##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON D.C. 20549
 FORM 10-K/A
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For
the fiscal year ended December 31, 2004
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number 1-13004
 CITIZENS, INC.
 
  Colorado
    
    84-0755371(State of incorporation)
    
    (IRS Employer Identification No.)400 East Anderson Lane, Austin, Texas
    
    78752(Address of principal executive offices)
    
    (Zip Code)
   Title of each class
    
    Name of each exchange on which registeredClass A Common Stock
    
    New York Stock Exchange
 None
 þ o
 þ o
 
 o þ
  DOCUMENTS INCORPORATED BY REFERENCE




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TABLE OF CONTENTS
 PagePART IItem 1. Business
2Item 1A.
Risk Factors
24Item 2. Description of Properties
48Item 3. Legal Proceedings
48Item 4. Submission of Matters to a Vote of Security Holders
48PART IIItem 5. Market for Registrants Common Equity and Related Stockholder Matters
49Item 6. Selected Financial Data
50Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
50Item 7A. Quantitative and Qualitative Disclosures about Market Risk
71Item 8. Financial Statements and Supplementary Data
73Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
73Item 9A. Controls and Procedures
74Item 9B. Other Information
78PART IIIItem 10. Directors and Executive Officers of the Registrant
78Item 11. Executive Compensation.
86Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
87Item 13. Certain Relationships and Related Transactions.
89Item 14. Principal Accounting Fees and Services.
90PART IVItem 15. Exhibits, Financial Statement Schedules
91Report of Independent Registered Public Accounting Firm
92Signatures
137EXHIBITSConsent of Independent Registered Public Accounting FirmCertification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906




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##### Table of Contents



PART I 
 Item 1. Business  (a)
    General development of businessCitizens, Inc. (Citizens) operates primarily as an insurance holding company. We were
incorporated in Colorado in 1977. We are a parent company that directly or indirectly
owns 100% of 15 operating subsidiaries that are listed in the table below.
Collectively, Citizens and its subsidiaries are referred to herein as the Company,
we or us. Information concerning our subsidiaries follows. Year
    
    State of
    
    BusinessSubsidiary
    
    Incorporated
    
    Incorporation
    
    ActivityCitizens Insurance Company of
America (CICA)
    
    
    1968
    
    
    Colorado
    
    Life insuranceCitizens USA Life Insurance
Company (CUSA)
    
    
    1965
    
    
    Illinois
    
    Life insuranceCitizens National Life
Insurance Company (CNLIC)
(formerly Combined
Underwriters Insurance Company
(Combined)
    
    
    1986
    
    
    Texas
    
    Life insuranceComputing Technology, Inc.
(CTI)
    
    
    1965
    
    
    Colorado
    
    Data processingFirst Alliance Insurance
Company (FAIC)
    
    
    1994
    
    
    Kentucky
    
    Life insuranceFuneral Homes of America, Inc.
(FHA)
    
    
    1989
    
    
    Louisiana
    
    Funeral homeInsurance Investors, Inc. (III)
    
    
    1965
    
    
    Texas
    
    Aircraft transportationKYWIDE Insurance Management,
Inc. (KYWIDE)
    
    
    1997
    
    
    Kentucky
    
    DormantMid-American Alliance
Corporation (Mid-American)
    
    
    1996
    
    
    Missouri
    
    Insurance holding
companyMid-American Alliance
Insurance Agency, Inc. (MAAIA)
    
    
    1980
    
    
    Missouri
    
    Insurance agencyMid-American Associates
Agency, Inc. (MAAAI)
    
    
    2001
    
    
    Missouri
    
    Insurance agency
 
 2




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##### Table of Contents



Year
    
    State of
    
    BusinessSubsidiary
    
    Incorporated
    
    Incorporation
    
    ActivityMid American Century Life
Insurance Company (MACLIC)
    
    
    1983
    
    
    Missouri
    
    Life insuranceSecurity Alliance Insurance
Company (SAIC)
    
    
    1996
    
    
    Arkansas
    
    Life insuranceSecurity Plan Life Insurance
Company (SPLIC)
    
    
    1995
    
    
    Louisiana
    
    Life insuranceSecurity Plan Fire Insurance
Company (SPFIC)
    
    
    1995
    
    
    Louisiana
    
    Property and
casualty insurance
 Historically, our business has focused primarily on issuing ordinary whole life insurance
products to overseas residents, and most of our revenues continue to be generated from this
area. In addition, our U.S. operations consist of the sale of ordinary whole life insurance
and limited amount of benefit accident and health insurance products to middle and lower
income Americans, as well as managing books of life insurance from insurance subsidiaries
acquired over the past several years. We actively review acquisition opportunities for other U.S. life insurers, and we consider a
variety of criteria when evaluating potential acquisition candidates, including:  
    the asset base and growth opportunities;
    insurance policy composition as well as persistency and profitability of the
policies;
    the market location and demographics of the policyholder base;
    opportunities to achieve economies of scale;
    the effect of the acquisition on book value and earnings per share;
    resources required to integrate the operations; and
    the investment required for, and opportunity costs of, the acquisition. Our strategy in integrating acquisitions is to achieve revenue growth while continuously
reviewing and streamlining the operations of the acquired entities. The following are our
acquisitions in the last five years. On March 19, 2002, we issued approximately 753,000 shares of our Class A common stock to
acquire Combined, and approximately 305,000 shares of our Class A common stock to acquire
Lifeline Underwriters Life Insurance Company (Lifeline). The aggregate market value of the
consideration was approximately $12.0 million. On February 18, 2003, we issued approximately 2.6 million shares of our Class A common stock
to acquire First Alliance Corporation, the then owner of FAIC. The aggregate market value of
the consideration was approximately $17.2 million. On November 18, 2003, we issued approximately 775,000 shares of our Class A common stock to
acquire Mid-American. The aggregate market value of the consideration was approximately $7.2
million. On October 1, 2004, we acquired SPLIC and its subsidiary, SPFIC, for $85 million, which was
funded from cash on hand and a $30 million term loan from Regions Bank. 3




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Certain statements contained in this Annual Report on Form 10-K are not statements of
historical fact and constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act (the Act), including, without limitation, the italicized
statements and the statements specifically identified as forward-looking statements within
this document. Many of these statements contain risk factors as well. In addition, certain
statements in future filings by the Company with the Securities and Exchange Commission, in
press releases, and in oral and written statements made by or with the approval of the
Company which are not statements of historical fact constitute forward-looking statements
within the meaning of the Act. Examples of forward-looking statements, include, but are not
limited to: (i) projections of revenues, income or loss, earnings or loss per share, the
payment or non-payment of dividends, capital structure, and other financial items, (ii)
statements of plans and objectives of the Company or its management or Board of Directors
including those relating to products or services, (iii) statements of future economic
performance and (iv) statements of assumptions underlying such statements. Words such as
believes, anticipates, expects, intends, targeted, may, will and similar
expressions are intended to identify forward-looking statements but are not the exclusive
means of identifying such statements. Forward-looking statements involve risks and uncertainties, which may cause actual results to
differ materially from those in such statements. Factors that could cause actual results to
differ from those discussed in the forward-looking statements include, but are not limited
to: (i) the strength of foreign and U.S. economies in general and the strength of the local
economies where our policyholders reside; (ii) the effects of and changes in trade, monetary
and fiscal policies and laws; (iii) inflation, interest rates, market and monetary
fluctuations and volatility; (iv) the timely development of and acceptance of new products
and services and perceived overall value of these products and services by existing and
potential customers; (v) changes in consumer spending, borrowing and saving habits; (vi) a
concentration of business from persons residing in third world countries; (vii)
uncertainties in assimilating acquisitions; (viii) the persistency of existing and future
insurance policies sold by the Company and its subsidiaries; (ix) the dependence of the
Company on its Chairman of the Board; (x) the ability to control expenses; (xi) the effect
of changes in laws and regulations (including laws and regulations concerning insurance) with
which the Company and its subsidiaries must comply, (xii) the effect of changes in
accounting policies and practices, as may be adopted by the regulatory agencies as well as
the Financial Accounting Standards Board, (xiii) changes in the Companys organization and
compensation plans; (xiv) the costs and effects of litigation and of unexpected or adverse
outcomes in such litigation; and (xv) the success of the Company at managing the risks
involved in the foregoing. Such forward-looking statements speak only as of the date on which such statements are made,
and the Company undertakes no obligation to update any forward-looking statement to reflect
events or circumstances after the date on which such statement is made to reflect the
occurrence of unanticipated events. We make available, free of
charge, through our Internet website
(http://www.citizensinc.com),
our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K,
Section 16 reports filed by officers and directors, news releases, and, if applicable,
amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we
electronically file such reports with, or furnish such reports to, the Securities and
Exchange Commission. We are not including the 4




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information contained on our website as part of, or incorporating it by reference into, this
Annual Report on Form 10-K.  (b)
    Financial information regarding the insurance businessThrough several of our subsidiaries, we operate principally in four business segments:
offering selected lines of individual life insurance policies in the United States, selected
U.S. individual accident and health policies, the issuance of ordinary whole life insurance
policies in the United States utilizing the home service distribution method, and the
acceptance of applications from foreign nationals and overseas residents for the
consideration of the issuance of individual ordinary whole life insurance around the world.
Except for certain insignificant operations, we do not, and have no present intention to,
engage in any non-insurance related business. The following tables set forth certain
statistical information on the basis of accounting principles generally accepted in the
United States of America (U.S. GAAP) concerning our operations for each of the five years
ended December 31, 2004. Table I The following table sets forth (i) life insurance in force and (ii) mean life insurance in force. In Force
    
    
    
    
    
    
    Mean LifeBeginning
    
    
    In Force
    
    
    Insuranceof Year
    
    
    End of Year
    
    
    In Force(a) (b)
    
    
    (a) (b)
    
    
    (a) (b)2004
    
    $
    2,920,533
    
    
    $
    4,001,356
    
    
    $
    3,460,9452003
    
    
    2,408,004
    
    
    
    2,920,533
    
    
    
    2,664,2692002
    
    
    2,416,610
    
    
    
    2,408,004
    
    
    
    2,412,3072001
    
    
    2,240,523
    
    
    
    2,416,610
    
    
    
    2,328,5672000
    
    
    2,197,844
    
    
    
    2,240,523
    
    
    
    2,219,184
   (a)
    
    Dollars in thousands.(b)
    
    Before assuming and ceding reinsurance from/to reinsurers. Improved persistency in 2001 combined with increased sale of new policies in 2000 and 2001
contributed to the growth in insurance in force during 2000 and 2001. Increased surrender
activity during 2002 related to the uncertain economic climate in several Latin American
countries contributed to the decline in insurance in force. Increased issuance of new policies
coupled with acquisitions contributed to the growth in insurance in force in 2003. The
acquisition of SPLIC in October, 2004 added approximately $982 million to the life insurance in
force. 5




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Table II The following table sets forth (i) the ratio of lapses and surrenders to mean life insurance in
force and (ii) life reinsurance ceded. Ratio ofLapses and
    
    
    Reinsurance CededSurrenders
    
    
    Amount
    
    
    ReinsuranceLapses and
    
    
    To Mean
    
    
    of
    
    
    PremiumSurrenders (a)
    
    
    In Force
    
    
    Reinsurance (a)
    
    
    Ceded (b)2004
    
    $
    248,533
    
    
    
    7.2
    %
    
    $
    265,001
    
    
    $
    15,388,8242003
    
    
    217,888
    
    
    
    8.2
    
    
    
    301,366
    
    
    
    1,793,9122002
    
    
    177,227
    
    
    
    7.3
    
    
    
    152,103
    
    
    
    2,212,7152001
    
    
    113,482
    
    
    
    4.9
    
    
    
    206,386
    
    
    
    2,312,2322000
    
    
    112,676
    
    
    
    5.1
    
    
    
    272,150
    
    
    
    2,494,798
   (a)
    
    Dollars in thousands.(b)
    
    Premiums reflect both life and accident & health business. Lapsation and surrender activity attributed to policyholders of FAIC and MACLIC, two companies
we acquired in 2003, contributed approximately $39,627,000 to the increase in 2003 lapses and
surrenders. As described above, the uncertain economic climate in several Latin American countries
contributed to the increased lapsation and surrender activity in 2002. The decline in ceded
premium in 2001 and 2002 related to an increase in our retention from $75,000 to $100,000. The
decline in ceded premium in 2003 was related to the termination of a substantial portion of the
major medical business acquired with the acquisitions of CNLIC, while the significant increase in
2004 ceded premium related to the 100% cession of the in-force accident and health premiums to
another carrier. Table III The following table sets forth information with respect to total insurance premiums. Ordinary
    
    
    Annuity &
    
    
    
    
    
    
    
    
    
    
    AccidentLife (a)
    
    
    Universal Life
    
    
    Casualty
    
    
    Group Life
    
    
    & Health (a)
    
    
    Total2004
    
    $
    77,110,880
    
    
    $
    3,519,523
    
    
    $
    1,113,189
    
    
    $
    636,361
    
    
    $
    787,547
    
    
    $
    83,167,5002003
    
    
    60,395,058
    
    
    
    2,383,768
    
    
    
    
    
    
    
    463,629
    
    
    
    14,784,958
    
    
    
    78,027,4132002
    
    
    54,033,409
    
    
    
    283,185
    
    
    
    
    
    
    
    420,321
    
    
    
    13,473,966
    
    
    
    68,210,8812001
    
    
    48,142,397
    
    
    
    216,905
    
    
    
    
    
    
    
    543,792
    
    
    
    5,059,843
    
    
    
    53,962,9372000
    
    
    45,892,621
    
    
    
    228,479
    
    
    
    
    
    
    
    95,068
    
    
    
    7,235,685
    
    
    
    53,451,853
   (a)
    
    After deduction for reinsurance ceded. The non-renewal of certain major medical policies affected total premium income for 2000 and
2001. The 2002 increase in accident and health premiums is attributable to the acquisition of
CNLIC. The 2003 premium increase was related to increased new life revenues and the acquisitions
of FAIC and MACLIC. In 2004, the decline in accident and health premium as a result of the cession
of the business to another carrier, was offset by increases in CICAs international business and
the acquisition of SPLIC in 2004. The casualty premiums in 2004 resulted from the acquisition of
SPFIC. 6




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Table IV The following table sets forth information relating to the ratio of underwriting and other expenses
to insurance revenues. Commissions, Underwritingand Operating Expenses,Policy Reserve Increases,Commissions, Underwriting
    
    
    Policyholder Benefits andand Operating Expenses
    
    
    Dividends to PolicyholdersRatio to
    
    
    
    
    
    
    Ratio toInsurance
    
    
    
    
    
    
    Insurance
    
    
    
    
    
    
    InsurancePremiums (a)(b)
    
    
    Amount(b)
    
    
    Premiums
    
    
    Amount(b)
    
    
    Premiums2004
    
    $
    83,168
    
    
    $
    38,665
    
    
    
    46.5
    %
    
    $
    98,840
    
    
    
    118.9
    %2003
    
    
    78,027
    
    
    
    37,201
    
    
    
    47.7
    
    
    
    89,455
    
    
    
    114.72002
    
    
    68,211
    
    
    
    31,411
    
    
    
    46.1
    
    
    
    79,320
    
    
    
    116.32001
    
    
    53,963
    
    
    
    24,085
    
    
    
    44.6
    
    
    
    63,253
    
    
    
    117.22000
    
    
    53,452
    
    
    
    22,570
    
    
    
    42.2
    
    
    
    63,693
    
    
    
    119.2
   (a)
    
    After premiums ceded to reinsurers.(b)
    
    Dollars in thousands. During 2000, accident and health premiums and claims decreased as discussed above due to the
cancellation of major portions of our group dental and major medical business; however, due to the
costs associated with the creation of a U.S. ordinary life sales program and the administrative
costs of managing the run-off of the cancelled accident and health business, the ratio of expenses
to premiums increased. During 2001, a decrease in lapses and surrenders combined with a decrease
in accident and health claims offset increased commissions and administration expenses, resulting
in a decrease in the ratio of benefits to premiums and an increase in the ratio of expenses to
premiums. During 2002, increased new life revenues and increased accident and health premiums
attributable to the acquisition of CNLIC resulted in decreases in the ratio of benefits to
premiums; however, the expenses associated with conversion efforts and the administration of the
accident and health business increased the ratio of expenses to premiums. During 2003, increased
new life revenues from new business and the acquisitions of FAIC and MACLIC resulted in decreases
in the ratio of benefits; however, the expenses of these two acquisitions resulted in increases in
the ratios of expenses to premiums. In 2004, expense reductions resulted in improvement in the
ratio of expenses to premiums; however, the claims incurred by SPLIC caused the overall expense and
benefit ratio to increase slightly. Because of the nature of SPLICs business, a high benefit
ratio is not unusual. Table V The following table sets forth changes in the face amount of new life insurance business produced
between participating and non-participating policies. Total New
    
    
    Participating
    
    
    Non-participatingBusiness (a)
    
    
    Amount (a)
    
    
    Percent
    
    
    Amount (a)
    
    
    Percent2004
    
    $
    570,462
    
    
    $
    339,008
    
    
    
    59.4
    %
    
    $
    231,454
    
    
    
