6,018Due premiums, net

(less $1,461 and $1,644 allowance for doubtful accounts in 2010 and 2009, respectively)
    
    
    7,923
    
    
    
    8,960Prepaid expenses
    
    
    2,291
    
    
    
    Other assets
    
    
    502
    
    
    
    834Total assets
    
    $
    972,467
    
    
    
    927,326
    2




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 Consolidated Statements of Financial Position, Continued
(In thousands, except share amounts)
 June 30,
    
    
    December 31,Liabilities and Stockholders Equity
    
    2010
    
    
    2009(Unaudited)Liabilities:Policy liabilities:Future policy benefit reserves:Life insurance
    
    $
    610,803
    
    
    
    592,358Annuities
    
    
    39,466
    
    
    
    37,882Accident and health
    
    
    6,062
    
    
    
    6,399Dividend accumulations
    
    
    7,474
    
    
    
    5,621Premiums paid in advance
    
    
    21,598
    
    
    
    20,373Policy claims payable
    
    
    10,107
    
    
    
    10,222Other policyholders funds
    
    
    7,975
    
    
    
    8,105Total policy liabilities
    
    
    703,485
    
    
    
    680,960Commissions payable
    
    
    2,209
    
    
    
    2,434Deferred federal income tax
    
    
    12,513
    
    
    
    8,052Payable for securities in process of settlement
    
    
    17,278
    
    
    
    6,000Warrants outstanding
    
    
    1,567
    
    
    
    1,819Other liabilities
    
    
    8,719
    
    
    
    11,986Total liabilities
    
    
    745,771
    
    
    
    711,251Commitments and contingencies (Note 8)Stockholders equity:Common stock:Class A, no par value, 100,000,000 shares authorized,
51,822,497 shares issued in 2010 and 2009,
including shares in treasury of 3,135,738 in
2010 and 2009
    
    
    256,703
    
    
    
    256,703Class B, no par value, 2,000,000 shares authorized, 1,001,714 shares issued and outstanding in 2010 and 2009
    
    
    3,184
    
    
    
    3,184Retained deficit
    
    
    (33,302
    )
    
    
    (38,092
    )Accumulated other comprehensive income:Unrealized gains on securities, net of tax
    
    
    11,122
    
    
    
    5,291237,707
    
    
    
    227,086Treasury stock, at cost
    
    
    (11,011
    )
    
    
    (11,011
    )Total stockholders equity
    
    
    226,696
    
    
    
    216,075Total liabilities and stockholders equity
    
    $
    972,467
    
    
    
    927,326
   3




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 
 Consolidated Statements of Operations
 Three Months Ended June 30,  (In thousands, except per share amounts)  (Unaudited)
 2010
    
    
    2009Revenues:Premiums:Life insurance
    
    $
    35,085
    
    
    
    34,586Accident and health insurance
    
    
    409
    
    
    
    368Property insurance
    
    
    1,182
    
    
    
    1,161Net investment income
    
    
    8,275
    
    
    
    6,578Realized gains, net
    
    
    692
    
    
    
    1,520Decrease in fair value of warrants
    
    
    366
    
    
    
    976Other income
    
    
    151
    
    
    
    240Total revenues
    
    
    46,160
    
    
    
    45,429Benefits and expenses:Insurance benefits paid or provided:Claims and surrenders
    
    
    15,214
    
    
    
    14,953Increase in future policy benefit reserves
    
    
    9,783
    
    
    
    9,958Policyholders dividends
    
    
    1,777
    
    
    
    1,453Total insurance benefits paid or provided
    
    
    26,774
    
    
    
    26,364Commissions
    
    
    9,028
    
    
    
    8,992Other underwriting, acquisition and insurance expenses
    
    
    6,988
    
    
    
    7,808Capitalization of deferred policy acquisition costs
    
    
    (5,875
    )
    
    
    (5,894
    )Amortization of deferred policy acquisition costs
    
    
    4,115
    
    
    
    3,720Amortization of cost of customer relationships acquired
and other intangibles
    
    
    768
    
    
    
    818Total benefits and expenses
    
    
    41,798
    
    
    
    41,808Income before federal income tax
    
    
    4,362
    
    
    
    3,621Federal income tax expense
    
    
    1,177
    
    
    
    320Net income
    
    $
    3,185
    
    
    
    3,301Net income applicable to common stockholders
    
    $
    3,185
    
    
    
    2,131Per Share Amounts:Basic and diluted earnings per share of Class A common stock
    
    $
    0.07
    
    
    
    0.04Basic and diluted earnings per share of Class B common stock
    
    $
    0.03
    
    
    
    0.02
   4




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 
 Consolidated Statements of Operations
 Six Months Ended June 30,  (In thousands, except per share amounts)  (Unaudited)
 2010
    
    
    2009Revenues:Premiums:Life insurance
    
    $
    68,681
    
    
    
    67,269Accident and health insurance
    
    
    823
    
    
    
    764Property insurance
    
    
    2,362
    
    
    
    2,309Net investment income
    
    
    16,624
    
    
    
    14,320Realized gains, net
    
    
    751
    
    
    
    1,821Decrease in fair value of warrants
    
    
    252
    
    
    
    3,081Other income
    
    
    499
    
    
    
    523Total revenues
    
    
    89,992
    
    
    
    90,087Benefits and expenses:Insurance benefits paid or provided:Claims and surrenders
    
    
    30,671
    
    
    
    29,760Increase in future policy benefit reserves
    
    
    19,328
    
    
    
    17,716Policyholders dividends
    
    
    3,347
    
    
    
    2,915Total insurance benefits paid or provided
    
    
    53,346
    
    
    
    50,391Commissions
    
    
    17,156
    
    
    
    17,027Other underwriting, acquisition and insurance expenses
    
    
    13,961
    
    
    
    15,117Capitalization of deferred policy acquisition costs
    
    
    (11,258
    )
    
    
    (10,951
    )Amortization of deferred policy acquisition costs
    
    
    8,447
    
    
    
    7,412Amortization of cost of customer relationships acquired
and other intangibles
    
    
    1,606
    
    
    
    1,684Total benefits and expenses
    
    
    83,258
    
    
    
    80,680Income before Federal income tax
    
    
    6,734
    
    
    
    9,407Federal income tax expense
    
    
    1,944
    
    
    
    1,729Net income
    
    $
    4,790
    
    
    
    7,678Net income applicable to common stockholders
    
    $
    4,790
    
    
    
    5,330Per Share Amounts:Basic earnings per share of Class A common stock
    
    $
    0.10
    
    
    
    0.11Basic earnings per share of Class B common stock
    
    $
    0.05
    
    
    
    0.06Diluted earnings per share of Class A common stock
    
    $
    0.10
    
    
    
    0.05Diluted earnings per share of Class B common stock
    
    $
    0.05
    
    
    
    0.03
   5




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 
 Consolidated Statements of Cash Flows
 Six Months Ended June 30,  (In thousands)  (Unaudited)
 2010
    
    
    2009Cash flows from operating activities:Net income
    
    $
    4,790
    
    
    
    7,678Adjustments to reconcile net income to net cash
provided by operating activities:Realized gains on sale of investments
and other assets
    
    
    (751
    )
    
    
    (1,821
    )Net deferred policy acquisition costs
    
    
    (2,811
    )
    
    
    (3,539
    )Amortization of cost of customer relationships
acquired and other intangibles
    
    
    1,606
    
    
    
    1,684Decrease in fair value of warrants
    
    
    (252
    )
    
    
    (3,081
    )Depreciation
    
    
    524
    
    
    
    622Amortization of premiums and discounts on
fixed maturities and short-term investments
    
    
    1,377
    
    
    
    1,079Deferred Federal income tax expense (benefit)
    
    
    27
    
    
    
    (1,003
    )Change in:Accrued investment income
    
    
    276
    
    
    
    1,267Reinsurance recoverable
    
    
    1,185
    
    
    