    40.6
    %2003
    
    
    433,697
    
    
    
    266,303
    
    
    
    61.4
    
    
    
    167,394
    
    
    
    38.62002
    
    
    410,352
    
    
    
    265,476
    
    
    
    64.7
    
    
    
    144,876
    
    
    
    35.32001
    
    
    346,132
    
    
    
    235,847
    
    
    
    68.1
    
    
    
    110,285
    
    
    
    31.92000
    
    
    327,753
    
    
    
    217,303
    
    
    
    66.3
    
    
    
    110,450
    
    
    
    33.7
   (a)
    
    Dollars in thousands. 7




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During 2000 and 2001, the percentage of participating new business grew due to the mix of
products issued. During 2003, the acquisitions of FAIC and MACLIC contributed to the increase in
non-participating new business, and the 2004 purchase of SPLIC further increased the percentage of
non-participating business. Table VI The following table sets forth changes in the face amount of new life insurance business issued
according to policy types. Whole LifeTotal New
    
    
    and Endowment
    
    
    Term
    
    
    CreditBusiness (a)
    
    
    Amount (a)
    
    
    Percent
    
    
    Amount (a)
    
    
    Percent
    
    
    Amount (a)
    
    
    Percent2004
    
    $
    570,462
    
    
    $
    406,075
    
    
    
    71.2
    %
    
    $
    82,839
    
    
    
    14.5
    %
    
    $
    81,548
    
    
    
    14.3
    %2003
    
    
    433,697
    
    
    
    297,280
    
    
    
    68.5
    
    
    
    76,637
    
    
    
    17.7
    
    
    
    59,780
    
    
    
    13.82002
    
    
    410,352
    
    
    

    289,976
    
    
    
    70.7
    
    
    
    80,342
    
    
    
    19.5
    
    
    
    40,034
    
    
    
    9.82001
    
    
    346,132
    
    
    
    238,765
    
    
    
    69.0
    
    
    
    71,900
    
    
    
    20.8
    
    
    
    35,467
    
    
    
    10.22000
    
    
    327,753
    
    
    
    220,691
    
    
    
    67.3
    
    
    
    56,747
    
    
    
    17.3
    
    
    
    50,315
    
    
    
    15.4
   (a)
    
    Dollars in thousands. In 2000, new life business, measured in paid annualized premiums, increased 21.4%. In 2001,
new life business increased 14.9%. In 2002, such business increased 17.7% due to acquisitions and
internal growth, while in 2003 the increase was 2.9%. The 2003 growth was slowed by the economic
downturn in several Latin American countries. In 2004, the addition of SPLIC, which contributed
three months results, coupled with growth in CICAs overseas business, increased the percentage of
whole life insurance in force. Table VII The following table sets forth deferred policy acquisition costs capitalized and amortized compared
to new life insurance business issued. Total New
    
    
    Deferred PolicyBusiness
    
    
    Acquisition CostsIssued (a)
    
    
    Capitalized (a)
    
    
    Amortized (a)2004
    
    $
    570,462
    
    
    $
    17,241
    
    
    $
    8,4382003
    
    
    433,697
    
    
    
    16,558
    
    
    
    11,8072002
    
    
    410,352
    
    
    
    14,423
    
    
    
    10,0392001
    
    
    346,132
    
    
    
    11,112
    
    
    
    8,5682000
    
    
    327,753
    
    
    
    10,056
    
    
    
    8,522
   (a)
    
    Dollars in thousands. Amortization expense in 2002 and 2003 increased due to higher surrender activity while the
decreases in 2001 and 2000 were due to improved persistency. The increase in capitalized costs
since 2000 is related to the increase in new business issued. In 2004, persistency on CICAs
international business improved, contributing to lower amortization,
as well as no amortization for
the accident and health business that was ceded in 2004. 8




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Table VIII The following table sets forth the mean amount of our invested assets and net investment income
from our investment portfolio. Ratio of NetInvestment IncomeMean Amount of
    
    
    Net Investment
    
    
    to Mean AmountInvested Assets
    
    
    Income (a)
    
    
    of Invested Assets (a)2004
    
    $
    375,495,038
    
    
    $
    17,004,672
    
    
    
    4.5
    %2003
    
    
    250,598,366
    
    
    
    14,322,275
    
    
    
    5.72002
    
    
    216,352,206
    
    
    
    14,251,907
    
    
    
    6.62001
    
    
    200,449,569
    
    
    
    13,296,481
    
    
    
    6.62000
    
    
    184,270,944
    
    
    
    12,550,754
    
    
    
    6.8
   (a)
    
    Does not include realized and unrealized gains and losses on investments. During 2000, we terminated our outside investment manager and changed the mix of new
investments, resulting in improved performance for the year. During 2001, the significant decrease
in yields in the bond market caused the return on invested assets to drop slightly. During 2002 we
were able to maintain our investment yield by continuing to place less emphasis on government
guaranteed pass-through instruments and more emphasis on investments in callable instruments issued
by U.S. government agencies. During 2003, the low interest rates available on newly invested money
relative to prior years and the significant call activity on the bonds owned negatively impacted
our net investment income compared to prior years. In 2004, only SPLICs investment income for the
fourth quarter was included, leading to a further decline in percentage return. Had the entire
years results for SPLIC been included, the ratio above would have been 5.6%.  (c)
    Narrative description of business  (i)
    Business of CitizensOur principal business is that of a life insurance holding company. Additionally,
we provide management services to our subsidiaries and other companies who contract
with us for our services, under management services agreements. At December 31,
2004, we had approximately 600 full time equivalent employees, including
approximately 390 full-time agents. All inter-company fees and expenses have been
eliminated in the consolidated financial statements.(ii)
    Business of CICACICA has historically been our primary insurance subsidiary and 74% of our 2004
revenues were derived from its operations. Historically, CICAs revenues have been
from life insurance premiums and investment income. CICA is a Colorado-domiciled
life insurance company that makes available ordinary whole life products to high net
worth foreign nationals through contracts with overseas marketing organizations.
Additionally, it offers credit life insurance policies, as well as ordinary whole
life insurance products, to middle income U.S. residents. All intercompany fees and
expenses have been eliminated in the consolidated financial statements. 9




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During the year ended December 31, 2004, 97.7% of CICAs premium income was
attributable to life, endowment and term insurance, 1.4% to accident and health
insurance, and 0.9% to individual annuities. Of the life policies in force at
December 31, 2004 and 2003, 32.6% and 45.8%, respectively, were non-participating
and 67.4% and 54.2%, respectively, were participating.CICA has begun a United States marketing program focused on the sale of ordinary
whole life products to middle income families. Sales to date have been
insignificant. We intend to expand sales efforts to other states in which CICA is
licensed and believe that our recent acquisitions should augment this program.CICAs underwriting policy requires a medical examination of applicants for ordinary
insurance in excess of certain prescribed limits. These limits are graduated
according to the age of the applicant and the amount of insurance. Generally, the
maximum amount of ordinary life insurance issued domestically without a medical
examination is $200,000 for ages 0 through 35; $100,000 for ages 36 through 45;
$50,000 for ages 46 through 50; $15,000 for ages 51 through 55; and $10,000 for ages
56 and over. In addition, HIV testing is performed on all applicants for amounts
over $75,000. Non-United States applicants through age 39 can obtain up to $150,000
of insurance without a medical examination. Medical examinations are required of
all non-United States applicants aged 40 and over. The supplemental accident and
health policies sold in the United States have only minimal field underwriting.On life policies, CICAs maximum coverage on any one life is not limited. However,
CICA reinsures the amount of coverage, which is in excess of its retention policy.
See Business of CICA  Reinsurance.CICA does not accept substandard risks above
Table 6 (generally policyholders who cannot qualify for standard ordinary insurance
because of past medical history).At December 31, 2004, CICA had $30.4 million of insurance in force on individuals
that are classified as substandard risks, the majority of such business having been
acquired in the purchase of other companies. Management believes the exposure to
loss as a result of insuring these individuals is minimal, since the premiums are
higher than standard policies to cover the nature of the risk, additional reserves
are established, and the amount of this insurance represents approximately 1.0% of
the total insurance in force.Geographical distribution of businessCICA makes available ordinary whole-life insurance products to residents of foreign
countries worldwide. Premium income from non-U.S. residents accounted for
approximately 87.4%, 86.2% and 84.5% of total CICA premiums for the years ended
December 31, 2004, 2003 and 2002, respectively.Areas representing more than 5% of CICAs total premiums for the years ended
December 31, 2004, 2003 and 2002 were: Argentina  12.5%, 15.3% and 19.43%; Colombia
 26.9%, 26.3% and 25.1%; Ecuador  5.4%, 4.3%, 3.5%;
Taiwan  5.5%, 3.4%, 1.3%; Venezuela  9.5%, 8.9%, 10.4% and Uruguay  5.1%, 6.8% and 8.0%, respectively.The following table sets forth the composition of CICAs total yearly premium
income by geographic area for the years indicated. 10




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Area
    
    2004
    
    
    2003
    
    
    2002Oklahoma
    
    
    2.6
    %
    
    
    3.1
    %
    
    
    3.5
    %Texas
    
    
    3.6
    %
    
    
    3.7
    %
    
    
    4.9
    %Mississippi
    
    
    2.3
    %
    
    
    2.8
    %
    
    
    3.0
    %Louisiana
    
    
    1.1
    %
    
    
    1.0
    %
    
    
    0.9
    %All Other States
    
    
    3.0
    %
    
    
    3.2
    %
    
    
    3.2
    %Foreign
    
    
    87.4
    %
    
    
    86.2
    %
    
    
    84.5
    %
 The policies issued by CICA on residents of foreign countries have an average face
amount of approximately $58,000 and are issued primarily to individuals in the top
5% of the population in terms of household income. CICA has neither offices nor
employees overseas. It accepts applications for international insurance policies
submitted by several outside marketing firms and consultants in these markets with
whom CICA has non-exclusive contracts. These firms and consultants specialize in
marketing life insurance products to citizens of foreign countries and have many
years of experience marketing life insurance products. The outside firms provide
recruitment, training and supervision of their managers and associates in the
placement of dollar-denominated life insurance products; however, all associates of
these firms contract directly with CICA and receive their compensation directly from
CICA. Accordingly, should the arrangement between any outside marketing firm and
CICA be canceled for any reason, CICA believes it could continue suitable marketing
arrangements with the associates of these outside firms without appreciable loss of
present and future sales, as CICA has done in the past. There is, however, always a
risk that sales could decrease. CICAs standard agreement with individual consultants provides that the consultant
is the representative of the prospective insured. CICAs standard contract with
outside marketing firms provides that the firm has the responsibility for recruiting
and training its associates. These firms guarantee any debts of their marketers and
their associates to CICA. In consideration for the services rendered, the marketing
firms receive a fee on all new policies placed by them or their associates. See
Business of CICA  Commissions.CICAs contracts with both outside marketing
firms and consultants provide that any party may terminate the contracts for various
causes at any time or upon 30 days notice. At present, CICA is dependent on the non-U.S. markets for a large percentage of its
new life insurance business. As a result of these foreign markets, CICA is
subjected to potential risks with regard to the continued ability to write such
business should adverse events occur in the countries from which CICA receives
applications. These potential risks include lapses of policies if funds that flow
out of such countries were to become restricted. Based on more than 35 years
experience in the marketplace in which CICA competes, management believes such risks
are not material.CICA maintains no assets outside the U.S. and requires all
premiums to be paid in the U.S. with U.S. dollars via drafts drawn on banks in the
U.S.; therefore, it is not subject to currency devaluation or foreign appropriation.
Management believes that many of the inherent risks in foreign countries, such as
political instability, hyperinflation and economic disruptions, tend to improve
rather than hurt CICAs business over the long term because they
encourage individuals to convert assets out of local currencies to the more stable
U.S. dollar. 11




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Marketing operations CICA holds licenses to do business in 16 states and accepts applications for
consideration from any foreign country. CICAs marketing operations are conducted
by outside consultants, with 3,263 active representatives contracted at December 31,
2004, 3,778 individuals contracted at December 31, 2003 and 2,445 at December 31,
2002. Commissions CICAs marketing associates are independent contractors, responsible for their
respective expenses, and are compensated based on a percentage of premiums.
Percentage amounts paid to insurance associates on individual term, annuity and
accident and health insurance are substantially less than the levels paid for
individual ordinary life insurance. With respect to CICAs contracts with outside
marketing consultants, these firms receive overriding first year and renewal
commissions on business written by associates under their supervision, and all
marketing expenses related thereto, except conventions, are borne by these
consultants. Reserves CICA has established liabilities for policyholders account balances and future
policy benefits to meet obligations on various policies and contracts. Reserves for
policyholders account balances for investment-type policies are equal to cumulative
account balances consisting of deposits plus credited interest, less expense and
mortality charges and withdrawals. Future policy benefits for traditional products
are computed on the net level premium method, which utilizes assumed investment
yields, mortality, persistency, morbidity and expenses (including a margin for
adverse deviation). These reserves are established at the time of issuance of a
policy and generally vary by product, year of issue and policy duration. CICA
periodically reviews both reserve assumptions and policyholder liabilities. Reinsurance As is customary among insurance companies, CICA reinsures with other companies
portions of the life and accident and health insurance risks it will underwrite.
The primary purpose of reinsurance agreements is to enable an insurance company to
reduce the amount of risk on any particular policy and, by reinsuring the amount
exceeding the maximum amount the insurance company is willing to retain, to write
policies in amounts larger than it could without such agreements. Even though a
portion of the risk may be reinsured, CICA remains liable to perform all the
obligations imposed by the policies issued by it and could be liable if its
reinsurers were unable to meet their obligations under the reinsurance agreements.  (1)
    Insurance ceded 12




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CICA retains up to $100,000 of risk on any one person. As of December 31, 2004, the
aggregate amount of life insurance ceded was $171,283,000 or 5.3% of total direct
and assumed life insurance in force, and at December 31, 2003 was $171,992,000 or
5.6% of direct insurance in force. CICA is contingently liable with respect to
ceded insurance should any reinsurer be unable to meet the obligations reinsured. As of December 31, 2004, CICA had in effect automatic reinsurance agreements with
reinsurers that provide for cessions of ordinary insurance from CICA. These
treaties provide for both automatic and facultative reinsurance of standard and
substandard risks ceded to them by CICA for life, accident and health and
supplemental benefits above CICAs retention limit on a yearly renewable term, or
coinsurance basis. Automatic cession means that so long as the risk is within the
limits of the reinsurance agreement the reinsurer must assume the risk. Facultative
cases are subject to specific underwriting approval of the reinsurer. Historically, treaties with Employers Reassurance (ERC), American United Life
Insurance Company (AUL) and Businessmens Assurance (BMA), all unaffiliated parties,
were used by CICA for its international business. The treaties were structured in
such a way as to allow CICA to self administer the cessions on a reduced cost
basis. The ERC and BMA agreements provided that for risks reinsured in specified countries,
70% of each risk in excess of CICAs retention would be ceded to ERC and 30% to BMA.
The AUL agreement provided that on risks reinsured in specified countries, 100% of
the risk in excess of CICAs retention was ceded to AUL. CICA paid premiums to ERC,
BMA and AUL on an annual basis. The cessions were on a yearly renewable term basis and were automatic over CICAs
retention up to $280,000 for ERC, $120,000 for BMA and $400,000 for AUL, after which
the reinsurance is subject to a facultative review by the reinsurers. At December
31, 2004, CICA had ceded $57,909,000 in face amount of insurance to ERC, $23,794,000
to Riunione Adriatica di Sicurta of Italy, a predecessor to AUL, $16,320,000 to BMA
and $24,632,000 to AUL under these agreements. In late 2002, AUL notified CICA that it would no longer be accepting new reinsurance
business effective January 1, 2003, as a result of being purchased by ERC, which was
owned by General Electric. Subsequently, ERC indicated a desire to withdraw from
the international reinsurance market because of a decision on the part of its new
parent. Consequently, a pool of two reinsurers was created in early 2003 to replace BMA, ERC
and AUL for new business. Worldwide Reassurance of England (Worldwide) received 55%
of the reinsurance pool of all countries. Converium, of Germany, was given 45% of
the reinsurance pool. At December 31, 2004, CICA had ceded $27,729,000 in face
amount to Worldwide and $16,532,000 to Converium. The former reinsurers retain
their risk on business previously ceded. Worldwide and Converium are unauthorized reinsurers in the state of Colorado.
However, they have each agreed to provide a letter of credit issued by a U.S. Bank
in the amount of any liabilities they may incur under the reinsurance 13




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agreements
with CICA in the event that a reinsurance credit is significant. There were no such
significant credits as of December 31, 2004. In addition, a reinsurance treaty with Swiss Re Life & Health America, Inc.
(Swiss Re) covers all of CICAs accidental death insurance supplementing its life
insurance policies. These cessions are on a yearly renewable term basis and occur
automatically if total accidental death benefits known to CICA are less than
$250,000 or otherwise on a facultative review basis. At December 31, 2004, CICA had
ceded $1.4 billion of supplemental life insurance benefits to Swiss Re under this
treaty. Effective January 1, 2004, CICA entered into a coinsurance agreement with Texas
International Life Insurance Company (TILIC), an unaffiliated party, whereby TILIC
assumed all of CICAs non-credit accident and health business. CICA shares in the
profits of the business, on a graduated scale, over a ten-year period. CICA monitors the solvency of its reinsurers in seeking to minimize the risk of loss
in the event of a failure by a reinsurer. The primary reinsurers of CICA are large,
well capitalized entities.  (2)
    Insurance assumed At December 31, 2004, CICA had in-force reinsurance assumed as follows: Type of
    