    736Due premiums and other receivables
    
    
    1,037
    
    
    
    235Future policy benefit reserves
    
    
    18,903
    
    
    
    17,123Other policyholders liabilities
    
    
    2,833
    
    
    
    1,048Federal income tax receivable
    
    
    746
    
    
    
    1,600Commissions payable and other liabilities
    
    
    (3,492
    )
    
    
    (317
    )Other, net
    
    
    (1,959
    )
    
    
    (1,340
    )Net cash provided by operating activities
    
    
    24,039
    
    
    
    21,971Cash flows from investing activities:Sale of fixed maturities, available-for-sale
    
    
    6,866
    
    
    
    38,670Maturity and calls of fixed maturities, available-for-sale
    
    
    86,600
    
    
    
    257,872Calls of fixed maturities, held-to-maturity
    
    
    51,250
    
    
    
    Purchase of fixed maturities, available-for-sale
    
    
    (105,524
    )
    
    
    (133,554
    )Purchase of fixed maturities, held-to-maturity
    
    
    (31,140
    )
    
    
    (161,279
    )Sale of equity securities, available-for-sale
    
    
    641
    
    
    
    1,175Purchase of equity securities, available-for-sale
    
    
    (136
    )
    
    
    (326
    )Principal payments on mortgage loans
    
    
    24
    
    
    
    14Mortgage loans funded
    
    
    
    
    
    
    (379
    )Increase in policy loans
    
    
    (1,877
    )
    
    
    (2,234
    )Sale of other long-term investments and property
and equipment
    
    
    
    
    
    
    580Purchase of other long-term investments and property and
equipment
    
    
    (1,332
    )
    
    
    (1,725
    )Maturity of short-term investments
    
    
    2,500
    
    
    
    2,250Purchase of short-term investments
    
    
    
    
    
    
    (2,605
    )Cash acquired in acquisition
    
    
    
    
    
    
    9,770Net cash provided by investing activities
    
    
    7,872
    
    
    
    8,229
    6




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

Six Months Ended June 30,
(In thousands)
(Unaudited)
 2010
    
    
    2009Cash flows from financing activities:Warrants exercised
    
    $
    
    
    
    
    69Annuity deposits
    
    
    2,458
    
    
    
    2,735Annuity withdrawals
    
    
    (1,669
    )
    
    
    (1,706
    )Net cash provided by financing activities
    
    
    789
    
    
    
    1,098Net increase in cash and cash equivalents
    
    
    32,700
    
    
    
    31,298Cash and cash equivalents at beginning of
year
    
    
    48,625
    
    
    
    63,792Cash and cash equivalents at end of period
    
    $
    81,325
    
    
    
    95,090Supplemental disclosures of operating activities:Cash paid during the period for income taxes
    
    $
    1,171
    
    
    
    1,125
 Supplemental Disclosures of Non-Cash Investing Activities:
  
  Supplemental Disclosures of Non-Cash Financing Activities:
    7




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 
 Notes to Consolidated Financial Statements
 June 30, 2010
 (Unaudited)
 (1)
    
    Financial StatementsBasis 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), Funeral Homes of America, Inc.
(FHA), 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 June 30, 2010, the consolidated statements
of operations for the three and six-month periods ended June 30, 2010 and 2009, and the
consolidated statements of cash flows for the six-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 June 30, 2010 and for
comparative periods have been made.
 The Company completed its acquisition of ICC in exchange for 1,294,000 shares of its Class A
common stock in the first quarter of 2009. ICC is the parent of ICIC, an Indiana life insurance
company. The transaction was valued at $9.0 million on the closing date of February 27, 2009.
On October 30, 2009, FHA completed the sale of its business assets consisting primarily of
funeral home assets. The transaction was valued at approximately $600,000.
 We provide life and health insurance policies through four of our subsidiaries  CICA, SPLIC,
CNLIC and ICIC. 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. FHA was a funeral home operator
before the sale of its assets in 2009.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 available-for-sale 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.
 
  8




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

June 30, 2010
(Unaudited)
 Significant Accounting Policies
 For a description of significant accounting policies, see Note 1 of the Notes to Consolidated
Financial Statements included in our 2009 Form 10-K Annual Report, which should be read in
conjunction with these accompanying Consolidated Financial Statements.
 (2)
    
    Accounting PronouncementsAccounting Standards Recently Adopted
 In January 2010, the Financial Accounting Standards Board (FASB) updated Accounting Standards
Codification (ASC) Topic 820, requiring additional disclosures about fair value measurements
regarding transfers between fair value categories as well as purchases, sales, issuances and
settlements related to fair value measurements of financial instruments with non-observable
inputs. This update was effective for interim and annual periods beginning after December 15,
2009 except for disclosures about purchases, sales, issuances and settlements of financial
instruments with non-observable inputs, which are effective for years beginning after December
15, 2010. The additional disclosures required by this update are included in the note on fair
value measurements upon adoption. The additional disclosures did not have a material impact on
our financial condition or results of operations.
 (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.
  9




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
June 30, 2010
(Unaudited)
 Three Months Ended June 30, 2010Home
    
    
    OtherLife
    
    
    Service
    
    
    Non-InsuranceInsurance
    
    
    Insurance
    
    
    Enterprises
    
    
    Consolidated(In thousands)Revenues:Premiums
    
    $
    26,081
    
    
    
    10,595
    
    
    
    
    
    
    
    36,676Net investment income
    
    
    4,635
    
    
    
    3,475
    
    
    
    165
    
    
    
    8,275Realized gains, net
    
    
    144
    
    
    
    548
    
    
    
    
    
    
    
    692Decrease in fair value of warrants
    
    
    
    
    
    
    
    
    
    
    366
    
    
    
    366Other income
    
    
    132
    
    
    
    4
    
    
    
    15
    
    
    
    151Total revenue
    
    
    30,992
    
    
    
    14,622
    
    
    
    546
    
    
    
    46,160Benefits and expenses:Insurance benefits paid or provided:Claims and surrenders
    
    
    10,367
    
    
    
    4,847
    
    
    
    
    
    
    
    15,214Increase in future policy
benefit reserves
    
    
    8,773
    
    
    
    1,010
    
    
    
    
    
    
    
    9,783Policyholders dividends
    
    
    1,760
    
    
    
    17
    
    
    
    
    
    
    
    1,777Total insurance benefits paid or provided
    
    
    20,900
    
    
    
    5,874
    
    
    
    
    
    
    
    26,774Commissions
    
    
    5,239
    
    
    
    3,789
    
    
    
    
    
    
    
    9,028Other underwriting, acquisition and insurance
expenses
    
    
    2,520
    
    
    
    3,794
    
    
    
    674
    
    
    
    6,988Capitalization of deferred policy acquisition costs
    
    
    (4,475
    )
    
    
    (1,400
    )
    
    
    
    
    
    
    (5,875
    )Amortization of deferred policy acquisition costs
    
    
    4,257
    
    
    
    (142
    )
    
    
    
    
    
    
    4,115Amortization of cost of customer relationships
acquired and other intangibles
    
    
    289
    
    
    
    479
    
    
    
    
    
    
    
    768Total benefits and expenses
    
    
    28,730
    
    
    
    12,394
    
    
    
    674
    
    
    
    41,798Income (loss) before income tax expense
    
    $
    2,262
    
    
    
    2,228
    
    
    
    (128
    )
    
    
    4,362
  10




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
June 30, 2010
(Unaudited)
 Six Months Ended June 30, 2010Home
    
    
    OtherLife
    
    
    Service
    
    
    Non-InsuranceInsurance
    
    
    Insurance
    
    
    Enterprises
    
    
    Consolidated(In thousands)Revenues:Premiums
    
    $
    50,850
    
    
    
    21,016
    
    
    
    
    
    
    
    71,866Net investment income
    
    
    9,346
    
    
    
    7,007
    
    
    
    271
    
    
    
    16,624Realized gains (losses), net
    
    
    115
    
    
    
    681
    
    
    
    (45
    )
    
    
    751Decrease in fair value of warrants
    
    
    
    
    
    
    
    
    
    
    252
    
    
    
    252Other income
    
    
    409
    
    
    
    53
    
    
    
    37
    
    
    
    499Total revenue
    
    
    60,720
    
    
    
    28,757
    
    
    
    515
    
    
    
    89,992Benefits and expenses:Insurance benefits paid or provided:Claims and surrenders
    
    
    20,146
    
    
    
    10,525
    
    
    
    
    
    
    
    30,671Increase in future policy
benefit reserves
    
    
    17,435
    
    
    
    1,893
    
    
    
    
    
    
    
    19,328Policyholders dividends
    
    
    3,302
    
    
    
    45
    
    
    
    
    
    
    
    3,347Total insurance benefits paid or provided
    
    
    40,883
    
    
    
    12,463
    
    
    
    
    
    
    
    53,346Commissions
    
    
    9,744
    
    
    
    7,412
    
    
    
    
    
    
    
    17,156Other underwriting, acquisition and insurance
expenses
    
    
    5,617
    
    
    
    7,435
    
    
    
    909
    
    
    
    13,961Capitalization of deferred policy acquisition costs
    
    
    (8,162
    )
    
    
    (3,096
    )
    
    
    
    
    
    
    (11,258
    )Amortization of deferred policy acquisition costs
    
    
    8,139
    
    
    
    308
    
    
    
    
    
    
    
    8,447Amortization of cost of customer relationships
acquired and other intangibles
    
    
    619
    
    
    
    987
    
    
    
    
    
    
    
    1,606Total benefits and expenses
    
    
    56,840
    
    
    
    25,509
    
    
    
    909
    
    
    
    83,258Income (loss) before income tax expense
    
    $
    3,880
    
    
    
    3,248
    
    
    
    (394
    )
    
    
    6,734
  11




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
June 30, 2010
(Unaudited)
 Three Months Ended June 30, 2009Home
    
    
    OtherLife
    
    
    Service
    
    
    Non-InsuranceInsurance
    
    
    Insurance
    
    
    Enterprises
    
    
    Consolidated(In thousands)Revenues:Premiums
    
    $
    25,720
    
    
    
    10,395
    
    
    
    
    
    
    
    36,115Net investment income
    
    
    3,707
    
    
    
    2,868
    
    
    
    3
    
    
    
    6,578Realized gains, net
    
    
    358
    
    
    
    1,085
    
    
    
    77
    
    
    
    1,520Decrease in fair value of warrants
    
    
    
    
    
    
    
    
    
    
    976
    
    
    
    976Other income
    
    
    71
    
    
    
    46
    
    
    
    123
    
    
    
    240Total revenue
    
    
    29,856
    
    
    
    14,394
    
    
    
    1,179
    
    
    
    45,429Benefits and expenses:Insurance benefits paid or provided:Claims and surrenders
    
    
    10,514
    
    
    
    4,439
    
    
    
    
    
    
    
    14,953Increase in future policy
benefit reserves
    
    
    8,118
    
    
    
    1,840
    
    
    
    
    
    
    
    9,958Policyholders dividends
    
    
    1,435
    
    
    
    18
    
    
    
    
    
    
    
    1,453Total insurance benefits paid or provided
    
    
    20,067
    
    
    
    6,297
    
    
    
    
    
    
    
    26,364Commissions
    
    
    5,247
    
    
    
    3,745
    
    
    
    
    
    
    
    8,992Other underwriting, acquisition and insurance
expenses
    
    
    2,707
    
    
    
    4,035
    
    
    
    1,066
    
    
    
    7,808Capitalization of deferred policy acquisition costs
    
    
    (4,495
    )
    
    
    (1,399
    )
    
    
    
    
    
    
    (5,894
    )Amortization of deferred policy acquisition costs
    
    
    3,568
    
    
    
    152
    
    
    
    
    
    
    
    3,720Amortization of cost of customer relationships
acquired and other intangibles
    
    
    440
    
    
    
    378
    
    
    
    
    
    
    
    818Total benefits and expenses
    
    
    27,534
    
    
    
    13,208
    
    
    
    1,066
    
    
    
    41,808Income before income tax expense
    
    $
    2,322
    
    
    
    1,186
    
    
    
    113
    
    
    
    3,621
  12




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
June 30, 2010
(Unaudited)
 Six Months Ended June 30, 2009Home
    
    
    OtherLife
    
    
    Service
    
    
    Non-InsuranceInsurance
    
    
    Insurance
    
    
    Enterprises
    
    
    Consolidated(In thousands)Revenues:Premiums
    
    $
    49,775
    
    
    
    20,567
    
    
    
    
    
    
    
    70,342Net investment income
    
    
    7,964
    
    
    
    6,270
    
    
    
    86
    
    
    
    14,320Realized gains, net
    
    
    418
    
    
    
    1,326
    
    
    
    77
    
    
    
    1,821Decrease in fair value of warrants
    
    
    
    
    
    
    
    
    
    
    3,081
    
    
    
    3,081Other income
    
    
    159
    
    
    
    64
    
    
    
    300
    
    
    
    523Total revenue
    
    
    58,316
    
    
    
    28,227
    
    
    
    3,544
    
    
    
    90,087Benefits and expenses:Insurance benefits paid or provided:Claims and surrenders
    
    
    20,224
    
    
    
    9,536
    
    
    
    
    
    
    
    29,760Increase in future policy
benefit reserves
    
    
    15,408
    
    
    
    2,308
    
    
    
    
    
    
    
    17,716Policyholders dividends
    
    
    2,878
    
    
    
    37
    
    
    
    
    
    
    
    2,915Total insurance benefits paid or provided
    
    
    38,510
    
    
    
    11,881
    
    
    
    
    
    
    
    50,391Commissions
    
    
    9,704
    
    
    
    7,323
    
    
    
    
    
    
    
    17,027Other underwriting, acquisition and insurance
expenses
    
    
    5,310
    
    
    
    7,989
    
    
    
    1,818
    
    
    
    15,117Capitalization of deferred policy acquisition costs
    
    
    (8,252
    )
    
    
    (2,699
    )
    
    
    
    
    
    
    (10,951
    )Amortization of deferred policy acquisition costs
    
    
    6,920
    
    
    
    492
    
    
    
    
    
    
    
    7,412Amortization of cost of customer relationships
acquired and other intangibles
    
    
    708
    
    
    
    976
    
    
    
    
    
    
    
    1,684Total benefits and expenses
    
    
    52,900
    
    
    
    25,962
    
    
    
    1,818
    
    
    
    80,680Income before income tax expense
    
    $
    5,416
    
    
    
    2,265
    
    
    
    1,726
    
    
    
    9,407
 (4)
    
    Total Comprehensive Income
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(In thousands)
    
    
    (In thousands)Net income
    
    $
    3,185
    
    
    
    3,301
    
    
    
    4,790
    
    
    
    7,678Other comprehensive
income net of
effects
of deferred
acquisition
costs and
taxes:Unrealized gains on available-for-sale
securities
    
    
    3,815
    
    
    
    11,410
    
    
    
    10,266
    
    
    
    5,651Tax expense
    
    
    (2,646
    )
    
    
    (1,160
    )
    
    
    (4,435
    )
    
    
    (555
    )Other comprehensive income
    
    
    1,169
    
    
    
    10,250
    
    
    
    5,831
    
    
    
    5,096Total comprehensive income
    
    $
    4,354
    
    
    
    13,551
    
    
    
    10,621
    
    
    
    12,774
  13




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
June 30, 2010
(Unaudited)
 (5)
    
    Earnings per Share
 The following table sets forth the computation of basic and diluted earnings per share:
 Three Months Ended June 30,2010
    
    
    2009(In thousands, except per share amounts)Basic and diluted earnings per share:Numerator:Net income
    
    $
    3,185
    
    
    
    3,301Less: Preferred stock dividend
    
    
    