    
    AmountBusiness
    
    
    in force atName of Company
    
    Location
    
    
    Assumed
    
    
    end of yearPrudential Insurance
    
    Newark,Company (Prudential)
    
    New Jersey
    
    Group Life
    
    $
    488,312,000
 The reinsurance agreement with Prudential provides for CICA to assume a portion of
the insurance under a group insurance policy issued by Prudential to the
Administrator of Veterans Affairs. CICAs portion of the total insurance under the
policy is allocated to CICA in accordance with the criteria established by the
Administrator. CICA has also entered into a Servicemans Group Life Insurance Conversion Pool
Agreement with Prudential, under the above-described agreement, whereby CICA assumed
a portion of the risk of Prudential under the group policy due to excess mortality
under the conversion pool agreement. This was for risks resulting from issuing
conversion policies as prescribed for membership in the conversion pool. Investments State insurance statutes prescribe the quality and percentage of the various types
of investments which may be made by insurance companies and generally permit
investment in qualified state, municipal, federal and foreign government
obligations, high quality corporate bonds, preferred and common stock, real estate
and mortgage loans within certain specified percentages. CICAs invested assets at
December 31, 2004 were distributed as follows: 83.4% in fixed maturities, 0.2% in
mortgage loans, 10.9% in policy loans, 0.1% in other long-term 14




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investments, and 5.4%
in short-term investments. CICA foreclosed on one small mortgage in 2004 for a
profit. The investment policy of CICA is consistent with the provisions of the
Colorado Insurance Code. At December 31, 2004, 98.6% of CICAs investments in fixed maturities were comprised
of U.S. Treasury securities and obligations of U.S. government corporations and
agencies, including U.S. government guaranteed mortgage-backed securities, compared
to 97.4% at December 31, 2003. Of these mortgage-backed securities, all were
guaranteed by U.S. government agencies or corporations that are backed by the full
faith and credit of the U.S. government or that bear the implied full faith and
credit of the U.S. government. Regulation Our insurance company subsidiaries are subject to regulation and supervision by the
insurance department of each state or other jurisdiction in which they are licensed
to do business. These departments have broad administrative powers relating to the
granting and revocation of licenses to transact business, the licensing of marketing
persons, the approval of policy forms, the advertising and solicitation of
insurance, the form and content of mandatory financial statements, the reserve
requirements, and the type of investments which may be made. Our insurance
subsidiaries are required to file detailed annual reports with each such insurance
department, and their books and records are subject to examination at any time. In
accordance with state laws and the rules and practices of the National Association
of Insurance Commissioners (NAIC), our insurance subsidiaries are examined
periodically by examiners of their domiciliary states and by representatives (on an
association or zone basis) of the other states in which they are licensed to do
business. An examination of CICA was concluded in 2003 for the five years ended
December 31, 2001, by a statutory examination accounting firm under contract with
and supervision by the Colorado Division of Insurance. The examination noted no
substantive findings, but made suggestions on a few minor housekeeping matters. An
independent public accounting firm audits CICA annually. Various states, including Colorado, have enacted Insurance Holding Company
legislation, which requires the registration and periodic reporting by insurance
companies that control, or are controlled by, other corporations or persons. Under
most of such legislation, control is presumed to exist with the ownership of ten
percent or more of an insurance companys voting securities. We are subject to such
regulation and have registered under such statutes as a member of an insurance
holding company system. The legislation typically requires periodic disclosure
concerning the transactions between the registered insurer, the ultimate controlling
party, and all affiliates and subsidiaries of the ultimate controlling party, and in
many instances requires prior approval of intercorporate transfers of assets
(including in some instances payment of dividends by the insurance subsidiary)
within the holding company system. Since we do not physically conduct business in countries outside the U.S. but rather
accept applications for consideration from overseas marketers, we are not subject to
regulation in countries where most of our insureds are residents. We view the
prospect of such regulation as unlikely because obtaining insurance 15




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through
application by mail outside of ones country is a common practice in many foreign
countries, particularly those where CICAs insureds reside. Competition The life insurance business is highly competitive, and we compete with a large
number of stock and mutual life companies both internationally and domestically as
well as from financial institutions which offer insurance products. We compete with
1,500 to 2,000 other life insurance companies in the United States, some of which we
also compete with internationally. We believe that our premium rates and policies
are generally competitive with those of other life insurance companies selling
similar types of ordinary whole-life insurance, many of which are larger than we
are. A large percentage of our first year and renewal life insurance premium income comes
from the international market. See Business of CICA  Geographical Distribution of
Business.Given the significance of our international business, the variety of
markets in which we make ordinary whole-life insurance available and the impact that
economic changes have on these foreign markets, it is not possible to ascertain our
competitive position. We face offshore competition from several American life
insurance companies that also sell U.S. dollar denominated policies to non-U.S.
citizens, with no one company being dominant in the market. Some companies may be
deemed to have a competitive advantage due to histories of successful operations and
large agency forces. Management believes that its experience, combined with the
special features of CICAs unique policies, allows CICA to compete effectively in
pursuing new business. Our marketing plan stresses making available dollar-denominated whole life, cash
value build-up, insurance products to high net worth individuals residing in foreign
countries. It also focuses on the sale of individual, cash value whole life and
supplemental accident and health products to United States residents. We compete indirectly with non-U.S. companies, particularly Latin American
companies. However, because our premiums must be paid in U.S. dollars drawn on U.S.
banks, and we pay claims in U.S. dollars, we have a different clientele and product
than foreign-domiciled companies. Our products are usually acquired by persons in
the top 5% of income of their respective countries. The policies sold by foreign
companies are offered broadly and are priced based on the mortality of the entire
populace of the respective geographic region. Because of the predominance of lower
incomes in most of these countries, the mortality experience tends to be very high
on the average, causing mortality charges that are considered unreasonable based on
the life mortality experience of the upper 5% of income of the population. Additionally, the assets that back up the policies issued by foreign companies are
substantially invested in the respective countries, and thus, are exposed to the
inflationary risks and economic crises that historically have impacted many
foreign countries. Another reason that we experience an advantage is that many of
our policyholders desire to transfer capital out of their countries due to the
perceived financial strength and security of the United States. 
 
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(iii)
    Business of SPLIC 
 SPLIC was acquired in October 2004 for $85 million. Historically, SPLIC has focused
on the needs of the lower income market. Its policies, which are predominantly
ordinary whole life products, provide a means of taking care of individuals final
expenses, primarily consisting of funeral and cemetery costs. The policies are sold
and serviced through the home service (or debit) marketing distribution system
utilizing employee-agents who work on a route system to collect premiums and service
policyholders. Virtually all business has been written in Louisiana, where SPLIC is
one of the leading writers of life insurance in the home service business. In
addition, SPLIC has a small block ($830,000 of annual premium) of accidental health
insurance in force. SPLICs premium writings have been supplemented by the
acquisition of life insurance policies from over 100 companies in its history. Because of the type of business SPLIC writes, the average life insurance policy face
amount in force is relatively smallapproximately $1,400 per policy in 2004. The
underwriting performed on these applications is limited due to the small average
face amount. Marketing operations SPLIC holds licenses to do business in two statesLouisiana and Mississippi. Its
marketing activities were conducted by approximately 390 employee/agents as of
December 31, 2004. Reserves SPLIC has established liabilities for policyholders account balances and future
policy benefits to meet obligations on various policies and contracts. Reserves for
policyholders account balances for investment-type policies are equal to cumulative
account balances consisting of deposits plus credited interest, less expense and
mortality charges and withdrawals. Future policy benefits for traditional products
are computed on the net level premium method, which utilizes assumed investment
yields, mortality, persistency, morbidity and expenses (including a margin for
adverse deviation). These reserves are established at the time of issuance of a
policy and generally vary by product, year of issue and policy duration. SPLIC
periodically reviews both reserve assumptions and policyholder liabilities. Reinsurance Consistent with the general practice in the life insurance industry, SPLIC has
reinsured portions of the coverage provided by its insurance products with other
non-affiliated insurance companies. Insurance is ceded principally to reduce net
liability on individual risks, to provide protection against large losses and to
obtain a greater diversification of risk. Although reinsurance does not legally
discharge the ceding insurer from its primary liability for the full amount of
policies reinsured, it does make the reinsurers liable to the insurer to the fullest
extent of the reinsurance ceded. SPLIC seeks to enter into reinsurance treaties with highly rated and capitalized
insurers. Its policy is to use reinsurers who have received an A.M. Best rating of 17




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A-(Excellent) or better and who, in the opinion of management have significant
levels of capital and surplus. We believe that we have established appropriate
reinsurance coverage based upon our net retained insured liabilities compared to our
surplus. Based on a review of our reinsurers financial positions and reputations
in the reinsurance marketplace, we believe that our reinsurers are financially
sound. In addition, SPLIC maintains a coinsurance agreement with the former parent of SPLIC
on a closed block of business that represents less than 1% of total business in
force. Investments Prior to its acquisition by CICA, SPLIC utilized outside investment managers to
oversee its portfolio. CICA terminated the outside managers, preferring its own
in-house style. The portfolio of SPLIC has a significant investment in corporate bonds. Corporate
bonds make up approximately 48% of the overall bond portfolio. Additionally,
because of certain provisions of Louisiana law that permit reductions in certain
taxes based upon investment in that state, tax-exempt municipal bonds make up more
than 12% of the bond portfolio. The remaining bonds are comprised of those issued
by the U.S. government, or agencies. SPLIC does not have any equity investments.  (iv)
    Business of CNLIC (formerly Combined) CNLIC is a Texas-domiciled life and accident and health insurer offering products
primarily to residents of the southern United States. CNLIC was acquired by the
Company in 2002. At the same time, an affiliated company of Combined, Lifeline
Underwriters Life Insurance Company (Lifeline) was also acquired. Lifeline was
merged into Combined in 2003. During 2004, Combined was renamed Citizens National
Life Insurance Company (CNLIC). CNLIC is licensed in the states of Alabama,
Arizona, Arkansas, Florida, Louisiana, Mississippi, Missouri, New Mexico, Oklahoma,
Texas and Virginia. The majority of CNLICs business is concentrated in Texas
(66.2%), Oklahoma (21.6%) and Louisiana (5.4%). At December 31, 2004, CNLIC had
assets of $22.7 million and 2004 revenues of $4.9 million. All intercompany fees
and expenses have been eliminated in the consolidated financial statements. As of December 31, 2004, CNLIC had $73,885,000 of life insurance in force, of which
$5,205,000 was reinsured. The maximum retention on any one life is $35,000. All of
its accidental death benefit coverage is reinsured. As of December 31, 2004, CNLIC
also had $9,526,000 (in premiums) of accident and health insurance in force
(including $495,000 of group business), all of which was
ceded to another carrier. CNLIC operates as a stipulated premium company under Texas law. Life, accident and
health policies are primarily sold by licensed independent general agents. In
addition, individuals may also be issued licenses to act as agents and sell only
life insurance not to exceed $15,000 on any one life after receiving certification
from CNLIC that the individual has completed a course of study and 18




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passed a written
examination. None of these agents or individuals licensed to act as agents have
underwriting authority. Management believes that commissions paid by CNLIC are
competitive with commissions paid by other life and accident and health insurance
companies in the states in which CNLIC is licensed to operate. CNLIC is aware that
there is considerable competition for obtaining qualified agents and that it
competes with well-established insurance companies for agents to sell its policies.
CNLIC also recruits and trains agents from among persons who are not now engaged in
the selling of life and accident and health insurance. Investments CNLICs investments are limited as to type and amount by Texas insurance laws
designed to insure prudent investment policies. The investment of capital, paid-in
and operating surplus and other funds of insurers organized under the laws of the
State of Texas is governed by the Texas Insurance Code. These statutes include
general and specific limitations on investments, records of investments and other
matters. The Texas insurance law regulating investments and other aspects of the
management of insurance companies is designed primarily for the protection of
policyholders rather than investors. The administration of CNLICs investment portfolio is handled by management, with
all trades approved by a committee of its Board of Directors. The investment
guidelines require that bonds, both government and corporate, are of high quality
and comprise a majority of the investment portfolio. The assets selected are
intended to mature in accordance with the average maturity of the insurance products
and to provide cash flow for CNLIC to meet its policyholder obligations. The type,
quality and mix of investments are designed to allow CNLIC to compete in the life
and accident and health insurance marketplace and to provide appropriate interest
margins. Of CNLICs investments at December 31, 2004, 74.1% were in bonds and 25.7% in
short-term investments, with the remaining .2% invested in equity securities. With
respect to the invested bonds, 98.9% were invested in U.S. Treasury securities and
obligations of U.S. government corporations and agencies, or in corporations that
bear the implied full faith and credit of the U.S. government, with the remaining
1.1% invested in corporate securities. Reinsurance CNLICs life insurance is being ceded through reinsurance agreements with Generali
USA Reinsurance Company (Generali), Kansas City, Missouri and Optimum Re, Dallas,
Texas. At December 31, 2004, CNLIC had ceded $1,020,000 in face amount to Generali
and $4,185,000 to Optimum Re.
Additionally, during 2004 CNLIC entered into a coinsurance agreement with Texas
International Life Insurance Co. (TILIC) whereby TILIC assumed 100% of CNLICs
accident and health business in force. None of CNLICs reinsurers are affiliated
with the Company. 
 
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Reserves 
 CNLIC has established liabilities for policyholders account balances and future
policy benefits to meet obligations on various policies and contracts. Reserves for
policyholders account balances for investment-type policies are equal to cumulative
account balances consisting of deposits plus credited interest, less expense and
mortality charges and withdrawals. Future policy benefits for traditional products
are computed on the net level premium method, which utilizes assumed investment
yields, mortality, persistency, morbidity and expenses (including a margin for
adverse deviation). These reserves are established at the time of issuance of a
policy and generally vary by product, year of issue and policy duration. CNLIC
periodically reviews both reserve assumptions and policyholder liabilities.  (v)
    Business of CUSA, FAIC, MACLIC and SAIC In addition to the domestic life business of CICA, SPLIC and SPFIC, the remaining
domestic life operations of the Company originate from CUSA, FAIC, MACLIC and SAIC. CUSA is an Illinois domiciled life insurer admitted to do business in four states.
During 2003, Excalibur Insurance Corporation was merged into Central Investors Life
Insurance Company of Illinois and the merged company was renamed Citizens USA Life
Insurance Company (CUSA). At December 31, 2004, CUSA had assets of $6.7 million and
annual revenues of $430,000. All inter-company fees and expenses have been
eliminated in the consolidated financial statements. As of December 31, 2004, CUSA
had $4,482,000 in life insurance in force, of which $1,038,000 was reinsured. FAIC is a Kentucky domiciled life insurer admitted to do business in six states. It
was acquired in connection with the Companys February 18, 2003 acquisition of First
Alliance. At December 31, 2004, FAIC had assets of $34 million and revenues of $4.9
million. All intercompany fees and expenses have been eliminated in the
consolidated financial statements. As of December 31, 2004, FAIC had $128,894,000
of life insurance in force, of which $49,028,000 was reinsured. FAIC was merged
into CICA effective January 1, 2005, following regulatory approval. MACLIC is a Missouri domiciled life insurer admitted to do business in two states.
It was acquired in connection with the Companys November 18, 2003 acquisition of
Mid-American. At December 31, 2004, MACLIC had assets of $9 million and revenues
of approximately $2.9 million. MACLIC offers ordinary whole life insurance policies
with annuity riders to residents of Missouri. During 2004, approximately $1.0
million of new life insurance premiums were submitted. All intercompany fees and
expenses have been eliminated in the
consolidated financial statements. As of December 31, 2004, MACLIC had $77,354,000
of life insurance in force, of which $30,784,000 was reinsured. SAIC is a dormant Arkansas domiciled life insurer admitted to do business in
Arkansas. It was also acquired in connection with the Companys November 18, 2003
acquisition of Mid-American. At December 31, 2004, SAIC had assets of approximately
$362,000 and revenues of $17,000. All inter-company fees and expenses have been
eliminated in the consolidated financial statements. As of December 31, 2004, SAIC
had $941,000 of life insurance in force, of which 20