    
    
    
    (98
    )Accretion of deferred issuance costs and
discounts on preferred stock
    
    
    
    
    
    
    (1,072
    )Net income available to common stockholders
    
    $
    3,185
    
    
    
    2,131Net income allocated to Class A common stock
    
    $
    3,153
    
    
    
    2,109Net income allocated to Class B common stock
    
    
    32
    
    
    
    22Net income available to common stockholders
    
    $
    3,185
    
    
    
    2,131Denominator:Weighted average shares of Class A outstanding -
basic and diluted
    
    
    48,687
    
    
    
    46,964Weighted average shares of Class B outstanding -
basic and diluted
    
    
    1,002
    
    
    
    1,002Total weighted average shares outstanding -
basic and diluted
    
    
    49,689
    
    
    
    47,966Basic and diluted earnings per share of Class A common stock
    
    $
    0.07
    
    
    
    0.04Basic and diluted earnings per share of Class B common stock
    
    $
    0.03
    
    
    
    0.02
  14




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
June 30, 2010
(Unaudited)
 Six Months Ended June 30,2010
    
    
    2009(In thousands, except per share amounts)Basic and diluted earnings per share:Numerator:Net income
    
    $
    4,790
    
    
    
    7,678Less: Preferred stock dividend
    
    
    
    
    
    
    (203
    )Accretion of deferred issuance costs and
discounts on preferred stock
    
    
    
    
    
    
    (2,145
    )Net income available to common stockholders
    
    $
    4,790
    
    
    
    5,330Net income allocated to Class A common stock
    
    $
    4,741
    
    
    
    5,273Net income allocated to Class B common stock
    
    
    49
    
    
    
    57Net income available to common stockholders
    
    $
    4,790
    
    
    
    5,330Denominator:Weighted average shares of Class A
outstanding -
basic and diluted
    
    
    48,687
    
    
    
    46,538Weighted average shares of Class B
outstanding -
basic and diluted
    
    
    1,002
    
    
    
    1,002Total weighted average shares outstanding -
basic and diluted
    
    
    49,689
    
    
    
    47,540Basic earnings per share of Class A common stock
    
    $
    0.10
    
    
    
    0.11Basic earnings per share of Class B common stock
    
    $
    0.05
    
    
    
    0.06Diluted earnings per share of Class A common stock
    
    $
    0.10
    
    
    
    0.05Diluted earnings per share of Class B common stock
    
    $
    0.05
    
    
    
    0.03
 For the three and six months ended June 30, 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 outstanding for the period was 48,687,000.
 For the six months ended June 30, 2009, certain warrants relative to the Convertible
Preferred Stock became dilutive. As such, the diluted weighted average shares of Class A
common stock for the period was 46,599,000. Total diluted weighted average shares was
47,601,000.
  15




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
June 30, 2010
(Unaudited)
 (6)
    
    Investments
 Financial stability and the prevention of capital erosion are important investment
considerations for the Company. A primary investment goal is the conservation of assets due
to the long-term nature of a significant portion of our insurance liabilities. The Company
invests primarily in fixed maturity securities, which totaled 79.5% of total investments and
cash and cash equivalents at June 30, 2010.
 June 30, 2010
    
    
    December 31, 2009Carrying
    
    
    % of Total
    
    
    Carrying
    
    
    % of TotalValue
    
    
    Carrying Value
    
    
    Value
    
    
    Carrying Value(In thousands)
    
    
    
    
    
    (In thousands)Fixed maturity securities
    
    $
    607,767
    
    
    
    79.5
    %
    
    $
    592,488
    
    
    
    82.3
    %Equity securities
    
    
    30,809
    
    
    
    4.0
    
    
    
    33,477
    
    
    
    4.6Mortgage loans
    
    
    1,612
    
    
    
    0.2
    
    
    
    1,533
    
    
    
    0.2Policy loans
    
    
    33,973
    
    
    
    4.5
    
    
    
    32,096
    
    
    
    4.5Real estate and other long-term
investments
    
    
    9,267
    
    
    
    1.2
    
    
    
    9,216
    
    
    
    1.3Short-term investments
    
    
    
    
    
    
    
    
    
    
    2,510
    
    
    
    0.3Cash and cash equivalents
    
    
    81,325
    
    
    
    10.6
    
    
    
    48,625
    
    
    
    6.8Total cash, cash equivalents and
investments
    
    $
    764,753
    
    
    
    100.0
    %
    
    $
    719,945
    
    
    
    100.0
    %
 The following tables represent gross unrealized gains and losses for fixed maturities
and equity securities as of the periods indicated.
 June 30, 2010Cost or
    
    
    Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    Value(In thousands)Fixed maturities available-for-sale:U.S. Treasury securities
    
    $
    11,083
    
    
    
    2,364
    
    
    
    
    
    
    
    13,447U.S. Government-sponsored enterprises
    
    
    165,263
    
    
    
    1,602
    
    
    
    226
    
    
    
    166,639States of the United States and political
subdivisions of the states
    
    
    61,795
    
    
    
    770
    
    
    
    2,553
    
    
    
    60,012Foreign governments
    
    
    105
    
    
    
    30
    
    
    
    
    
    
    
    135Corporate
    
    
    157,216
    
    
    
    7,572
    
    
    
    1,309
    
    
    
    163,479Securities not due at a single maturity date
    
    
    16,475
    
    
    
    990
    
    
    
    50
    
    
    
    17,415Total fixed maturities
available-for-sale
    
    
    411,937
    
    
    
    13,328
    
    
    
    4,138
    
    
    
    421,127Fixed maturities held-to-maturity:U.S. Government-sponsored enterprises
    
    
    186,640
    
    
    
    1,065
    
    
    
    64
    
    
    
    187,641Total fixed maturities
    
    $
    598,577
    
    
    
    14,393
    
    
    
    4,202
    
    
    
    608,768Total equity securities
    
    $
    25,577
    
    
    
    5,244
    
    
    
    12
    
    
    
    30,809
  16




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
June 30, 2010
(Unaudited)
 December 31, 2009Cost or
    
    
    Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    Value(In thousands)Fixed maturities available-for-sale:U.S. Treasury securities
    
    $
    11,110
    
    
    
    1,324
    
    
    
    
    
    
    
    12,434U.S. Government-sponsored enterprises
    
    
    184,797
    
    
    
    96
    
    
    
    4,610
    
    
    
    180,283States of the United States and political
subdivisions of the states
    
    
    60,070
    
    
    
    321
    
    
    
    3,199
    
    
    
    57,192Foreign governments
    
    
    105
    
    
    
    15
    
    
    
    
    
    
    
    120Corporate
    
    
    114,175
    
    
    
    3,726
    
    
    
    1,803
    
    
    
    116,098Securities not due at a single maturity date
    
    
    18,938
    
    
    
    556
    
    
    
    42
    
    
    
    19,452Total fixed maturities
available-for-sale
    
    
    389,195
    
    
    
    6,038
    
    
    
    9,654
    
    
    
    385,579Fixed maturities held-to-maturity:U.S. Government-sponsored
enterprises
    
    
    206,909
    
    
    
    18
    
    
    
    7,251
    
    
    
    199,676Total fixed maturities
    
    $
    596,104
    
    
    
    6,056
    
    
    
    16,905
    
    
    
    585,255Total equitysecurities
    
    $
    25,899
    
    
    
    7,578
    
    
    
    
    
    
    
    33,477
  Valuation of Investments in Fixed Maturity and Equity Securities
    17




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
June 30, 2010
(Unaudited)
     June 30, 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
    
    $
    27,789
    
    
    
    226
    
    
    
    22
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27,789
    
    
    
    226
    
    
    
    22Securities issued by states and
political subdivisions
    
    
    6,803
    
    
    
    84
    
    
    
    8
    
    
    
    14,345
    
    
    
    2,469
    
    
    
    14
    
    
    
    21,148
    
    
    
    2,553
    
    
    
    22Corporate
    
    
    27,670
    
    
    
    802
    
    
    
    23
    
    
    
    6,846
    
    
    
    507
    
    
    
    10
    
    
    
    34,516
    
    
    
    1,309
    
    
    
    33Securities not due at a single
maturity date
    
    
    1,964
    
    
    
    20
    
    
    
    3
    
    
    
    477
    
    
    
    30
    
    
    
    7
    
    
    
    2,441
    
    
    
    50
    
    
    
    10Total available-for-sale
    
    
    64,226
    
    
    
    1,132
    
    
    
    56
    
    
    
    21,668
    
    
    
    3,006
    
    
    
    31
    
    
    
    85,894
    
    
    
    4,138
    
    
    
    87Held-to-maturity securities:U.S. Government-sponsored
enterprises
    
    
    12,981
    
    
    
    64
    
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,981
    
    
    
    64
    
    
    
    5Total fixed maturities
    
    $
    77,207
    
    
    
    1,196
    
    
    
    61
    
    
    
    21,668
    
    
    
    3,006
    
    
    
    31
    
    
    
    98,875
    
    
    
    4,202
    
    
    
    92Total equity securities
    
    $
    43
    
    
    
    12
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43
    
    
    
    12
    
    
    
    3
  18




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
June 30, 2010
(Unaudited)
 December 31, 2009Less 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
    
    $
    169,514
    
    
    
    4,610
    
    
    
    213
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    169,514
    
    
    
    4,610
    
    
    
    213Securities issued by states and
political subdivisions
    
    
    19,055
    
    
    
    343
    
    
    
    19
    
    
    
    14,995
    
    
    
    2,856
    
    
    
    15
    
    
    
    34,050
    
    
    
    3,199
    
    
    
    34Corporate
    
    
    36,342
    
    
    
    541
    
    
    
    21
    
    
    
    12,857
    
    
    
    1,261
    
    
    
    12
    
    
    
    49,199
    
    
    
    1,802
    
    
    
    33Securities not due at a single
maturity date
    
    
    179
    
    
    
    1
    
    
    
    1
    
    
    
    637
    
    
    
    42
    
    
    
    8
    
    
    
    816
    
    
    
    43
    
    
    
    9Total available-for-sale
    
    
    225,090
    
    
    
    5,495
    
    
    
    254
    
    
    
    28,489
    
    
    
    4,159
    
    
    
    35
    
    
    
    253,579
    
    
    
    9,654
    
    
    
    289Held-to-maturity securities:U.S. Government-sponsored
enterprises
    
    
    185,659
    
    
    
    7,251
    
    
    
    81
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    185,659
    
    
    
    7,251
    
    
    
    81Total fixed maturities
    
    $
    410,749
    
    
    
    12,746
    
    
    
    335
    
    
    
    28,489
    
    
    
    4,159
    
    
    
    35
    
    
    
    439,238
    
    
    
    16,905
    
    
    
    370
 As of June 30, 2010, the Company had 31 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 June 30, 2010 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.
 June 30, 2010Amortized
    
    
    FairCost
    
    
    Value(In thousands)Available-for-sale securities:Due in one year or less
    
    $
    16,659
    
    
    
    16,832Due after one year through five years
    
    
    31,182
    
    
    
    32,316Due after five years through ten
years
    
    
    84,151
    
    
    
    85,592Due after ten years
    
    
    263,470
    
    
    
    268,972Total available-for-sale securities
    
    
    395,462
    
    
    
    403,712Held-to-maturity securities:Due after ten years
    
    
    186,640
    
    
    
    187,641Securities not due at a single maturity date
    
    
    16,475
    
    
    
    17,415Total fixed maturities
    
    $
    598,577
    
    
    
    608,768
 The securities not due at a single maturity date are primarily mortgage-backed obligations
of U.S. Government-sponsored enterprises and corporate securities.
  19




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
June 30, 2010
(Unaudited)
 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 and six months ended June 30, 2010 and
2009 are summarized as follows:
 Fixed Maturities Available-for-Sale
    
    
    Equity SecuritiesThree Months
    
    
    Six Months
    
    
    Three Months
    
    
    Six MonthsEnded June 30,
    
    
    Ended June 30,
    
    
    Ended June 30,
    
    
    Ended June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009(In thousands)
    
    
    (In thousands)Proceeds
    
    $
    4,740
    
    
    
    30,630
    
    
    
    6,866
    
    
    
    38,670
    
    
    $
    537
    
    
    
    512
    
    
    
    641
    
    
    
    1,175Gross realized gains
    
    $
    615
    
    
    
    1,252
    
    
    
    742
    
    
    
    1,553
    
    
    $
    159
    
    
    
    37
    
    
    
    184
    
    
    
    219
 No securities were sold for realized losses for the periods reported and there were no
securities sold from the held-to-maturity portfolio during the three and six months ended
June 30, 2010.
 (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.
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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
June 30, 2010
(Unaudited)
 The following table sets forth our assets that are measured at fair value on a recurring
basis as of the dates indicated:
 Fair Value MeasurementsJune 30, 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
    
    $
    13,447
    
    
    
    166,639
    
    
    
    
    
    
    
    180,086Corporate
    
    
    
    
    
    
    163,479
    
    
    
    
    
    
    
    163,479Municipal bonds
    
    
    
    
    
    
    60,012
    
    
    
    
    
    
    
    60,012Mortgage-backed
    
    
    
    
    
    
    16,868
    
    
    
    547
    
    
    
    17,415Foreign governments
    
    
    
    
    
    
    135
    
    
    
    
    
    
    
    135Total fixed maturities, available-for-sale
    
    
    13,447
    
    
    
    407,133
    
    
    
    547
    
    
    
    421,127Total equity securities, available-for-sale
    
    
    30,809
    
    
    
    
    
    
    
    
    
    
    
    30,809Total financial assets
    
    $
    44,256
    
    
    
    407,133
    
    
    
    547
    
    
    
    451,936Financial liabilities:Warrants outstanding
    
    $
    
    
    
    
    1,567
    
    
    
    
    
    
    
    1,567
 December 31, 2009TotalLevel 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
    
    $
    12,434
    
    
    
    180,283
    
    
    
    
    
    
    
    192,717Corporate
    
    
    
    
    
    
    116,098
    
    
    
    
    
    
    
    116,098Municipal bonds
    
    
    
    
    
    
    57,192
    
    
    
    
    
    
    
    57,192Mortgage-backed
    
    
    
    
    
    
    18,875
    
    
    
    577
    
    
    
    19,452Foreign governments
    
    
    
    
    
    
    120
    
    
    
    
    
    
    
    120Total fixed maturities,
available-for-sale
    
    
    12,434
    
    
    
    372,568
    
    
    
    577
    
    
    
    385,579Total equity securities,
available-for-sale
    
    
    33,477
    
    
    
    
    
    
    
    
    
    
    
    33,477Total financial assets
    
    $
    45,911
    
    
    
    372,568
    
    
    
    577
    
    
    
    419,056Financial liabilities:Warrants outstanding
    
    $
    
    
    
    
    1,819
    
    
    
    
    
    
    
    1,819
 Financial Instruments Valuation
 Fixed maturity securities, available-for-sale. At June 30, 2010, the fixed maturities,
valued using an independent pricing source, totaled $407.1 million for Level 2 assets and
comprised 96.7% 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 independent pricing models, other third
party pricing services, and back tested to recent trades. For the six months ended June 30,
2010, 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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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
June 30, 2010
(Unaudited)
 Equity securities, available-for-sale. Fair values of these securities are based upon quoted
market price and are classified as Level 1 assets.
 Short-term investments. The fair values for short-term investments are determined using an
independent pricing source. These assets are classified as Level 2.
 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:
 June 30, 2010(In thousands)Beginning balance at December 31, 2009
    