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$574,000 was reinsured. CUSA, FAIC, MACLIC and SAIC all operate as life insurance companies under the laws
of their respective states of domicile. SAIC is dormant, and the remaining companies
offer ordinary whole life insurance policies sold by licensed general agents. No
agent has underwriting authority. The commissions paid are believed by management
to be competitive with commissions paid by other life insurance companies in the
states in which CUSA, FAIC, MACLIC and SAIC are licensed to operate. There is
considerable competition for obtaining qualified agents and these companies compete
with other well-established insurance companies for agents to sell their policies. Investments CUSA, FAIC, MACLIC and SAIC invest and reinvest certain of their reserves and other
funds. The investments of these companies are limited as to type and amount by the
insurance laws of their state of domicile, which are designed to insure prudent
investment policies. The investment of capital, paid-in and operating surplus and other funds of insurers
organized under the laws of the state of domicile of CUSA, FAIC, MACLIC and SAIC is
specified by the insurance laws of those states. These statutes generally include
general and specific limitations on investments, records of investments and other
matters. The insurance law of these states regulating investments and other aspects
of the management of insurance companies is designed primarily for the protection of
the policyholders rather than investors. The administration of the investment portfolios of CUSA, FAIC, MACLIC and SAIC is
handled by management, with all trades approved by a committee of their respective
Boards of Directors. The guidelines used require that bonds, both government and
corporate, are of high quality and comprise a majority of the investment portfolio.
The assets selected are intended to mature in accordance with the average maturity
of the insurance products and to provide the cash flow for CUSA, FAIC, MACLIC and
SAIC to meet their respective policyholder obligations. Of CUSAs investments at
December 31, 2004, 92% were in bonds and 7.2% were in short-term investments, with
the remaining .8% invested in equity securities. With respect to the invested
bonds, 96.4% were invested in U.S Treasury securities and obligations of U.S.
government corporations and agencies, or in corporations that bear the implied full
faith and credit of the U.S. government, with the remaining 3.6% invested in
corporate securities. Of FAICs investments at December 31, 2004, 94.6% were in bonds, with the remaining
5.4% invested in common stocks. With respect to the invested bonds, 96.5% were
invested in U.S. Treasury securities and obligations of U.S. government corporations
and agencies, or in corporations that bear the implied full faith and credit of the
U.S. government, with the remaining 3.5% invested in corporate securities. Of MACLICs investments at December 31, 2004, 88% were in
bonds and 12% in
short-term investments. With respect to the invested
bonds, 63.3% were invested in U.S. Treasury securities and obligations 21




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of U.S. government corporations and agencies, or in corporations that bear the implied full
faith and credit of the U.S. government, with the remaining 39.7% invested in corporate securities. The invested assets of SAIC at December 31, 2004 were invested in bonds. Reinsurance As is customary among insurance companies, CUSA, FAIC, MACLIC and SAIC reinsure with
other companies portions of the life insurance risks they underwrite. Even though
a portion of the risk may be reinsured, the issuing company remains liable to
perform all the obligations imposed by the policies issued by it and is liable if
the reinsurer should be unable to meet its obligation under the reinsurance
agreements. Reserves CUSA, FAIC, MACLIC and SAIC have established liabilities for policyholders account
balances and future policy benefits to meet obligations on various policies and
contracts. Reserves for policyholders account balances for investment-type
policies are equal to cumulative account balances consisting of deposits plus
credited interest, less expense and mortality charges and withdrawals. Future
policy benefits for traditional products are computed on the net level premium
method, which utilizes assumed investment yields, mortality, persistency, morbidity
and expenses (including a margin for adverse deviation). These reserves are
established at the time of issuance of a policy and generally vary by product, year
of issue and policy duration. We periodically review both reserve assumptions and
policyholder liabilities.  (vi)
    Business of SPFIC SPFIC, a wholly owned subsidiary of SPLIC, provides property and casualty coverages
to lower income residents of Louisiana. SPFIC utilizes the same employees/agents as
SPLIC. The maximum coverage on any one dwelling is $20,000 and content coverage is
limited to $10,000. At December 31, 2004, SPFIC had total assets of approximately $6 million and annual
revenues of $4.7 million.  (vii)
    Business of CTI CTI is a wholly owned subsidiary of CICA and engages in the business of providing
data processing services and acquisition and leasing of furniture and equipment for
its parent as well as data processing services and software to other companies.
Pursuant to an Information Systems Management and Services Contract dated October 1,
1991, and subsequently amended, CTI provides data processing services to the Company
for a fixed fee of $85,000 per month. As of and for the year ended December 31,
2004, CTIs total assets were approximately $1.1 million and revenues were $1.1 million. All intercompany fees and expenses
have been eliminated in the consolidated financial statements. 22




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(viii)
    Business of III III is a wholly owned subsidiary of CICA and engages in the business of providing
aviation transportation for the Company. As of and for the year ended December 31,
2004, IIIs total assets were $3.3 million and revenues were $30,000. All
inter-company fees and expenses have been eliminated in the consolidated financial
statements.  (ix)
    Business of FHA FHA owns and operates a funeral home in Baker, Louisiana. At December 31, 2004, FHA
had total assets of $575,000 and total annual revenues of $369,000. All
inter-company fees and expenses have been eliminated in the consolidated financial
statements.  (x)
    Business of KYWIDE, MAAAI and MAAIA In connection with the acquisitions of First Alliance and Mid-American, Citizens
acquired four operating insurance agencies. These insurance agencies market life
and property and casualty insurance products of various insurance companies to
individuals and companies. During 2004, a dormant subsidiary, AIM, was liquidated.
At January 28, 2005, a contract to sell MAAIA was pending. At December 31, 2004,
these insurance agencies had total assets of approximately $187,000 and total
revenues of approximately $213,000. All inter-company fees and expenses have been
eliminated in the consolidated financial statements.  (xi)
    Business of First Alliance and Mid-American First Alliance was the parent of FAIC. It was liquidated in 2004. Mid-American also operates as an insurance holding company through its directly or
indirectly wholly owned subsidiaries MACLIC, SAIC, MAAAI and MAAIA. Mid-American is
incorporated in Missouri. At December 31, 2004, Mid-American had total assets of
approximately $6.2 million and total revenues of $136,000. All inter-company fees
and expenses have been eliminated in the consolidated financial statements. 23




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Item 1A. Risk Factors
  We are a defendant in a class action lawsuit and other lawsuits, which may adversely affect our
financial condition and detract from our managements time
 Bolanos, et. al. v.
Citizens Insurance Company of America, et al.
  
 24




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Our business is subject to risks related to litigation and regulatory actions.
 Bolanos
 
    
    other disputes relating to the overseas trusts that, as described above, purchase
and hold our Class A common stock on behalf of CICA policyholders. For example, if
the plaintiffs were able to prevail on their claims that Texas securities laws apply
to the assignment of policy dividends, as asserted in the Bolanoscase, we could face
the possibility of other claims within the United States;
    
    disputes over insurance coverage or claims adjudication;
    
    disputes regarding sales practices, disclosures or absence of disclosures in
connection with the offer and sale of our insurance policies and the option available
to policyholders to assign dividends to a non-U.S. trust for the purpose of
accumulating our Class A common stock, premium refunds, licensing and regulatory
compliance with insurance and securities laws in the United States and foreign
countries;
 
 25




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
    
    disputes with our consultants or employee agents over compensation and termination
of contracts and related claims;
    
    disputes regarding our tax liabilities; and
    
    disputes relating to businesses acquired by us.
   A substantial amount of our revenues comes from foreign nationals. This involves risks associated
with business in other countries, such as might result from political or economic instability or
the application of laws or regulations to our business.
  
 26




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We may not be able to continue our past strategy of acquiring other U.S. life insurance companies,
and we may not realize improvements to our financial results as a result of past and future
acquisitions.
    
    
    inaccurate assessment of undisclosed liabilities;
 
    
    difficulties in realizing projected efficiencies, synergies and cost savings;
 
    
    failure to achieve anticipated revenues, earnings or cash flow;
 
    
    an increase in indebtedness and a limitation in our ability to access additional
capital when needed; and
 
    
    adverse changes in the economies of geographic regions in which the businesses of our
acquisitions are concentrated, due to natural disasters, changing population
demographics, governmental actions, and other causes.
  
 27




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Sales of our products may be reduced if we are unable to attract and retain marketing
representatives or develop and maintain distribution sources.
   Policy lapses in excess of those actuarially anticipated would have a negative impact on our
financial performance.
 .
 Our actual claims losses may exceed our reserves for claims, which may require us to establish
additional reserves, which in turn may materially reduce our earnings, profitability and capital.
  
 28




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Our investment portfolio is subject to several risks that may diminish the value of our invested
assets and negatively affect profitability.
 Our investment portfolio may suffer reduced returns or losses that could reduce our
profitability.
  The performance of our investment portfolio is subject to fluctuations due to changes in
interest rates and market conditions.
  
 29




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Our investment portfolio is subject to credit risk.
  
 30




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We may be required to accelerate the amortization of deferred acquisition costs and the cost of
customer relationships acquired, which would increase our expenses and reduce profitability.
     We may be required to recognize impairment in the value of our excess of cost over net assets
acquired, which would increase our expenses and reduce our profitability.
  
 31




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Loss of the services of our senior management team would likely hinder development of our operating
and marketing programs and our strategy for expanding our business.
  We operate in a highly competitive, mature industry within the U.S., which could limit our ability
to increase our domestic insurance operations.
   
 32




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Our international operations face competition from several sources.
  Locally operated companies with local currency policies.
 Companies foreign to the countries in which policies are sold but that issue local currency
policies.
 
 33




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Foreign operated companies with U.S. dollar policies.
   
    
    to attract marketing organizations and individuals who will market our products;
    
    to market our insurance products;
    
    to develop competitive and profitable products; and
    
    to maintain our underwriting and claims handling criteria.
 We are subject to extensive governmental regulation in the U.S., which increases our costs and
could restrict the conduct of our business.
  
    
    licensing companies to transact business;
    
    authorizing lines of business;
    
    mandating capital and surplus requirements;
    
    imposing dividend limitations;
    
    regulating changes in control;
    
    licensing agents and distributors of insurance products;
    
    placing limitations on the minimum size of life insurance contracts;
    
    restricting companies ability to enter and exit markets;
 
 34




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
    
    admitting statutory assets;
    
    mandating certain insurance benefits;
    
    restricting companies ability to terminate or cancel coverage;
    
    requiring companies to provide certain types of coverage;
    
    regulating premium rates, including the ability to increase premium rates;
    
    approving policy forms;
    
    regulating trade and claims practices;
    
    imposing privacy requirements;
    
    establishing reserve requirements and solvency standards;
    
    restricting certain transactions between affiliates;
    
    regulating the content of disclosures to debtors in the credit insurance area;
    
    regulating the type, amounts and valuation of investments;
    
    mandating assessments or other surcharges for guaranty funds;
    
    regulating market conduct and sales practices of insurers and their marketers; and
    
    restricting contact with consumers, such as the recently created national do not
call list, and imposing consumer protection measures.
   
 35




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We are unable to quantify the effect of foreign regulation of our insurance business if regulation
were to be imposed on us, but we believe we could expend substantial amounts of time and incur
substantial expense in complying with any foreign regulation, and we may decide to withdraw from
the particular market where the regulation was imposed.
  Changes in U.S. regulation may reduce our profitability and limit our prospective growth.
   
 36




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We have identified a material weakness in our internal control over financial reporting and we have
received an adverse opinion on internal control over financial reporting from our independent
registered public accounting firm in connection with their annual internal control attestation
process. We have also identified several significant deficiencies in our internal control over
financial reporting.
   
 37




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
    
    failure to evaluate the valuation allowance on our deferred tax account;
    
    failure to maintain end user controls over the Excel file for payment of certain
insurance commissions;
    
    failure to document and test certain reinsurance processes;
    
    failure to adequately review market values of certain fixed income securities;
    
    failure to maintain end user controls relating to market value adjustments of
certain investment securities; and
    
    failure to maintain adequate documentation and controls regarding certain payroll
procedures.
    
 38




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Reinsurers with which we do business with may not honor their obligations, leaving us liable for
the reinsured coverage, and our reinsurers could increase their premium rates.
     
 39




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The failure to effectively maintain and modernize our information systems could adversely affect
our business.
   
    
    inadequate information on which to base pricing, underwriting and reserving
decisions;
    
    the loss of existing customers;
    
    difficulty in attracting new customers;
    
    customer and marketer disputes;
    
    regulatory problems, such as failure to meet prompt payment obligations;
    
    litigation exposure; or
    
    increases in administrative expenses.
  
 40




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Failure to protect confidential information and privacy could result in the loss of customers,
reduction to our profitability and subject us to fines and penalties
  
    
    monitoring our record retention plans and any changes in state or federal privacy
and compliance requirements;
    
    drafting appropriate contractual provisions into any contract that raises
proprietary and confidentiality issues;
    
    maintaining secure storage facilities for tangible records; and
    
    limiting access to electronic information in order to safeguard certain current
information.
   The insurance business in which we operate may be subject to periodic negative publicity, which may
negatively impact our financial results.
  
 41




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General economic, financial market and political conditions may adversely affect our results of
operations and financial condition.
  
    
    insurance industry cycles;
    
    levels of employment;
    
    levels of consumer spending;
    
    levels of inflation; and
    
    movements of the financial markets.
  The inability of our subsidiaries to make payments to us in sufficient amounts for us to conduct
operations could harm our ability to meet our obligations.
  
 42




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The price of our Class A common stock may be volatile and may be affected by market conditions
beyond our control.
  
    
    quarterly variations in actual or anticipated results of our operations including
for individual products;
    
    interest rate fluctuations;
    
    changes in financial estimates by securities analysts;
    
    our failure to meet the
expectations of securities analysts and investors; and
    
    actions or announcements by our competitors.
 Class A common stock holders will always be minority shareholders who will not control us, will
have a limited ability to influence our business policies and corporate actions, and will not by
themselves be able to elect any directors.
  Our articles of incorporation, bylaws and insurance laws may discourage takeovers and business
combinations that our stockholders might consider in their best interests.
  
 43




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
    
    provide that our Class B common stock elects a simple majority of our board of
directors, all of which is beneficially owned by Harold E. Riley; and
    
    permit our board of directors to issue one or more series of preferred stock.
  You should not anticipate receiving cash dividends on your Citizens Class A common stock, because
we have not paid any cash dividends and do not anticipate doing so in the foreseeable future.
  
 44




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There are a substantial number of shares of our Class A common stock eligible for future sale in
the public market. The sale of a large number of these shares could cause the market price of our
Class A common stock to fall.
     Provisions of our Series A Preferred Stock may prevent or make it more difficult for us to raise
funds or take certain other actions
  
 45




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Holders of our Series A Preferred Stock may require us to redeem their Series A Preferred Stock,
and we will be required to redeem any shares of Series A Preferred Stock that remain outstanding on
the fifth anniversary of their issuance.
   
    
    the average closing price of our Class A common stock is $3.74 per share or above;
    
    we have sufficient number of shares of Class A common stock available for issuance;
    
    our Class A common stock is listed on NYSE or other eligible market;
    
    the shares of Class A common stock to be issued are registered under an effective
registration statement;
    
    the shares to be issued can be issued without violating the rules of the NYSE or
any applicable trading market or a provision of our agreement with the holders;
 
 46




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
    
    no bankruptcy event has occurred; and
    
    certain other enumerated conditions.
   