    $
    577Total realized and unrealized losses:Included in net income
    
    
    Included in other comprehensive income
    
    
    (2
    )Principal paydowns
    
    
    (28
    )Transfer in and (out) of Level 3
    
    
    Ending balance at June 30, 2010
    
    $
    547
 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:
 June 30, 2010
    
    
    December 31, 2009Carrying
    
    
    Fair
    
    
    Carrying
    
    
    FairValue
    
    
    Value
    
    
    Value
    
    
    Value(In thousands)Financial assets:Fixed maturities,
held-to-maturity
    
    $
    186,640
    
    
    
    187,641
    
    
    
    206,909
    
    
    
    199,676Mortgage loans
    
    
    1,612
    
    
    
    1,563
    
    
    
    1,533
    
    
    
    1,484Policy loans
    
    
    33,973
    
    
    
    33,973
    
    
    
    32,096
    
    
    
    32,096Short-term investments
    
    
    
    
    
    
    
    
    
    
    2,510
    
    
    
    2,512Cash and cash equivalents
    
    
    81,325
    
    
    
    81,325
    
    
    
    48,625
    
    
    
    48,625Financial liabilities:Annuities
    
    
    39,466
    
    
    
    37,035
    
    
    
    37,882
    
    
    
    33,980
 Fair values for fixed income securities are based on an independent pricing source.
  22




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
June 30, 2010
(Unaudited)
 Mortgage loans are secured principally by residential properties and commercial properties.
Weighted average interest rates for these loans were approximately 6.7% per year as of
June 30, 2010 and December 31, 2009, with maturities ranging from one to thirty years.
Management estimated the fair value using an annual interest rate of 6.25% at June 30,
2010 and December 31, 2009.
 Policy loans have a weighted average annual interest rate of 7.7% and 7.6% as of June 30, 2010
and December 31, 2009, 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 tied to the
crediting rate applied to the related policy and contract reserves. Policy loans are an
integral part of the life insurance policies that 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
June 30, 2010 using December 31, 2009 discounted cash flows using a risk free rate plus a
component for non-performance risk and interest rate risk. 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 Citizens Insurance Company of America, Citizens, Inc., Harold E. Riley and
Mark A. Oliver, Petitioners v. Fernando Hakim Daccach, Respondent, in which a class was
originally certified by the trial court and 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.
  23




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
June 30, 2010
(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. 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.
 (10)
    
    Income Taxes
 The effective tax rate was 27% and 9% for the second quarter of 2010 and 2009, respectively,
and 29% and 18% for the six months ended June 30, 2010 and 2009, respectively. The 2010 and
2009 rates were lower than the statutory rate of 35%, primarily due to gains from the change
in fair value of outstanding warrants for purchase of Class A common stock of $366,000 and
$976,000 that was not taxable for the three months ended June 30, 2010 and 2009,
respectively. The gains from the decrease in fair value of outstanding warrants were
$252,000 and $3.1 million for the six months ended June 30, 2010 and 2009, respectively.
Also causing a reduction in the effective tax rate are tax benefits from the release of tax
valuation allowances. Citizens redeemed its stock that was held by a subsidiary in a taxable
transaction resulting in $472,000 of tax expense during the six months ended June 30, 2010.
This tax increased the effective tax rate as the gain was eliminated in consolidation.
 The table below details the changes in the Companys tax valuation allowance.
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(In thousands)Tax benefit in tax provision
    
    $
    157
    
    
    
    585
    
    
    
    671
    
    
    
    449Tax benefit
(expense) in other
comprehensive income
    
    
    (1,310
    )
    
    
    2,833
    
    
    
    (842
    )
    
    
    1,423Adjustment to goodwill
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (254
    )(Increase) decrease in valuation allowance
    
    $
    (1,153
    )
    
    
    3,418
    
    
    
    (171
    )
    
    
    1,618
 
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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
June 30, 2010
 
 Item 2 . MANAGEMENTSDISCUSSION 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, particularly in light of the severe
economic conditions and the severe stress experienced by the global financial markets in
recent years;
 
    
    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.
  25




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
June 30, 2010
 Overview
  
    
    U.S. Dollar-denominated ordinary whole life insurance and endowment policies
predominantly to high net worth, high income foreign residents, located principally in
Latin America and the Pacific Rim, through independent marketing consultants;
 
    
    ordinary whole life insurance policies to middle income households in the midwest and
the southern United States through independent marketing consultants; and
 
    
    final expense and limited liability property policies to middle and lower income
households in Louisiana, Mississippi and Arkansas through employee and independent agents
in our home service distribution channel.
 Life Insurance
  Home Service Insurance
 Recent Acquisitions
   26




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
June 30, 2010
 Consolidated Results of Operations
 Note: All discussion below compares or states 2010 results for the three and six months ended June
30, 2010 compared to 2009 results.
 Revenues
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(In thousands)Revenues:Premiums:Life insurance
    
    $
    35,085
    
    
    
    34,586
    
    
    
    68,681
    
    
    
    67,269Accident and health insurance
    
    
    409
    
    
    
    368
    
    
    
    823
    
    
    
    764Property insurance
    
    
    1,182
    
    
    
    1,161
    
    
    
    2,362
    
    
    
    2,309Net investment income
    
    
    8,275
    
    
    
    6,578
    
    
    
    16,624
    
    
    
    14,320Realized gains, net
    
    
    692
    
    
    
    1,520
    
    
    
    751
    
    
    
    1,821Decrease in fair value of warrants
    
    
    366
    
    
    
    976
    
    
    
    252
    
    
    
    3,081Other income
    
    
    151
    
    
    
    240
    
    
    
    499
    
    
    
    523Total revenues
    
    
    46,160
    
    
    
    45,429
    
    
    
    89,992
    
    
    
    90,087Exclude decrease in fair value of warrants
    
    
    (366
    )
    
    
    (976
    )
    
    
    (252
    )
    
    
    (3,081
    )Total revenues excluding fair value adjustments
    
    $
    45,794
    
    
    
    44,453
    
    
    
    89,740
    
    
    
    87,006
 Premium Income
 Net Investment Income
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(In thousands)Gross investment income:Fixed maturity securities
    
    $
    7,263
    
    
    
    5,613
    
    
    
    14,649
    
    
    
    12,130Equity securities
    
    
    183
    
    
    
    280
    
    
    
    332
    
    
    
    549Mortgage loans
    
    
    18
    
    
    
    7
    
    
    
    36
    
    
    
    13Policy loans
    
    
    657
    
    
    
    600
    
    
    
    1,313
    
    
    
    1,185Real estate investments
    
    
    287
    
    
    
    359
    
    
    
    580
    
    
    
    714Other investment income
    
    
    180
    
    
    
    124
    
    
    
    377
    
    
    
    521Total investment income
    
    
    8,588
    
    
    
    6,983
    
    
    
    17,287
    
    
    
    15,112Investment expenses
    
    
    (313
    )
    
    
    (405
    )
    
    
    (663
    )
    
    
    (792
    )Net investment income
    
    $
    8,275
    
    
    
    6,578
    
    
    
    16,624
    
    
    
    14,320
  27




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
June 30, 2010
   Six Months Ended June 30,2010
    
    
    2009(In thousands)Net investment income
    
    $
    16,624
    
    
    
    14,320Average invested assets, at amortized cost
    
    $
    668,182
    
    
    
    586,252Annualized yield on average invested
assets
    
    
    4.98
    %
    
    
    4.89
    %
  Realized Gains, Net.
 Change in Fair Value of Warrants
  28




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
June 30, 2010
 Benefits and Expenses
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(In thousands)Benefits and expenses:Insurance benefits paid or provided:Claims and surrenders
    
    $
    15,214
    
    
    
    14,953
    
    
    
    30,671
    
    
    
    29,760Increase in future policy benefit
reserves
    
    
    9,783
    
    
    
    9,958
    
    
    
    19,328
    
    
    
    17,716Policyholders dividends
    
    
    1,777
    
    
    
    1,453
    
    
    
    3,347
    
    
    
    2,915Total insurance benefits
paid or provided
    
    
    26,774
    
    
    
    26,364
    
    
    
    53,346
    
    
    
    50,391Commissions
    
    
    9,028
    
    
    
    8,992
    
    
    
    17,156
    
    
    
    17,027Other underwriting, acquisition and
insurance expense
    
    
    6,988
    
    
    
    7,808
    
    
    
    13,961
    
    
    
    15,117Capitalization of deferred policy acquisition costs
    
    
    (5,875
    )
    
    
    (5,894
    )
    
    
    (11,258
    )
    
    
    (10,951
    )Amortization of deferred policy acquisition costs
    
    
    4,115
    
    
    
    3,720
    
    
    
    8,447
    
    
    
    7,412Amortization of cost of customer relationships
acquired and other intangibles
    
    
    768
    
    
    
    818
    
    
    
    1,606
    
    
    
    1,684Total benefits and expenses
    
    $
    41,798
    
    
    
    41,808
    
    
    
    83,258
    
    
    
    80,680
 Claims and Surrenders.
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(In thousands)Death claims
    
    $
    5,800
    
    
    
    5,647
    
    
    
    11,935
    
    
    
    11,782Surrender benefits
    
    
    4,843
    
    
    
    5,155
    
    
    
    9,737
    
    
    
    9,628Endowments
    
    
    3,539
    
    
    
    3,570
    
    
    
    6,830
    
    
    
    6,594Property claims
    
    
    307
    
    
    
    253
    
    
    
    871
    
    
    
    750Accident and health benefits
    
    
    246
    
    
    
    70
    
    
    
    386
    
    
    
    210Other policy benefits
    
    
    479
    
    
    
    258
    
    
    
    912
    
    
    
    796$
    15,214
    
    
    
    14,953
    
    
    
    30,671
    
    
    
    29,760
   Policyholder Dividends
  29




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
June 30, 2010
 Commissions
 Other Underwriting, Acquisition and Insurance Expenses
 Federal Income Tax
 Segment Operations
  Home
    
    
    OtherLife
    
    
    Service
    
    
    Non-InsuranceInsurance
    
    
    Insurance
    
    
    Enterprises
    
    
    Total(In thousands)Income (loss) before income tax expense:Three months ended:June 30, 2010
    
    $
    2,262
    
    
    
    2,228
    
    
    
    (128
    )
    
    
    4,362June 30, 2009
    
    
    2,322
    
    
    
    1,186
    
    
    
    113
    
    
    
    3,621Six months ended:June 30, 2010
    
    
    3,880
    
    
    
    3,248
    
    
    
    (394
    )
    
    
    6,734June 30, 2009
    
    
    5,416
    
    
    
    2,265
    
    
    
    1,726
    
    
    
    9,407
  30




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
June 30, 2010
 Life Insurance
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(In thousands)
    
    
    (In thousands)Revenue:Premiums
    
    $
    26,081
    
    
    
    25,720
    
    
    
    50,850
    
    
    
    49,775Net investment income
    
    
    4,635
    
    
    
    3,707
    
    
    
    9,346
    
    
    
    7,964Realized gains, net
    
    
    144
    
    
    
    358
    
    
    
    115
    
    
    
    418Other income
    
    
    132
    
    
    
    71
    
    
    
    409
    
    
    
    159Total revenue
    
    
    30,992
    
    
    
    29,856
    
    
    
    60,720
    
    
    
    58,316Benefits and expenses:Insurance benefits paid or provided:Claims and surrenders
    
    
    10,367
    
    
    
    10,514
    
    
    
    20,146
    
    
    
    20,224Increase in future policy benefit reserves
    
    
    8,773
    
    
    
    8,118
    
    
    
    17,435
    
    
    
    15,408Policyholders dividends
    
    
    1,760
    
    
    
    1,435
    
    
    
    3,302
    
    
    
    2,878Total insurance benefits paid or provided
    
    
    20,900
    
    
    
    20,067
    
    
    
    40,883
    
    
    
    38,510Commissions
    
    
    5,239
    
    
    
    5,247
    
    
    
    9,744
    
    
    
    9,704Other underwriting, acquisition and insurance
expenses
    
    
    2,520
    
    
    
    2,707
    
    
    
    5,617
    
    
    
    5,310Capitalization of deferred policy acquisition costs
    
    
    (4,475
    )
    
    
    (4,495
    )
    
    
    (8,162
    )
    
    
    (8,252
    )Amortization of deferred policy acquisition costs
    
    
    4,257
    
    
    
    3,568
    
    
    
    8,139
    
    
    
    6,920Amortization of cost of customer relationships
acquired and other intangibles
    
    
    289
    
    
    
    440
    
    
    
    619
    
    
    
    708Total benefits and expenses
    
    
    28,730
    
    
    
    27,534
    
    
    
    56,840
    
    
    
    52,900Income before income tax expense
    
    $
    2,262
    
    
    
    2,322
    
    
    
    3,880
    
    
    
    5,416
 Premiums
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(In thousands)
    
    
    (In thousands)Premiums:First year
    
    $
    4,012
    
    
    
    4,037
    
    
    
    7,224
    
    
    
    7,154Renewal
    
    
    22,069
    
    
    
    21,683
    
    
    
    43,626
    
    
    
    42,621Total premiums
    
    $
    26,081
    
    
    
    25,720
    
    
    
    50,850
    
    
    
    49,775
 Net Investment Income
  31




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
June 30, 2010
 Claims and Surrenders
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(In thousands)
    
    
    (In thousands)Death claims
    
    $
    2,041
    
    
    
    2,000
    
    
    
    3,784
    
    
    
    4,154Surrender benefits
    
    
    4,243
    
    
    
    4,688
    
    
    
    8,606
    
    
    
    8,749Endowment benefits
    
    
    3,532
    
    
    
    3,564
    
    
    
    6,816
    
    
    
    6,584Accident and health benefits
    
    
    209
    
    
    
    35
    
    
    
    283
    
    
    
    116Other policy benefits
    
    
    342
    
    
    
    227
    
    
    
    657
    
    
    
    621Total claims and
surrenders
    
    $
    10,367
    
    
    
    10,514
    
    
    
    20,146
    
    
    
    20,224
  Increase in Future Policy Benefit Reserves
 Commissions
 Amortization of Deferred Policy Acquisition Costs (DAC)
  32




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
June 30, 2010
 Home Service Insurance
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(In thousands)Revenue:Premiums
    
    $
    10,595
    
    
    
    10,395
    
    
    
    21,016
    
    
    
    20,567Net investment income
    
    
    3,475
    
    
    
    2,868
    
    
    
    7,007
    
    
    
    6,270Realized gains, net
    
    
    548
    
    
    
    1,085
    
    
    
    681
    
    
    
    1,326Other income
    
    
    4
    
    
    
    46
    
    
    
    53
    
    
    
    64Total revenue
    
    
    14,622
    
    
    
    14,394
    
    
    
    28,757
    
    
    
    28,227Benefits and expenses:Insurance benefits paid or provided:Claims and surrenders
    
    
    4,847
    
    
    
    4,439
    
    
    
    10,525
    
    
    
    9,536Increase in future policy benefit reserves
    
    
    1,010
    
    
    
    1,840
    
    
    
    1,893
    
    
    
    2,308Policyholders dividends
    
    
    17
    
    
    
    18
    
    
    
    45
    
    
    
    37Total insurance benefits paid or provided
    
    
    5,874
    
    
    
    6,297
    
    
    
    12,463
    
    
    
    11,881Commissions
    
    
    3,789
    
    
    
    3,745
    
    
    
    7,412
    
    
    
    7,323Other underwriting, acquisition and insurance
expenses
    
    
    3,794
    
    
    
    4,035
    
    
    
    7,435
    
    
    
    7,989Capitalization of deferred policy acquisition costs
    
    
    (1,400
    )
    
    
    (1,399
    )
    
    
    (3,096
    )
    