 47




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Item 2. Description of Properties We own our principal office in Austin, Texas, consisting of an 80,000 square foot
office building and approximately one acre of land nearby that contains housing
storage facilities. Approximately 50,000 square feet is occupied or reserved for our operations with the
remainder of the building being leased to a single tenant under a multi-year lease. We also own a 6,324 square foot funeral home in Baker, Louisiana acquired at a total
cost of $527,000. This facility, acquired in a 1995 acquisition, is
owned and operated by FHA. In addition, we own other properties in Texas and Louisiana that are incidental to
our operations. 
 Item 3. Legal Proceedings 
 Delia Bolanos Andrade,
et al v. Citizens Insurance Company of America, Citizens, Inc., Negocios Savoy, S.A., Harold E.
Riley, and Mark A. Oliver, Case Number 99-09099
   
 
 Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to our shareholders during the fourth calendar quarter of
2004. 48




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PART II 
 Item 5. Market for Registrants Common Equity and Related Stockholder Matters Our
Class A common stock is traded on the New York Stock Exchange
(NYSE), under the symbol CIA. The quarterly high and low prices per share as
reported by the NYSE are shown below. These prices have been adjusted to reflect 7%
stock dividends paid in 2003 and 2004. 2004
    
    
    2003Quarter Ended
    
    High
    
    
    Low
    
    
    High
    
    
    LowMarch 31
    
    $
    9.35
    
    
    $
    6.84
    
    
    $
    6.89
    
    
    $
    5.24June 30
    
    
    7.84
    
    
    
    5.63
    
    
    
    7.42
    
    
    
    5.38September 30
    
    
    7.45
    
    
    
    4.57
    
    
    
    8.17
    
    
    
    6.11December 31
    
    
    6.62
    
    
    
    5.07
    
    
    
    9.67
    
    
    
    7.29
 As of December 31, 2004, the approximate number of record owners of our Class
A common stock was 22,000. Management estimates the number of beneficial owners to
be approximately 90,000. On December 31, 2003, we paid a 7% stock dividend to holders of record as of
December 1, 2003. The dividend resulted in the issuance of 2,476,420 Class A shares (including 179,181 shares in treasury) and 57,239 Class B shares. On December 31, 2004, we paid a 7% stock dividend to holders of record as of
December 1, 2004. The dividend resulted in the issuance of 2,690,039 Class A shares (including 191,722 shares in treasury) and 61,246 Class B shares. We have not paid cash dividends in any of the past five years and do not expect to
pay such in the forseeable future. For restrictions on the present and future
ability to pay dividends, see Note 6 of the Notes to Consolidated Financial
Statements. Securities Authorized for Issuance Under Equity Compensation Plans We do not maintain any equity compensation plans or arrangements. Thus, we do not
have any securities authorized for issuance under these types of plans, nor have we
issued any options, warrants or similar instruments to purchase any of our equity
securities, except for cash warrants issued in conjunction with the convertible
preferred stock issued in 2004. (See Note 8 of the Notes to Consolidated
Financial Statements.) 49




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Item 6. Selected Financial Data The table below sets forth, in summary form, selected data of the Company. This
data, which is not covered in the report of our independent auditors, should be read
in conjunction with the consolidated financial statements and notes, which are
included elsewhere herein. The net income (loss) per share amounts have been adjusted retroactively
for all periods presented to reflect the 7% common stock dividends paid on December
31, 2004 and December 31, 2003. Year Ended December 31,(in thousands except per share data)2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Total Revenues
    
    $
    102,826
    
    
    $
    95,103
    
    
    $
    83,004
    
    
    $
    67,647
    
    
    $
    66,678Net Income (Loss)
    
    $
    7,732
    
    
    $
    3,126
    
    
    $
    4,254
    
    
    $
    3,963
    
    
    $
    2,053Net Income (Loss) Per Share
    
    $
    .18
    
    
    $
    .08
    
    
    $
    .12
    
    
    $
    .15
    
    
    $
    .08Total Assets at December 31
    
    $
    661,212
    
    
    $
    390,093
    
    
    $
    326,291
    
    
    $
    282,086
    
    
    $
    267,842Long-term Debt
    
    $
    30,000
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Total Liabilities
    
    $
    520,179
    
    
    $
    263,066
    
    
    $
    224,499
    
    
    $
    199,364
    
    
    $
    190,529Total Stockholders Equity
    
    $
    135,131
    
    
    $
    127,027
    
    
    $
    101,792
    
    
    $
    82,722
    
    
    $
    77,313Book Value Per Share
    
    $
    3.52
    
    
    $
    3.32
    
    
    $
    3.16
    
    
    $
    3.08
    
    
    $
    2.88
 See Item I  Business (a) and (b), and Item 7  Managements Discussion and Analysis, for
information that may affect the comparability of the financial data contained in the above table. 
  Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations Overview In 2004, new avenues to growth were added and existing sources of revenues were
expanded, leading to improved revenue and profitability for the year. Our international life business continued to grow at a double-digit pace. New
annualized submitted premiums from the international market increased by more than
17% during 2004 compared to 2003. The development of new markets in the Pacific Rim
and the expansion of existing markets in Latin America contributed to the growth in
international revenues. Our book of accident and health business, a source of continuing operating losses
over the past five years, was transferred to another carrier under a reinsurance
agreement that permits us to share in any profits developed over a graduated scale
for a period of ten years. Although this action decreased revenues by approximately
$13 million in 2004, management believes the reduced overhead and potential for
profit will benefit shareholders for the long term. The development of a United States marketing operation continued during the year.
Marketing was active in Missouri, Illinois, Texas and Oklahoma during 2004, and the
addition of SPLIC in October 2004 brings an established presence in Louisiana with an experienced core of home service marketing representatives. 50




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Management believes that the marketing activities of SPLIC can be expanded beyond
its current levels. The acquisition of SPLIC was, at $85 million, the largest made by the Company in its
history, and it provides a profitable source of revenue and a solid asset base. We
used our $30 million line of credit negotiated in March 2004 from Regions Bank to
supplement available cash in completing the transaction. Although the acquisition
added $30 million of debt to our balance sheet, management expects to repay the debt
by the end of April 2005. Management continues to seek other candidates
for acquisition. Additionally, during 2004 we successfully completed a $12.5 million private
placement of convertible preferred stock to a group of four institutional investors.
The offering can be increased to $25 million under certain conditions. The
preferred stock carries a 4% dividend and is mandatorily redeemable
in five years if not converted prior to the redemption date.
The dividends and redemptions are payable in shares of the Companys Class A common
stock. Management believes that this placement marks a significant step in the
Companys evolution as it brings institutional investors into the Company. We continued our plan to consolidate certain operating subsidiaries in order to
reduce overhead and streamline operations during 2004. First Alliance was liquidated
during the year, and during the first quarter of 2005, FAIC was merged into CICA.
Additionally, we entered into an agreement with a third party to sell MAAIA. That
transaction is expected to close in the second quarter of 2005.Management plans to
continue to make such consolidations in order to achieve better economies of scale
by reducing the number of operating subsidiaries. Results of Operations The Company operates in four primary segmentsinternational life insurance, U.S.
life insurance operations, U.S. accident and health operations and, with the
acquisition of SPLIC and SPFIC, U.S. home service insurance operations. Prior to
2004, another segmentU.S. accident and health operationsexisted, but that
segment was exited in 2004 with the transfer of virtually all of such business to a
third party carrier through a coinsurance arrangement. International Operations The acceptance of applications for U.S. dollar denominated ordinary whole life
insurance from high net worth foreign nationals is the foundation upon which the
Company was built. For the past 35 years, we have participated in the foreign
marketplace. Positive attributes of the foreign insurance market include:  
    policies are typically larger face amounts than in the U.S.;
    the premiums are paid annually;
    persistency is higher compared to U.S. policies;
    the mortality is as good as or better than that experienced in the U.S.; 51




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
    the marketers from whom applications are received are more professional
than that typically seen in the U.S.; and
    commissions are not advanced. The Company has no assets, offices or employees outside of the U.S. We expect to
continue to expand our international operations. The number of our producing
independent contractors has expanded over the past few years and the number of
countries from where applications are received is expanding. Historically, the
majority of such business has come from Central and South America; however, in 2004
the Pacific Rim began to represent a meaningful and growing source of new business,
amounting to $2.4 million of submitted annualized premium. Overall, foreign
business made up more than 71.1% of total premium revenues in 2004. Beginning in 2002, expansion began into the Pacific Rim, particularly Taiwan. CICA
has established relationships with a number of marketing organizations in the
Pacific Rim, and during 2004, received approximately $2.4 million of annualized new
submitted premium from that region. Additionally, Brazil, which has never been a
country from which large volumes of premiums were received, began to develop adding
$650,000 of new premiums. Overall, submitted annualized premiums for 2004 from the
international markets totaled $16.7 million, compared to $13.5 million in 2003 and
$13.2 million in 2002. Management is pleased with the continued growth and expansion of the Companys
international production, particularly in light of the significant financial
problems experienced by several South American countries in recent years. Argentina
and Venezuela, in particular, experienced severe economic declines. These two
countries represented more than 18% of the premium income of the Company in 2003.
Argentina was historically a large source of new business for CICA, particularly as
a new middle class emerged in that countrys society. During the late 1980s, CICA
(which had historically only focused on the upper income groups) began offering a
plan in Argentina that was designed for this group that was popularly received.
When the economic crises occurred, the middle class was severely impacted and CICA
experienced a decrease in new business and an increase in lapsation from that
market. Since that time, management has refocused its Argentine marketing
organization on the high net worth individuals that have historically been the
core group of insureds. During 2003 and 2004 surrenders declined. In 2004,
production from that area amounted to more than $1.1 million and management has
successfully motivated numerous marketers who had ceased production to return to
recruiting new marketing representatives and writing applications. We are
optimistic that as the economy improves, the volume of new business written in
Argentina should increase to previous levels. Total premium income from the international market amounted to $59.2 million in
2004, compared to $51.9 million in 2003 and $48.6 million in 2002. (See Note 11 of
the Notes to Consolidated Financial Statements for an analysis of the results of
the International Life segment.) U.S. Life Operations 52




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The Companys focus historically has been on the international market because of the
key advantages described above. However, throughout the Companys history, it has
always written U.S. business and through the acquisition of other U.S. life
insurers, accumulated more than $13.6 million of annual U.S. life insurance premium
in 2004 (excluding home service). In 2000, management perceived an opportunity for the Company to serve middle-income
American families through the sale of an ordinary whole life insurance product
containing a no-load annuity benefit. Since its introduction, the Company has
sought the marketing management necessary to build a U.S. sales organization from
scratch and to begin to write the product in volume. After several attempts to
bring in such expertise, in early 2004 senior executives in the Companys home
office staff assumed this management responsibility. We have begun emphasizing the
development of a sales force comprised primarily of second career sales associates.
Recent acquisitions have created opportunities to increase production. MACLIC,
acquired in 2003, wrote approximately $1 million of new annual life premium, and
associates of CNLIC generated another $250,000. When the Company acquired Combined Underwriters (now called Citizens National Life
or CNLIC) in 2002, management hoped to take advantage of a unique charter structure
called a Stipulated Premium charter that permitted CNLIC to recruit and license
marketing associates in Texas without the standard testing requirements. Management
now believes that while this charter structure offers advantages, they are
outweighed by the costs and inefficiencies associated with maintaining CNLIC as a
separate operating entity. In early 2005, plans are being finalized to merge CNLIC
into CICA. Additionally, the Company has a block of credit life and disability business written
through furniture stores in Texas, Louisiana and Arkansas. This business is
typically single premium and amounted to $1.1 million in 2004 and $851,000 in 2003.
Total U.S. life premium income for 2004 (excluding home service) amounted to $13.6
million, compared to $11.2 million in 2003 and $6.2 million in 2002. Management
intends to broaden the portfolio of U.S. products to include the same products as
are offered to overseas clients. Home Service Business The acquisition of SPLIC and SPFIC created a new segment for the Company. SPLIC has
focused on writing ordinary whole life insurance utilizing the home service
marketing distribution method, whereby employee/agents working routes make regular
collections of premiums from clients. SPFIC also uses the home service method to
write small fire policies on Louisiana residents. This marketing method dates back
to the creation of the life insurance industry in the United States and SPLIC
utilizes approximately 390 agents (307 of whom also represent SPFIC) to write and
collect premiums. Because SPLIC and SPFIC were acquired on October 1, 2004, only
the fourth quarter of their activities are included in 2004 results from operations. Under the management of its previous owner, SPLIC had focused on limiting the amount
of new business sold in order to maximize profits under regulatory
accounting. As such, its book of premium revenues has decreased each year for the
past five years. Management is optimistic that a new emphasis on sales can 53




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halt the shrinkage in the premium income and serve as a base from which to expand the home
service or debit business. SPLIC is made up of books of business from more than 100
small life insurance carriers that it had acquired during its history. For the
last quarter of 2004, Home Service premium revenues amounted to $9.6 million, of
which $8.5 million was life and $1.1 million was casualty. Accident and Health Business We have historically maintained a small block of U.S. accident and health business,
primarily through acquisitions in the mid-1990s that brought other books of
accident and health business, including some major medical business. However, the
acquisition of CNLIC in 2002 substantially increased both the amount of accident and
health business in force, as well as the volume of new business. Most of the
accident and health business we acquired was unprofitable when we acquired it.
Significant rate increases coupled with the non-renewal of the major medical
business, would improve the performance of these acquired blocks over time. Management determined in late 2003 to seek a buyer for the block of accident and
health business due to increased costs, regulatory limits on rate increases, a
reduced reinsurance market and high administration costs relating to this segment.
In early 2004, they agreed to transfer most of the in-force accident and health
business to a Texas-domiciled reinsurer effective January 1, 2004. The
consideration for the transfer, which was initially accomplished through a 100%
coinsurance arrangement until the various state insurance departments can approve an
assumption reinsurance agreement, will be a participation in any future profits on
the book of business over a 10-year period. For 2004, accident and health premium decreased by $14 million, compared to the same
period in 2003. Upon closing of the transaction, CICA ceded reserves of $8,101,000,
and CNLIC ceded reserves of $6,859,000 to the assuming carrier. A loss of $634,000
was recorded on the transfer, which was offset by the amortization of the deferred
gain of $72,000. Administrative cost savings of $1,462,000 were achieved in 2004 as
a result of the transfer of this business. Consolidated Results The following table sets forth the Companys net income for periods indicated: Year Ended
    
    
    
    
    
    
    
    Net Income Per
    
    
    
    Change fromDecember 31
    
    
    Net Income
    
    
    
    Class A & B Shares
    
    
    
    Previous Year2004
    
    
    $
    7,732,000
    
    
    
    $
    0.18
    
    
    
    
    147.31
    %2003
    
    
    
    3,126,000
    
    
    
    
    0.08
    
    
    
    
    (26.5
    %)2002
    
    
    
    4,254,000
    
    
    
    
    0.12
    
    
    
    
    7.3
    %
 Reductions in operating expenses, coupled with the transfer of the Companys
accident and health business to another carrier and the acquisition of SPLIC,
contributed to the significant improvement in 2004. In 2003, increases in the 54




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amortization of cost of customer relationships acquired and other intangible assets
acquired in the FAIC acquisition, combined with losses on the accident and health
business, caused the earnings decrease. The Company entered into coinsurance agreements, effective January 1, 2004, and
ceded approximately $14 million of its annual accident and health premium and
corresponding benefits and claims. In consideration for these cessions, the Company
made a closing settlement payment of $10,440,000 to the reinsurer in June 2004. Due
to this cession, the Company also reduced its January 1, 2004 deferred policy
acquisition costs, cost of customer relationships acquired and policy benefit
reserves by $2,197,000, $2,886,000 and $14,960,000, respectively. The Company
recorded an initial amount payable to the reinsurer of $10,440,000, resulting in a
first quarter 2004 charge of $634,000 and a deferred gain of $72,000, which was
amortized during 2004. The coinsurance agreements provide that this ceded business
will revert to the reinsurer when parallel assumption reinsurance agreements are
approved by the various state insurance departments holding jurisdiction. Such
approval is anticipated during 2005. The Company also participates in future
profits on the accident and health business subject to the coinsurance agreements
over a 10-year period. During 2004, the Company recognized approximately $809,000
as profit under the agreements. Total revenues for 2004 were $102,826,000 compared to $95,103,000 in 2003 and
$83,004,000 in 2002. The growth in CICAs premium income fueled by the increase in
new business, coupled with SPLICs acquisition, which
contributed only to the last quarter
of the year, offset the ceding of approximately $14 million of accident and health
premium. The acquisitions of FAIC and MACLIC increased 2003 revenues by $6,128,000.
The acquisition of CNLIC in 2002 increased revenues for that year by $11,270,000.
The 2004 increase in revenues was due to increases in life insurance premiums, plus
the acquisition of SPLIC and SPFIC. The 2003 increase in revenues was primarily due
to a 5.7% increase in new life premiums, a 17.1% increase in renewal life premiums
and a 9.7% increase in accident and health premiums. The 2002 increase in revenues
was due to a 17.1% increase in new life premiums, a 4.5% increase in renewal life
premiums, a 166.3% increase in accident and health premiums and a 7.2% increase in
net investment income. Premium income increased by 6.6% to $83,168,000 in 2004, from $78,027,000 in 2003.
The increase in 2004 was driven by a 6.4% increase in premiums from CICA, as well as
the inclusion of SPLIC and SPFIC, which added $9,587,000 since their acquisition in
October 2004, which offset the loss of approximately $14 million of accident and
health premium ceded to TILIC. Premium income increased by 14.4% from $68,211,000
in 2002 to $78,027,000 in 2003. The 2003 increase was comprised of an $8,506,000
increase in life premiums and annuity and universal life considerations, and a
$1,311,000 increase in accident and health premiums. The February 2003 acquisition
of FAIC and the November 2003 acquisition of MACLIC increased life premiums by
$4,345,000. Production of new life insurance premiums by CICA increased 5.7% from
2002 to 2003. 55




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Significant increases are anticipated in 2005 when the full year of results will be
included for SPLIC. Net investment income increased 18.7% to $17,005,000 from $14,322,000 in 2003 and
$14,252,000 in 2002. The increase reflects the acquisition of SPLIC and SPFIC in
October 2004. SPLIC and SPFIC contributed $2,875,000 to 2004 investment results, in
the form of additional interest on bonds. The remaining companies investment
income declined slightly during 2004 as a result of lower available interest rates
and the sale of a significant amount of bonds during the third quarter to fund the
acquisition of SPLIC and to provide the funds to transfer the accident and health
business. During the second and third quarters of 2004, approximately $50 million
of bonds were sold or matured to provide cash for the SPLIC acquisition. In
addition, approximately $10 million of bonds were sold or matured so that cash in an
amount equal to the accident and health reserves and claims payable could be
transferred under the coinsurance agreement. A majority of our new investment activity over the past three years has focused on
the acquisition of bonds issued by public corporations that carry the implied full
faith and credit of the Federal government, such as FNMA and FHLMC. These bonds
carry call features that limit the potential for capital gains in a falling interest
rate environment, but generate yields that are typically 150 basis points higher
than that available in the Treasury market and generally 50 basis points higher than
AAA and AA rated corporate securities. By choosing to invest in these securities,
the Company is exposed to reinvestment risk in the event that interest rates fall
for an extended period, because the securities will typically be called, and the
likelihood of increases in market value above par is unlikely because the
expectation is that the bond will be called. Such events require reinvestment of
the proceeds at levels lower than the yields of the called bonds. During the fourth
quarter of 2004, approximately $20 million of tax-exempt municipal bonds were
purchased for SPLIC in order to meet the requirements of the Louisiana Insurance
Code for a reduction in premium taxes. A period of falling interest rates occurred during 2003, and a significant number of
bonds were called; however, in many cases, the Company was able to reinvest in bonds
at levels at or near those of the called bonds. In 2004, a large number of bonds
were also called. The Company does not believe such declines in available yields
will have a material adverse effect on its future operating results because of
strong cash flow available to take advantage of any increases in interest rates. The change in future policy benefit reserves increased from $7,904,000 in 2003 to
$18,627,000 in 2004. CICAs life reserves increased $16.7 million in 2004 compared
to an increase of $10.6 million in 2003 predominantly due to increased persistency
on the Companys business and the increase in new business. Due to the cession of the majority of the accident and health business, CICA
experienced a minimal change in accident and health reserves for 2004. The change
in future policy benefit reserves increased from $6,052,000 in 2002 to $7,904,000 in
2003. CICAs life reserves increased $10.6 million in 2003, which offset decreases
in accident and health reserves. This was due to an increase in persistency on the
Companys overseas business. These persistency improvements have led to an increase
in policy reserves at an accelerated rate
compared to the past. CICAs accident and health reserves decreased 56




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approximately $200,000 because of expected lapsation and non-renewal as the Company continued to
implement significant rate increases. SPLICs reserves increased $233,000 between its October 1, 2004 acquisition and
year-end. CNLICs life reserves increased approximately $199,000 in 2004, compared to a
decrease of approximately $258,000 in 2003, due primarily to sales of newly
developed whole life products that carry increased reserves contrasted with the
existing life business that was in force at the acquisition date. Due to the
cession of all of its accident and health business, CNLIC had no change in
associated reserves for 2004. In 2003, accident and health policy reserves for
CNLIC decreased by approximately $3.0 million. The non-renewal of the major medical
block of business accounted for $1.3 million of the decrease. In addition, CNLIC
experienced high lapsation on new accident and health policies issued during 2003.
Including the policies terminated from the non-renewal of the major medical
business, the policy count for CNLIC accident and health policies decreased by
approximately 33% during 2003 compared to 2002, resulting in associated policy
reserves decreasing by approximately $1.7 million. The remaining change in future policy benefit reserves was primarily due to a
decrease of $1.1 million in FAIC life reserves between 2003 and
2004 and a $1.1 million
increase in MACLICs reserves in 2004. The MACLIC increase was primarily related to
the sales production and persistency of its life insurance block. FAIC, purchased
on February 18, 2003, had an increase in policy benefit reserves of approximately
$580,000 during 2003. Approximately $380,000 of the increase related to annuities
and approximately $200,000 related to life insurance. Policyholder dividends increased 12.9% during 2004 to $4,142,000 from 2003 dividends
of $3,666,000 due to improved persistency and the continued sale of participating
ordinary whole life products. Virtually all of CICAs overseas policies are
participating, and participating policies represent approximately 59% of our
business in force. Policyholder dividends are factored into the premium and as such
the increase should have no adverse impact on profitability. As noted in the table below, claims and surrenders decreased 8.9% from $40,445,000
for 2003 to $36,831,000 for 2004. The 2004 decrease primarily related to the
cession of most of our accident and health business as discussed above, which offset
the inclusion of SPLICs results for the fourth quarter of the year. Year ended December 31,2004
    
    
    2003
    
    
    2002Death claims
    
    $
    10,224,000
    
    
    $
    6,399,000
    
    
    $
    6,600,000Surrender expenses
    
    
    18,406,000
    
    
    
    17,986,000
    
    
    
    16,777,000Accident and health benefits
    
    
    (60,000
    )
    
    
    9,110,000
    
    
    
    8,615,000Endowments
    
    
    7,509,000
    
    
    
    6,416,000
    
    
    
    5,730,000Other policy benefits
    
    
    752,000
    
    
    
    534,000
    
    
    
    385,000Total claims and
surrenders
    
    $
    36,831,000
    
    
    $
    40,445,000
    
    
    $
    38,107,000
 57




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Death benefits increased 59.8% from $6,399,000 in 2003 to $10,224,000 in 2004.
Death claims in 2002 were $6,600,000. The acquisition of SPLIC increased 2004 death
benefits by $3,688,000. The experience of the other companies in the group was
generally favorable. As discussed above, CICA has historically adhered to an
underwriting policy that requires thorough medical examinations on all applicants
who are foreign residents. The 2002 claims were impacted by the acquisition of
CNLIC, which increased such expense by $712,000. Accident and health benefits decreased from $9,110,000 in 2003 to $(60,000) in 2004,
due to the cession of most of the Companys accident and health business pursuant to
coinsurance agreements effective January 1, 2004. In 2002, such benefits totaled
$8,615,000. The 2003 increase was directly related to the acquisition of CNLIC,
which saw continued increases in claims incurred. During 2003, we did not renew
approximately $2.3 million of major medical premiums on the CNLIC book of accident
and health business and, in addition, implemented significant rate increases on the
accident and health business remaining in force. Endowment benefits increased 17.0% from $6,416,000 in 2003 to $7,509,000 in 2004.
Endowments totaled $5,730,000 in 2002. CICA has a series of international policies
that carry an immediate endowment benefit of an amount elected by the policyowner.
This endowment is factored into the premium of the policy and is paid annually.
Like policy dividends, endowments are factored into the premium and as such the
increase should have no adverse impact on profitability. Policy surrenders increased 2.3% from $17,986,000 in 2003 to $18,406,000 in 2004.
The 2003 results represented a 7.2% increase over 2002 when surrenders amounted to
$16,777,000. The 2004 increase was primarily due to the acquisitions of FAIC and
MACLIC, discussed above, which generated $3,427,000 in additional surrenders, plus
the inclusion of SPLIC which added $432,000. FAIC has experienced significantly
higher surrender activity since its acquisition in 2003 due to the actions of former
marketing associates placing numerous policies with other companies (see Table III).
FAIC filed legal action against the individual primarily responsible for such
replacements in the fourth quarter of 2004 and saw a sharp drop in replacement
activity. The 2003 increase was directly related to the acquisitions of FAIC and
MACLIC, discussed above, which generated $2,669,000 in surrenders. Surrenders for
CICA declined 5.4% in 2003. The uncertain economic climate in several Latin
American countries was the primary reason for the increased 2002 surrender activity.
The economies in Argentina and Venezuela in particular were in near-depression
during 2002. However, management is optimistic about the long-term prospects for these countries. During 2004, commissions increased 16.7% to $21,274,000 from $18,228,000 in 2003
primarily due to the increase in the production of new life premiums during 2004
discussed above. Accident and health commissions on the business that was ceded in
2004 were approximately $2,608,000. In addition, the acquisitions of FAIC and
MACLIC contributed an additional $1,324,000 of commissions to the 2004 increase,
while SPLICs commissions during the fourth quarter of 2004 were $2,211,000. During
2003, commissions increased 11.6% to $18,228,000 from $16,339,000 in 2002. The 2003
increase was attributable to the acquisition of FAIC and MACLIC, whose 2003
commissions were $1,064,000. The 58




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remainder of the 2003 increase was due to the 5.7% increase in production of new life insurance premiums. Underwriting, acquisition and insurance expenses decreased 8.3% to $17,391,000 in
2004, compared to $18,966,000 in 2003, due primarily to economies of scale being
achieved in administration of the business of FAIC, MACLIC and CNLIC. The 2004
results include three months of expense for SPLIC amounting to $1,949,000.
Management believes expense reductions will be achieved in SPLIC during 2005 through
certain economies of scale.In addition, 2003 included severance related expenses
from the acquisitions of FAIC and CNLIC. Administration costs on the ceded accident
and health business in 2004 reduced expenses by $1,145,000. Underwriting,
acquisition and insurance expenses increased 25.9% to $18,966,000 in 2003 compared
to $15,064,000 in 2002. The 2003 increase includes $2,136,000 of expenses related
to the acquisitions of FAIC and MACLIC and approximately $900,000 related to the
annual marketing convention for international producers for 2003 and 2004, an
expense previously borne by our international marketing manager. In May 2002, in an
attempt to more efficiently manage and communicate with our independent marketing
consultants, we canceled our contract with an independent international company that
had served as the managing general agent for our international marketing activities
since early 1997. We no longer pay an overriding commission to this former
marketing firm on new business issued internationally but instead directly bear the
related costs of all marketing, management and promotional activities. Other
factors in the increased expenses relate to the start-up costs of the U.S. marketing
program, and approximately $250,000 was spent in attempting to acquire control of
First American Capital Corporation, a Kansas insurance holding company, and on other
merger and acquisition activities. Capitalized deferred policy acquisition costs increased 4.1% from $16,558,000 in
2003 to $17,241,000 in 2004 primarily due to the increase in new life production
discussed above. These costs were $14,423,000 in 2002. Amortization of these costs
was $8,438,000, $11,807,000, and $10,039,000 in 2004, 2003 and 2002, respectively.
With most of the accident and health business ceded effective January 1, 2004,
amortization of these costs was minimal in 2004. The 2003 increase related to the
5.7% increase in new life production. The 2002 increase included $1,518,000 of
deferred policy acquisition costs that have been capitalized by CNLIC. The
remainder of the increase related to the increase in new life production. Most of
the 2002 increase related to the increased surrender
activity caused by the uncertain economic climate in several Latin American
countries. Amortization of cost of customer relationships acquired and other intangibles
decreased from $7,110,000 in 2003 to $4,136,000 in 2004. With most of the accident
and health business ceded effective January 1, 2004, amortization of these costs was
minimal in 2004. The acquisitions of FAIC and MACLIC contributed an additional
$1,651,000 of amortization of these costs in 2004, while SPLIC added $849,000.
Amortization of other intangibles was $1,100,000 during 2004. Included in such
amortization was $668,000 related to other intangible assets that were deemed to be
impaired in 2004. Amortization of cost of customer relationships acquired, excess
of cost over net assets acquired and other intangibles increased from $2,528,000 in
2002 to $7,110,000 in 2003. The 2003 increase relates to the amortization of cost
of customer relationships acquired 59




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with respect to the acquisitions of CNLIC, FAIC and MACLIC that amounted to $5,644,000 and $563,000 related to amortization of an
intangible asset. The 2002 increase relates to the amortization of cost of customer
relationships acquired with respect to the acquisition of CNLIC that amounted to
$1,889,000 in 2002 that more than offset our adoption of the new Financial
Accounting Standards Boards (FASB) accounting statement where amortization of
goodwill and other intangibles ceased since management determined that these
intangibles have an indefinite life. Our analysis of goodwill and other intangibles
indicated that there was no impairment as of December 31, 2004 and December 31,
2003. For 2004, the Companys expected tax rate increased to 33.9% from the 28.4%
effective tax rate of the comparable 2003 period due to the Company no longer being
eligible for the small life insurance company deduction available under the Internal
Revenue Code due to the October 1, 2004 acquisition of SPLIC discussed above. The
Companys policy is to make its best estimate of the effective tax rate it expects
to be applicable for the full year in its provision for income taxes on an interim
basis. The acquisition of SPLIC will result in the life insurance company assets of
the Companys life insurance controlled group exceeding $500 million, making it
ineligible for the small life insurance company deduction going
forward.
The effective tax rate is low in 2004 due to the change in valuation allowance being
decreased by approximately $1,319,000 in 2004 and the correction of prior year
taxes. Liquidity and Capital Resources Liquidity refers to a companys ability to generate sufficient cash flows to meet
the needs of its operations. Liquidity is managed on insurance operations to ensure
stable and reliable sources of cash flows to meet all obligations and is provided by
a variety of sources. Liquidity requirements are met primarily by funds provided from operations. Premium
deposits and revenues, investment income and investment maturities are the primary
sources of funds while investment purchases, policy benefits, and operating expenses
are the primary uses of funds. Although the Company historically has not had to
liquidate invested assets to provide cash flow, its investments consist primarily of
marketable debt securities that could be readily converted to cash for liquidity
needs. A primary liquidity concern is the risk of an extraordinary level of early
policyholder withdrawals. The Company includes provisions within its annuity and
universal life insurance policies, such as surrender charges, that help limit and
discourage early withdrawals. Since these contractual withdrawals, as well as the
level of surrenders experienced, were consistent with the Companys assumptions in
asset liability management, the associated cash outflows did not have an adverse
impact on overall liquidity. Individual life insurance policies are less
susceptible to withdrawal than annuity reserves and deposit liabilities because
policyholders may incur surrender charges and undergo a new underwriting process in
order to obtain a new insurance policy. Cash flow projections and cash flow tests
under various market interest rate scenarios are also performed to assist in
evaluating liquidity needs and adequacy. The Company currently anticipates 60




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that available liquidity sources and future cash flows to be adequate to meet the demand
for funds. In the past, cash flows from the Companys insurance operations have been sufficient
to meet current needs. Cash flows from operating activities were $9.5 million and
$13.6 million for 2004 and 2003, respectively. The Company also has traditionally
had significant cash flows from both scheduled and unscheduled investment security
maturities, redemptions, and prepayments. Net cash outflows from investment
activity totaled $34.1 million and $17.8 million for the years ended December 31,
2004 and 2003, respectively. In 2004 the outflow resulted from the $85 million
expended to acquire SPLIC. The cash outflow for investment activities for the year
ended December 31, 2003 primarily related to the investment of excess cash and cash
equivalents generated from operations during 2003. Stockholders equity increased from $127,027,000 at December 31, 2003 to
$135,131,000 at December 31, 2004 primarily due to income earned during the period
and recognition of a $2,394,000 beneficial conversion feature, net of accretion, in
excess of unrealized losses, net of tax, of $(2,021,000) for 2004. Decreases in the
market value of our bond portfolio caused by lower bond prices resulted in the
increase in unrealized losses since December 31, 2003. Invested assets increased 72.9% to $475,802,000 at December 31, 2004 from
$275,188,000 at December 31, 2003. The increase relates to the assets of SPLIC,
acquired in 2004. The increase in cash on hand at December 31, 2004 ($31.7 million
versus $15 million at December 31, 2003) resulted from the call of fixed maturities
during December 2004. Fixed maturities are categorized into two classifications:
fixed maturities held-to-maturity, which are valued at amortized cost, and fixed
maturities available-for-sale, which are valued at fair value. Fixed maturities
available-for-sale and fixed maturities held-to-maturity were 92.5% and 1.6%,
respectively, of invested assets at December 31, 2004. Fixed maturities held to
maturity, amounting to $7,514,000 at December 31, 2004, consist of corporate bonds
which are backed by the implied full faith and credit of the U.S. government, U.S.
Treasury and U.S. government agency securities. Management has the intent and
believes we have the ability to hold the held-to-maturity securities to maturity. During 2004, fixed maturities available for sale grew to $440,053,000 from
$237,506,000 at December 31, 2003. Included in this growth were
more than $31
million of bonds issued by states and approximately $113 million of corporate bonds.
The overall growth, as well as the change in mix, is directly related to the
acquisition of SPLIC and SPFIC during 2004. During 2004, we disposed of
approximately $50 million in bonds to finance the purchase of SPLIC and the reserve
transfer on the TILIC reinsurance transaction. Policy loans comprised 5.1% of invested assets at December 31, 2004 compared to 7.9%
at December 31, 2003. The decrease relates to the acquisition of SPLIC, in which
policy loans represented less than 1.5% of invested assets. These loans, which are
secured by the underlying policy values, have annual yields ranging from 5% to 10%
percent and maturities that are related to the maturity or termination of the
applicable policies. Management believes that we maintain adequate liquidity
despite the uncertain maturities of these loans. 61




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Our cash balances at our primary depositories were significantly in excess of
Federal Deposit Insurance Corporation coverage at December 31, 2004 and December 31,
2003. Management monitors the solvency of all financial institutions in which we
have funds to minimize the exposure for loss. Management does not believe we are at
significant risk for such a loss. During 2005, we intend to utilize high-grade
commercial paper as a cash management tool to minimize excess cash balances and
enhance returns.During 2003, the Company transferred its primary banking
relationship from JP Morgan Chase to Regions Bank. We do not utilize special purpose entities as investment vehicles. Nor do we invest
in any such entities that engage in speculative activities of any description, and
we do not use such investments to hedge our investment positions. The NAIC has established minimum capital requirements in the form of Risk-Based
Capital (RBC), which factors the type of business written by an insurance company,
the quality of its assets, and various other factors into account to develop a
minimum level of capital called authorized control level risk-based capital and
compares this level to an adjusted statutory capital that includes capital and
surplus as reported under Statutory Accounting Principles, plus certain investment
reserves. Should the ratio of adjusted statutory capital to control level RBC fall
below 200%, a series of actions by the affected company would begin. At December
31, 2004 and December 31, 2003, all of the Companys insurance subsidiaries were
above required minimum levels. Effective January 1, 2001, the NAIC implemented codified rules for statutory
accounting. These rules were approved and implemented by each state in which all of
our insurance subsidiaries operations are domiciled. CICA is domiciled in Colorado,
CNLIC is domiciled in Texas, FAIC in Kentucky, MACLIC in Missouri, SAIC in Arkansas
and CUSA in Illinois. CICA follows certain Colorado state laws that differ from
NAICs codified rules. The primary difference between the Colorado statutes and the
codified rules involve the establishment of a liability for future policy dividends
payable. Under NAIC codified rules, such reserve is mandated; however, Colorado has
an exception if the difference between the premium charged and the mortality factor
included in the premium on participating policies exceeds the reserve that would be established.
Such is the case for CICA. As a result, as provided under Colorado law, CICA did
not establish a reserve of approximately $3 million in its statutory financial
statements as of and for the years ended December 31, 2004 and 2003. Texas,
Illinois, Kentucky, Missouri, Louisiana and Arkansas codified rules must be followed
unless the Commissioner of Insurance permits specific practices that differ from
codified rules. None of our insurance subsidiaries has requested any permission
from any state insurance regulatory authority to deviate from NAIC codified rules. During March 2004, the Companys shareholders approved amendments to the Articles of
Incorporation increasing the number of authorized Class A and Class B shares and
authorizing preferred stock that could be issued upon approval of the Board of
Directors. 62