    
    (2,699
    )Amortization of deferred policy acquisition costs
    
    
    (142
    )
    
    
    152
    
    
    
    308
    
    
    
    492Amortization of cost of customer relationships
acquired and other intangibles
    
    
    479
    
    
    
    378
    
    
    
    987
    
    
    
    976Total benefits and expenses
    
    
    12,394
    
    
    
    13,208
    
    
    
    25,509
    
    
    
    25,962Income before income tax expense
    
    $
    2,228
    
    
    
    1,186
    
    
    
    3,248
    
    
    
    2,265
 Premiums
 Net Investment Income
 Realized Gains, Net
  33




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
June 30, 2010
 Claims and Surrenders
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(In thousands)Death claims
    
    $
    3,759
    
    
    
    3,647
    
    
    $
    8,151
    
    
    
    7,628Surrender benefits
    
    
    600
    
    
    
    467
    
    
    
    1,131
    
    
    
    879Endowment benefits
    
    
    7
    
    
    
    6
    
    
    
    14
    
    
    
    10Property claims
    
    
    307
    
    
    
    253
    
    
    
    871
    
    
    
    750Accident and health benefits
    
    
    38
    
    
    
    35
    
    
    
    104
    
    
    
    94Other policy benefits
    
    
    136
    
    
    
    31
    
    
    
    254
    
    
    
    175Total claims and
surrenders
    
    $
    4,847
    
    
    
    4,439
    
    
    $
    10,525
    
    
    
    9,536
 Other Underwriting, Acquisition and Insurance Expenses
 Other Non-Insurance Enterprises
  Investments
   34




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
June 30, 2010
  June 30, 2010
    
    
    December 31, 2009Carrying
    
    
    % 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
    
    $
    366,726
    
    
    
    48.0
    %
    
    $
    399,626
    
    
    
    55.6
    %Corporate
    
    
    163,479
    
    
    
    21.4
    
    
    
    116,098
    
    
    
    16.1Municipal bonds
    
    
    60,012
    
    
    
    7.8
    
    
    
    57,192
    
    
    
    7.9Mortgage-backed (1)
    
    
    17,415
    
    
    
    2.3
    
    
    
    19,452
    
    
    
    2.7Foreign governments
    
    
    135
    
    
    
    
    
    
    
    120
    
    
    
    Total fixed maturity securities
    
    
    607,767
    
    
    
    79.5
    
    
    
    592,488
    
    
    
    82.3Cash and cash equivalents
    
    
    81,325
    
    
    
    10.6
    
    
    
    48,625
    
    
    
    6.8Short-term investments
    
    
    
    
    
    
    
    
    
    
    2,510
    
    
    
    0.3Policy loans
    
    
    33,973
    
    
    
    4.4
    
    
    
    32,096
    
    
    
    4.5Equity securities
    
    
    30,809
    
    
    
    4.0
    
    
    
    33,477
    
    
    
    4.6Mortgage loans
    
    
    1,612
    
    
    
    0.2
    
    
    
    1,533
    
    
    
    0.2Real estate and other long-term investments
    
    
    9,267
    
    
    
    1.3
    
    
    
    9,216
    
    
    
    1.3Total cash, cash equivalents and investments
    
    $
    764,753
    
    
    
    100.0
    %
    
    $
    719,945
    
    
    
    100.0
    %
 (1)
    
    Includes $15.0 million and $16.2 million of U.S. Government-sponsored enterprises at June
30, 2010 and December 31, 2009, respectively.    35




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
June 30, 2010
  June 30, 2010
    
    
    December 31, 2009Carrying Value
    
    
    %
    
    
    Carrying Value
    
    
    %(In thousands)
    
    
    
    
    
    (In thousands)AAA and U.S.
Government
    
    $
    406,812
    
    
    
    67.0
    %
    
    $
    442,160
    
    
    
    74.6
    %AA
    
    
    28,614
    
    
    
    4.7
    
    
    
    26,613
    
    
    
    4.5A
    
    
    76,780
    
    
    
    12.6
    
    
    
    69,934
    
    
    
    11.8BBB
    
    
    85,001
    
    
    
    14.0
    
    
    
    48,311
    
    
    
    8.2BB and other
    
    
    10,560
    
    
    
    1.7
    
    
    
    5,470
    
    
    
    0.9Totals
    
    $
    607,767
    
    
    
    100.0
    %
    
    $
    592,488
    
    
    
    100.0
    %
  Valuation of Investments
    Liquidity and Capital Resources
   36




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
June 30, 2010
     Contractual Obligations and Off-balance Sheet Arrangements
   37




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
June 30, 2010
 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
June 30, 2010
  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
June 30, 2010
    Premium Revenue and Related Expenses
   Tax Accounting
   40




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
June 30, 2010
 
 Item 3 . QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 General
  June 30, 2010
    
    
    December 31, 2009Net
    
    
    
    
    
    
    
    
    
    
    NetUnrealized
    
    
    
    
    
    
    
    
    
    
    UnrealizedAmortized
    
    
    Fair
    
    
    Gains
    
    
    Amortized
    
    
    Fair
    
    
    GainsCost
    
    
    Value
    
    
    (Losses)
    
    
    Cost
    
    
    Value
    
    
    (Losses)(In thousands)Fixed maturities,
available-for-sale
    
    $
    411,937
    
    
    
    421,127
    
    
    
    9,190
    
    
    
    389,195
    
    
    
    385,579
    
    
    
    (3,616
    )Fixed maturities,
held-to-maturity
    
    
    186,640
    
    
    
    187,641
    
    
    
    1,001
    
    
    
    206,909
    
    
    
    199,676
    
    
    
    (7,233
    )Total fixed maturities
    
    $
    598,577
    
    
    
    608,768
    
    
    
    10,191
    
    
    
    596,104
    
    
    
    585,255
    
    
    
    (10,849
    )Total equity securities
    
    $
    25,577
    
    
    
    30,809
    
    
    
    5,232
    
    
    
    25,899
    
    
    
    33,477
    
    
    
    7,578
 Market Risk Related to Interest Rates
       41




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
June 30, 2010
 Market Risk Related to Equity Prices
  
 Item 4 . CONTROLS AND PROCEDURES
    
 PART II. OTHER INFORMATION
 
 Item 1 . LEGAL PROCEEDINGS
 Citizens Insurance Company of America, Citizens, Inc., Harold E. Riley and Mark A.
Oliver, Petitioners v. Fernando Hakim Daccach Respondent
  
    
    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
June 30, 2010
 
 Item 1A . RISK FACTORS
  Control of our Company, through the ownership of our Class B Common Stock, may one day be held by a
501(c)(3) charitable foundation and we cannot determine whether any change in our management or
operations will occur as a result of the ownership change.
  
 Item 2 . UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 None.
 
 Item 3 . DEFAULTS UPON SENIOR SECURITIES
 None.
 
 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)
  43




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
June 30, 2010
 Exhibit Number
    
    The following exhibits are filed herewith: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)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)
  44




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
June 30, 2010
 Exhibit Number
    
    The following exhibits are filed herewith: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 second quarter results issued on August 6, 2010.*
 
 *
    
    Filed herewith.(a)
    
    Filed on March 15, 2004 with the Registrants Annual Report on Form 10-K for the
Year Ended December 31, 2003 as Exhibit 3.1, and incorporated herein by reference.(b)
    
    Filed on March 31, 1999 with the Registrants Annual Report on Form 10-K for the Year Ended
December 31, 1998, as Exhibit 3.2, and incorporated herein by reference.(c)
    
    Filed on July 15, 2004, with the Registrants Current Report on Form 8-K as Exhibit 4.1, and
incorporated herein by reference.(d)
    
    Filed 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
 Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
 CITIZENS, INC.By:
    /s/ Harold E. RileyHarold E. RileyChairman and Chief Executive OfficerBy:
    /s/ Kay E. OsbournKay E. OsbournExecutive Vice President, Chief Financial Officer

and Treasurer   46