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On July 12, 2004, the Company completed a private placement of $12.5 million of
Series A-1 Senior Convertible Preferred Stock to four unaffiliated institutional
investors. The terms and conditions of the Series A-1 Senior Convertible Preferred
Stock are discussed in Note 8 to our consolidated financial statements. The initial
recognition of the beneficial conversion feature and discounts on fair values of
options and warrants issued in connection with the private placement resulted in
$3,073,000 of additional paid-in capital for the Class A common stock and $2,994,000
of liabilities for options and warrants. Changes in the fair value of options and
warrants are recognized in the statement of operations with a corresponding change
in the liabilities for options and warrants. For the period ended December 31,
2004, there was a decrease in fair value of options and warrants of $256,000 and
corresponding decrease in the related liabilities. On September 30, 2004, and December 31, 2004 the Company declared and paid quarterly
dividends relating to the Series A-1 Senior Convertible Preferred Stock shareholders
(4% per year). The Company paid the dividend by issuing 19,396 shares of its Class
A common stock valued at $116,000 at September 30, and 20,948 shares of Class A
common stock valued at $133,000 at December 31. The Company signed a revolving line of credit agreement from Regions Bank for a $30
million credit facility for use in acquisitions in March 2004. On October 1, 2004,
the Company entered into a Second Amendment to the Loan Agreement that converted
into a term loan its $30 million advance against the line of credit made in
connection with the acquisition of SPLIC. Under the term loan, the Company is
obligated to repay the principal portion of the loan in ten semi-annual installments
of $3,000,000 beginning on May 1, 2005, with the final installment of principal and
any accrued and unpaid interest on November 1, 2009. Interest on the unpaid
principal balance of the loan is required to be paid on the fifth day of each month
following the end of each fiscal quarter of the Company. The interest rate is equal
to a 30-day LIBOR (London InterBank Offered Rate) plus 1.8% per year (approximately
4.3% annually as of December 31, 2004). Because the maximum borrowing authorized on the Companys line of credit is $30
million, the line has been drawn down to zero. Under the Amended Loan Agreement,
upon any prepayment or repayment of the term loan described above, the line of credit is to be reinstated to an aggregate amount equal to the
difference between (a) $30 million minus (b) the aggregate outstanding principal
amount under the term loan. Management expects to repay the loan in full during the
first quarter of 2005 using proceeds from bond calls and maturities. In connection with the SPLIC acquisition, funds borrowed by the Company were
re-loaned to CICA. CICA has issued to the Company a Subordinated Debenture in the
principal amount of $30 million plus interest equal to 30-day LIBOR plus 1.8% per
year. Because CICA is an insurance company formed under the laws of Colorado, any
principal and accrued interest on the subordinated debenture is not a legal
liability of CICA until repayment of interest or principal has received the prior
written approval of the Commissioner of Insurance for the State of Colorado. CICA
has filed with the Commissioner of Insurance requesting permission to retire the
debenture in full. 63




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##### Table of Contents



The Sarbanes-Oxley Act of 2002 (the Act) established significant new guidelines
for corporate governance. Subsequently, the New York Stock Exchange adopted new
rules relating to such matters as the composition of listed companies Boards of
Directors and various committees thereof, the need to adopt specific policies and
the establishment of a Code of Ethics. The Companys Board of Directors,
Compensation Committee and Audit Committee were already configured in such a way as
to comply with the Act. Citizens has operated under a Principles, Purposes,
Philosophy and Beliefs for numerous years that sets forth the manner in which the
Company and its officers, directors and employees are expected to function.
However, the Board of Directors has implemented a formal Code of Ethics applicable
to all officers, directors and employees. Additionally, the Act imposes a duty upon public companies to document and test all
internal controls and have such controls audited by independent auditors. The Company has committed to the following contractual obligations as of December
31, 2004 with the payments due by the period indicated below: Contractual
    
    
    
    
    
    Less than
    
    
    1 to 3
    
    
    3 to 5
    
    
    More than 5Obligation
    
    Total
    
    
    1 year
    
    
    years
    
    
    years
    
    
    yearsOperating leases
    
    $
    1,231,000
    
    
    $
    526,000
    
    
    $
    690,000
    
    
    $
    15,000
    
    
    $
    Other
    
    
    600,000
    
    
    
    300,000
    
    
    
    300,000
    
    
    
    
    
    
    
    Total operating
leases and
other
    
    $
    1,831,000
    
    
    $
    826,000
    
    
    $
    990,000
    
    
    $
    15,000
    
    
    $
    Future policy
benefit reserves:Life insurance
    
    $
    413,107,000
    
    
    $
    153,595
    
    
    $
    861,991
    
    
    $
    8,089,319
    
    
    $
    404,002,095Annuities
    
    
    16,913,000
    
    
    
    4,181,162
    
    
    
    2,550,261
    
    
    
    4,649,788
    
    
    
    5,531,789Accident and
health
    
    
    13,604,000
    
    
    
    13,604,000
    
    
    
    
    
    
    
    
    
    
    
    Total future
policy
benefit
reserves
    
    $
    443,624,000
    
    
    $
    17,938,757
    
    
    $
    3,412,252
    
    
    $
    12,739,107
    
    
    $
    409,533,884Policy claims
policy claims:Life insurance
    
    $
    6,372,000
    
    
    $
    6,372,000
    
    
    
    
    
    
    
    
    
    
    
    Accident and
health
    
    
    1,911,000
    
    
    
    1,911,000
    
    
    
    
    
    
    
    
    
    
    
    Total policy
claims
payable
    
    $
    8,283,000
    
    
    $
    8,283,000
    
    
    $
    
    
    
    $
    
    
    
    $
    Note payable
    
    $
    30,000,000
    
    
    $
    6,000,000
    
    
    $
    12,000,000
    
    
    $
    12,000,000
    
    
    $
    Convertible
preferred stock
    
    $
    5,901,000
    
    
    $
    
    
    
    $
    
    
    
    $
    5,901,000
    
    
    $
    Total contractual
obligations
    
    $
    489,639,000
    
    
    $
    33,047,757
    
    
    $
    16,402,252
    
    
    $
    30,655,107
    
    
    $
    409,533,884
 64




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##### Table of Contents



The payments related to the future policy benefits and claim liabilities reflected in
the table above have been projected utilizing assumptions based upon the Companys
historical experience and anticipated future experience. Critical Accounting Policies Our critical accounting policies are as follows: Policy Liabilities Future policy benefit reserves have been computed by the net level premium method
with assumptions as to investment yields, dividends on participating business,
mortality and withdrawals based upon our industry experience. The preparation of
financial statements requires management to make estimates and assumptions that
affect the reported amount of policy liabilities and the increase in future policy
benefit reserves. Managements judgments and estimates for future policy benefit
reserves provide for possible unfavorable deviation. We continue to use the original assumptions (including a provision for the risk of
adverse deviation) in subsequent periods to determine the changes in the liability
for future policy benefits (the lock-in concept) unless a premium deficiency
exists. Management monitors these assumptions and has determined that a premium
deficiency does not exist. Management believes that our policy liabilities and
increase in future policy benefit reserves as of and for the years ended December
31, 2004, 2003 and 2002 are based upon assumptions, including a provision for the
risk of adverse deviation, that do not warrant revision.The relative stability of
these assumptions and managements analysis is discussed below. In Table II in Item 1, the ratio of lapses and surrenders to mean life insurance in
force has varied between 4.9% and 8.2% over the past five years. The year 2003 was
adversely impacted by the acquisition of FAIC. The 2002 ratio of 7.3% relates to
surrenders caused by adverse economic conditions in several Latin American
countries. In addition, the 2003 ratio of 8.2% includes FAIC surrenders and lapses
of approximately $32.2 million of life insurance in force (approximately 1.2% of the
total). In 2004, the ratio improved to 7.2%, the lowest amount since 2001.
Improved persistency on CICAs international business was the primary reason for the
improvement. Table IV in Item 1 above, illustrates that during the past five years the ratio of
commissions, underwriting and operating expenses to insurance premiums has ranged
from 42.2% to 47.7% and the ratio of commissions, underwriting and operating
expenses, policy reserves increases, policyholder benefits and dividends to
policyholders to insurance premiums has ranged from 114.7% to 119.2%. Table VIII
also shows that the ratio of net investment income to mean amount of invested assets
has varied from 4.5% to 6.8% from 2000 through 2004. The 2003 5.7% and 2004 4.5%
represents the impact of the low interest environment and the liquidation of bonds
to fund the acquisition of SPLIC. Additionally, the 4.5% is negatively impacted by
the October acquisition of SPLIC. As set forth above in Managements Discussion and
Analysis of Financial Condition and Results of Operations, death benefits for the
years ended December 31, 2004, 2003 and 2002 65




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were $10,224,000, $6,399,000 and
$6,600,000, respectively. The acquisition of SPLIC increased 2004 benefits by
$3,688,000, while $712,000 of the 2002 increase in death benefits related to the
acquisitions of CNLIC and $320,000 of the 2003 increase in death benefits related to
the acquisitions of FAIC and MACLIC. Deferred Policy Acquisition Costs Acquisition costs, consisting of commissions and policy issuance, underwriting and
agency expenses that relate to and vary with the production of new business, are
deferred. These deferred policy acquisition costs are amortized primarily over the
estimated premium paying period of the related policies in proportion to the ratio
of the annual premium recognized to the total premium revenue anticipated, using the
same assumptions as were used in computing liabilities for future policy benefits. We utilize the factor method to determine the amount of costs to be capitalized and
the ending asset balance. The factor method is based on the ratio of premium
revenue recognized for the policies in force at the end of each reporting period
compared to the premium revenue recognized for policies in force at the beginning of
the reporting period. The factor method ensures that policies that lapsed or
surrendered during the reporting period are no longer included in the deferred
policy acquisition costs calculation. The factor method limits the amount of
deferred costs to its estimated realizable value, provided actual experience is
comparable to that contemplated in the factors. Inherent in the capitalization and amortization of deferred policy acquisition costs
are certain management judgments about what acquisition costs are deferred, the
ending asset balance and the annual amortization. Over 85% of our capitalized
deferred acquisition costs are attributed to first year excess commissions. The
remaining 15% are attributed to costs that vary with and are directly related to the
acquisition of new and renewal insurance business. Those costs generally include
costs related to the production, underwriting and issuance of new business. Use of
the factor method, as discussed above, limits the amount of unamortized deferred
policy acquisition costs to its estimated realizable value provided actual
experience is comparable to that contemplated in the factors and results in
amortization amounts such that policies that lapse or surrender during the period
are no longer included in the ending deferred policy acquisition cost balance. A recoverability test that considers among other things, actual experience and
projected future experience, is performed at least annually by third party actuarial
consultants. These annual recoverability tests initially calculate the available
premium (gross premium less benefit net premium less percent of premium expense) for
the next 30 years. The available premium per policy and the deferred policy
acquisition costs per policy are then calculated. The deferred policy acquisition
costs are then amortized over two methods utilizing reasonable assumptions and two
other methods using pessimistic assumptions. The two methods using reasonable
assumptions illustrate an early-deferred policy acquisition recoverability period.
The two methods utilizing pessimistic assumptions still support early recoverability
of our aggregate deferred policy acquisition costs. Based upon the analysis
performed to only capitalize expenses that vary with and are directly related to the
acquisition of new and renewal 66




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insurance business, utilization of the factor method
and annual recoverability testing, management believes that our deferred policy
acquisition costs and related amortization as of and for the years ended December
31, 2004, 2003 and 2002 limits the amount of deferred costs to its estimated
realizable value. Valuation of Investments in Fixed Maturity and Equity Securities At December 31, 2004, investments in fixed maturity and equity securities were 94.1%
and 0.2%, respectively, of total investments. Approximately 98.3% of our fixed
maturities were classified as available-for-sale securities at December 31, 2004,
with the remaining 1.7% classified as held-to-maturity securities based upon our
intent and ability to hold these securities to maturity. All equity securities at
December 31, 2004 are classified as available-for-sale securities. We have no fixed
maturity or equity securities that are classified as trading securities at December
31, 2004. Additionally, at December 31, 2004, 70.8% of our fixed maturity securities were
invested in corporations backed by the implied full faith and credit of the U.S.
government, U.S. Treasury securities and obligations of U.S. government corporations
and agencies, including U.S. government guaranteed mortgage-backed securities. All
of these securities are backed by or bear the implied full faith and credit of the
U.S. government. We evaluate the carrying value of our fixed maturity and equity
securities at least quarterly. A decline in the fair value of any fixed maturity or
equity security below cost that is deemed other than temporary is charged to
earnings resulting in the establishment of a new cost basis for the security. The
new cost basis is not changed for subsequent recoveries in the fair value of the
fixed maturity or equity security. With the exception of SPLIC, virtually all
subsidiaries investments are in corporate bonds that carry the implied full faith
and credit of the U.S. government, Treasuries or agencies of the U.S. government.
SPLIC has significant investments in corporate and municipality bonds. Based upon
our emphasis on investing in fixed maturity securities primarily composed of
obligations of U.S. government sponsored corporation, U.S. Treasury securities and
obligations of the U.S. government and agencies, including U.S. government
guaranteed mortgage-backed securities and callable instruments issued by U.S.
government agencies and our analysis whether declines in fair value below cost are
temporary or other than temporary, management believes that our investments in fixed
maturity and equity securities at December 31, 2004 are not impaired, and no other
than temporary losses need to be recorded. Gross unrealized losses on fixed maturities available-for-sale amounted to
$3,857,000 as of December 2004 and $2,553,000 as of December 2003. Of this 2004
total gross unrealized loss, $2,018,000 have been in a continuous loss situation for
more than 12 months and $1,839,000 have been in a continuous loss situation for less
than 12 months. The fixed maturities available-for-sale in a gross unrealized loss situation for
more than 12 months are primarily investments in callable instruments issued by
corporations backed by the implied full faith and credit of the U.S. government and
U.S. government agencies. It is remote that unrealized losses on these instruments
will result in realized losses, since the Company has the intent and believes it has
the ability to hold these securities to the call date or maturity date. 67




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These securities are being closely monitored by the Company to determine if the unrealized
loss as of December 31, 2004 indicates that there is a loss which is
other-than-temporary. As of December 31, 2004, the Company has determined that
there is no need to establish a new cost basis for these securities. The majority of the fixed maturities available-for-sale that have been in a
continuous loss situation for less than 12 months are from investments owned by
SPLIC. The losses are due to the coupon interest rate being less than the
prevailing market interest rates at December 31, 2004. The Company has determined
that there is no need to establish a new cost basis for these securities. Gross unrealized losses on equity securities available-for-sale were $3,000 as of
December 31, 2004 and were $3,200 as of December 31, 2003. The entire $3,000 at
December 31, 2004 have been in a continuous loss situation for more than 12
 months. As of December 31, 2004, the Company has determined that there is no need
to establish a new cost basis for these securities.
See also Item 7A, Quantitative and Qualitative Disclosures about Market Risk. Accounting Pronouncements On January 1, 2002, the Company adopted Statement of Financial Accounting Standard
(SFAS) No. 142, Goodwill and Other Intangible Assets. Under the guidelines of
SFAS No. 142, excess of cost over net assets acquired (goodwill) amounting to
$12,402,000 and $12,939,000 and other intangible assets amounting to $2,331,000 and
$3,086,000 as of December 31, 2004, and December 31, 2003, respectively, were
determined to have an indefinite useful life and will no longer be amortized.
Instead goodwill and other intangible assets will be subjected to annual impairment
analyses under the provisions of SFAS No. 142 and SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, respectively. In October 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144
superseded and amended SFAS No. 121 and relevant portions of SFAS No. 30. SFAS No.
144 was adopted on January 1, 2002. SFAS No. 144 did not have a material effect on
the financial position, results of operation or liquidity of the Company. In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4,
44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS No.
145 affected income statement classification of gains and losses from extinguishment
of debt and made certain other technical corrections. SFAS No. 145 was adopted on
January 1, 2003. SFAS No. 145 did not have a material effect on the financial
position, results of operations or liquidity of the Company. In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities. SFAS No. 146 spread out the reporting of expenses
related to restructurings initiated after 2002. Commitment to a plan to exit an
activity or dispose of long-lived assets will no longer be enough evidence 68




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to record
a charge for most anticipated exit or disposal activities. Companies will instead
record exit or disposal costs when they are incurred and can be measured by fair
value and the recorded liability will subsequently be adjusted for changes in
estimated cash flows. SFAS No. 146 also revised accounting for specified employee
and contract terminations that are part of restructuring activities. The Company
adopted SFAS No. 146 on January 1, 2003. SFAS No. 146 did not have a material
effect on the financial position, results of operations or liquidity of the Company. In November 2002, the FASB issued Interpretation No. 45, Guarantors Accounting
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others, an Interpretation of FASB Statements No. 5, 57 and 107 and a
rescission of FASB Interpretation No. 34. This Interpretation elaborated on the
disclosures to be made by a guarantor in its interim and annual financial statements
about its obligations under guarantees
issued and also clarified that a guarantor is required to recognize, at inception of
a guarantee, a liability for the fair value of the obligation undertaken. The
Company adopted FASB Interpretation No. 45 on January 1, 2003. FASB Interpretation
No. 45 did not have a material effect on the financial position, results of
operations or liquidity of the Company. In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure, an amendment of FASB No. 123. This
statement amends SFAS No. 123, Accounting for Stock Based Compensation, to provide
alternative methods of transition for a voluntary change to the fair value method of
accounting for stock-based employee compensation. In addition, SFAS No. 148 amended
the disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements. Certain of the disclosure modifications
are required for fiscal years ended after December 31, 2002. The Company currently
offers no stock-based employee compensation. The Company adopted SFAS No. 148 on
January 1, 2003. SFAS No. 148 did not have a material effect on the financial
position, results of operations or liquidity of the Company. In December 2003 the FASB issued a revision to Interpretation No. 46, Consolidation
of Variable Interest Entities, an Interpretation of ARB No. 51. that was originally
issued in January 2003. This interpretation as revised addresses the consolidation
by business enterprises of variable interest entities as defined in the
Interpretation. The Interpretation applies immediately to variable interests in
variable interest entities created after January 31, 2003, and to variable interests
in variable interest entities obtained after January 31, 2003. This interpretation
requires certain disclosures in financial statements issued after January 31, 2003.
The Company adopted FASB Interpretation No. 46 as revised on December 31, 2003.
FASB Interpretation 46 as revised did not have a material effect on the financial
position, results of operations or liquidity of the Company. In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. This statement clarifies financial
accounting and reporting for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. This statement
is generally effective for contracts entered into or modified after September 30,
2003, and all provisions should be applied prospectively. The 69




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Company adopted SFAS
No. 149 on September 30, 2003. SFAS No. 149 did not have a material effect on the
financial position, results of operations or liquidity of the Company. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equities. This statement
established standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. SFAS No. 150
requires that an issuer classify a financial instrument within its scope as a
liability (or an asset in some circumstances). Many of the instruments within the
scope of SFAS No. 150 were previously classified as equity. Based on current
operations, the Company does not anticipate that SFAS No. 150 will have a material
effect on the financial position, results of operations or liquidity of the Company. In December 2003, the FASB issued a revision to SFAS No. 132, Employers
Disclosures about Pensions and Other Postretirement Benefits. This statement
requires that companies provide more details about their plan assets, benefit
obligations, cash flows, benefit costs and other relevant information. This
statement is effective for fiscal years ending after December 15, 2003. The Company
adopted the revision to SFAS No. 132 on December 31, 2003. SFAS No. 132, as
revised, did not have a material effect on the financial position, results of
operations or liquidity of the Company. In 2004, the FASB issued a revision of SFAS No. 123, Accounting for Stock-Based
Compensation. This Statement supersedes APB Opinion No. 25, Accounting for Stock
Issued to Employees, and its related implementation guidance and establishes
standards for the accounting for transactions in which an entity exchanges its
equity instruments for goods or services. It also addresses transactions in which
an entity incurs liabilities in exchange for goods or services that are based on the
fair value of the entitys equity instruments or that may be settled by the issuance
of those equity instruments. This Statement focuses primarily on accounting for
transactions in which an entity obtains employee services in share-based payment
transactions. It does not change the accounting guidance for share-based payment
transactions with parties other than employees provided in Statement 123 as
originally issued and EITF Issue No. 96-18, Accounting for Equity Instruments That
Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services, nor does it 70




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address the accounting for employee share ownership
plans, which are subject to AICPA Statement of Position 93-6, Employers Accounting
for Employee Stock Ownership Plans. SFAS 123 as amended is effective for interim
reporting periods beginning after June 30, 2005. The Company does not anticipate
the revision of SFAS No. 123 will have a material effect on the financial position,
results of operations or liquidity of the Company. In July 2003, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 03-1, Accounting and Reporting by Insurance Enterprises
for Certain Nontraditional Long-Duration Contracts and for Separate Accounts. This
statement provides guidance on separate account presentation and valuation, the
accounting for sales inducements and the classification and valuation of
long-duration contract liabilities. The Company adopted this statement on January
1, 2004. The adoption of SOP 03-1 did not
have a material effect on the financial position, results of operations or liquidity
of the Company. 
 Item 7A. Quantitative and Qualitative Disclosures about Market Risk General The nature of our business exposes us to market risk. Market risk is the risk of
loss that may occur when changes in interest rates and public equity prices
adversely affect the value of our invested assets. Interest rate risk is our
primary market risk exposure. Substantial and sustained increases and decreases in
market interest rates can affect the market value of our investments. The market
value of our fixed maturity, mortgage loan portfolio and policy loans generally
increases when interest rates decrease, and decreases when interest rates increase. Market Risk Related to Interest Rates Our exposure to interest rate changes results from our significant holdings of fixed
maturity investments, policy loans and mortgage loans on real estate, all of which
comprised almost 99% of our investment portfolio as of December 31, 2004. These
investments are mainly exposed to changes in treasury rates. Our fixed maturities
investments include U.S. government bonds, securities issued by government
agencies, and corporate bonds. Approximately 70.8% of the fixed maturities we owned
at December 31, 2004 are instruments of private corporations carrying the implied
full faith and credit backing of the U.S. government, or are backed by U.S.
government agencies. To manage interest rate risk, we perform periodic projections of asset and liability
cash flows to evaluate the potential sensitivity of our investments and liabilities.
We assess interest rate sensitivity with respect to our available-for-sale fixed
maturities investments using hypothetical test scenarios that assume either upward
or downward 100 basis point shifts in the prevailing interest rates. The following
tables set forth the potential amount of unrealized gains (losses) that could be
caused by 100 basis point upward and downward shifts on our available-for-sale fixed
maturities investments as of the dates indicated: 71




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##### Table of Contents









Decreases in Interest Rates100 Basis
    
    
    200 Basis
    
    
    300 BasisPoints
    
    
    Points
    
    
    PointsDecember 31, 2004
    
    $
    28,368,000
    
    
    $
    47,412,000
    
    
    $
    69,321,000December 31, 2003
    
    $
    2,735,000
    
    
    $
    6,730,000
    
    
    $
    11,704,000
 Increases in Interest Rates100 Basis
    
    
    200 Basis
    
    
    300 BasisPoints
    
    
    Points
    
    
    PointsDecember 31, 2004
    
    $
    (20,298,000
    )
    
    $
    (48,702,000
    )
    
    $
    (74,613,000
    )December 31, 2003
    
    $
    (21,556,000
    )
    
    $
    (39,467,000
    )
    
    $
    (55,619,000
    )
 While the test scenario is for illustrative purposes only and does not reflect
our expectations regarding future interest rates or the performance of fixed-income
markets, it is a near-term change that illustrates the potential impact of such
events. Due to the composition of our book of insurance business, we believe it is
unlikely that we would encounter large surrender activity due an interest rate
increase that would force us to dispose of our fixed maturities at a loss. There are no fixed maturities or other investments that we classify as trading
instruments. At December 31, 2004 and 2003, we had no investments in derivative
instruments. Market Risk Related to Equity Prices Changes in the level or volatility of equity prices affect the value of equity
securities we hold as investments. However, our equity investments portfolio was
less than 1% of our total investments at December 31, 2004. Thus, we believe that
significant decreases in the equity markets would have an immaterial impact on our
total investment portfolio. See also Item 7. Managements Discussion and Analysis
of Financial Condition and Results of Operations. 72




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##### Table of Contents



Item 8. Financial Statements and Supplementary Data CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Index to Consolidated Financial Statements and
Financial Statement Schedules PageReferenceReport of independent registered public accounting firm
    
    92Consolidated statements of financial position at December 31, 2004 and 2003
    
    93Consolidated statements of operations  years ended December 31, 2004, 2003 and 2002
    
    95Consolidated statements of stockholders equity and comprehensive income  years ended December 31, 2004, 2003 and 2002
    
    97Consolidated statements of cash flows  years ended December 31, 2004, 2003 and 2002
    
    99Notes to consolidated financial statements
    
    102Schedules at December 31, 2004 and 2003:Schedule II  Condensed Financial Information of Registrant
    
    131Schedules for each of the years in the three-year period ended December 31, 2004:Schedule III  Supplementary Insurance Information
    
    134Schedule IV  Reinsurance
    
    136
 All other schedules have been omitted as the required information is inapplicable or the
information required is presented in the financial statements or the notes thereto filed
elsewhere herein. 
  Item 9.
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure During the 24 months preceding the date of the audited financial statements included herein,
we have not changed accountants, nor have we reported on Form 8-K any disagreements between
our independent accountants and us. 73




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Item 9A. Controls and Procedures (a) Disclosure Controls and Procedures We have established disclosure controls and procedures to ensure, among other things, that material
information relating to the Company, including its consolidated subsidiaries, is made known to the
officers who certify our financial reports and to the other members of senior management and the
Board of Directors. Our Chief Executive Officer (CEO) and our President and Chief Financial Officer (CFO) are
responsible for establishing and maintaining disclosure controls and procedures for the Company (as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended
(Exchange Act)). Based upon our evaluation at the end of the period, the Chief Executive Officer
and the President and Chief Financial Officer concluded that the Companys disclosure controls and
procedures were not effective as of the end of the period covered by this annual report because of
the material weakness discussed below. (b) Management Report on Internal Control over Financial Reporting Management of the Company is responsible for establishing and maintaining adequate internal control
over financial reporting. Management assessed the Companys internal control over financial
reporting based on criteria established in Internal Control  Integrated Frameworkissued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO).Based on this assessment,
and considering the material weakness discussed below, management concluded the Company did not
maintain effective internal control over financial reporting as of December 31, 2004. A material weakness in internal control over financial reporting is defined by the Public Company
Accounting Oversight Boards (PCAOB) Auditing Standard No. 2 as a significant deficiency, or
combination of significant deficiencies, that results in more than a remote likelihood that a
material misstatement of the annual or interim financial statements will not be prevented or
detected. The material weakness relates to the inadequate and ineffective management oversight and review of
the Companys financial reporting process. Specifically, the Company did not revise its management
oversight and review protocols to address changes in the qualifications of personnel performing
financial reporting functions, and did not provide for effective cross-training of personnel
performing financial reporting functions. As a result, numerous material errors were identified in
the Companys financial statement footnotes. These errors were corrected prior to issuance of the
Companys 2004 consolidated financial statements. The aforementioned material weakness in internal control over financial reporting resulted in more
than a remote likelihood that the Companys financial statements could have been materially
misstated. The Company acquired Security Plan Life Insurance Company and its subsidiary Security Plan Fire
Insurance Company (SPLIC) on October 1, 2004. Management excluded from its assessment of the
effectiveness of the Companys internal control over financial reporting as of December 31, 2004,
SPLICs internal control over financial reporting associated with total assets of $298,396,000,
representing 45.1% of the Companys consolidated total assets, and total revenues of $12,346,000, 74




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representing 12.0% of the Companys consolidated revenue, included in the consolidated financial
statements of Citizens, Inc. and subsidiaries as of and for the year ended December 31, 2004. The Companys independent registered public accounting firm, KPMG LLP, has issued an audit report
on managements assessment of the Companys internal control over financial reporting. Their report
is included in item 9A(d). (c) Change in Internal Control over Financial Reporting There were no changes in our internal control over financial reporting during the quarter ended
December, 31, 2004 that have materially affected, or are reasonably likely to materially affect,
the Companys internal control over financial reporting. However, we are in the process of completing remediation efforts relating to the material weakness,
which are set forth in detail below, which primarily include hiring additional personnel who will
be competent to address U.S. GAAP relating to our operations, additional training for our
accounting staff, particularly relating to U.S. GAAP, and enhanced management review procedures. In order to address the findings of our internal control assessment, we are implementing the
following improvements to our internal controls and procedures in the financial accounting area
which we believe will improve our internal control over financial reporting in future periods:  
    Hiring a new Vice President, Financial Reporting and Tax, with significant experience in
U.S. GAAP and SEC reporting who will be responsible for the preparation and supervision of
the Companys financial statements. This individual will report directly to the Chief
Financial Officer. In addition, we plan on assuring that at least one other person is
fully trained and experienced to step in and perform the duties of the Vice President,
Financial Reporting and Tax if he should, for any reason, be unable to do so.
    Hiring new personnel to work with the Vice President, Financial Reporting and Tax to
develop additional expertise in U.S. GAAP and SEC reporting and to insure that adequate
depth is developed in the Companys financial reporting area.
    Strengthening the process of workpaper review by senior members of management to ensure
the completeness and accuracy of supporting workpapers and schedules, including formalized
sign-off processes.
    Additional training of accounting department personnel in U.S. GAAP and SEC reporting.
    Adopt procedures to seek a more thorough and timely review process by senior management
of the financial statement process. We believe these efforts will address the material weakness identified by management during its
assessment of internal control over financial reporting as of December 31, 2004. 75




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(d) Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders
Citizens, Inc. We have audited managements assessment, included in the accompanying Management Report on Internal
Control over Financial Reporting (Item 9A(b), that Citizens, Inc. and subsidiaries (the Company)
did not maintain effective internal control over financial reporting as of December 31, 2004,
because of the effect of a material weakness identified in managements assessment related to
inadequate internal control over the Companys financial reporting process, based on criteria
established in Internal Control  Integrated Frameworkissued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Companys management is responsible for
maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility is to express an
opinion on managements assessment and an opinion on the effectiveness of the Companys internal
control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating managements assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinion. A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate. 76




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A material weakness is a control deficiency, or combination of control deficiencies, that results
in more than a remote likelihood that a material misstatement of the annual or interim financial
statements will not be prevented or detected. The following material weakness has been identified
and included in managements assessment as of December 31, 2004: The Companys policies and
procedures did not provide for adequate and effective management oversight and review of the
Companys financial reporting process. Specifically, the Company did not revise its management
oversight and review protocols to address changes in the qualifications of personnel performing
financial reporting functions, and did not provide for effective cross-training of personnel
performing financial reporting functions. As a result, numerous material errors were identified in
the Companys financial statement footnotes. We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the accompanying consolidated statements of financial position of Citizens,
Inc. and subsidiaries (the Company) as of December 31, 2004 and 2003, and the related consolidated
statements of operations, stockholders equity and comprehensive income and cash flows for each of
the years in the three-year period ended December 31, 2004, and the related financial statement
schedules. The aforementioned material weakness was considered in determining the nature, timing,
and extent of audit tests applied in our audit of the 2004 consolidated financial statements and
the financial statement schedules, and this report does not affect our report dated March 30, 2005,
which expressed an unqualified opinion on those consolidated financial statements and the financial
statement schedules. In our opinion, managements assessment that the Citizens, Inc. and subsidiaries did not maintain
effective internal control over financial reporting as of December 31, 2004, is fairly stated, in
all material respects, based on criteria established in Internal ControlIntegrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our
opinion, because of the effect of the material weakness described above on the achievement of the
objectives of the control criteria, the Company has not maintained effective internal control over
financial reporting as of December 31, 2004, based on criteria established in Internal
ControlIntegrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Company acquired Security
Plan Life Insurance Company and its subsidiary Security Plan Fire
Insurance Company (SPLIC) on October 1, 2004. Management excluded from its assessment of the
effectiveness of the Companys internal control over financial reporting as of December 31, 2004,
SPLICs internal control over financial reporting associated with total assets of $298,396,000,
representing 45.1% of the Companys consolidated total assets, and total revenues of $12,346,000, representing 12.0% of the Companys consolidated revenue, included in the consolidated
financial statements of Citizens, Inc. and subsidiaries as of and for the year ended December 31,
2004. Our audit of internal control over financial reporting of the Company also excluded an
evaluation of the internal control over financial reporting of SPLIC. /s/ KPMG LLP Dallas, Texas
March 30, 2005 77




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Item 9B. Other Information None. 
 PART III 
 Item 10. Directors and Executive Officers of the Registrant.
  Name
    
    Age
    
    Principal OccupationHarold E. Riley
    
    
    76
    
    
    Chairman of the Board of the Company,
Austin, TXRick D. Riley*
    
    
    51
    
    
    Vice Chairman and CEO of the Company;
Chairman of the Board and CEO of Citizens
Insurance Company of America and
subsidiaries, Austin, TXDr. E. Dean Gage
    
    
    62
    
    
    Executive Director and Bridges Chair, Center
for Executive Leadership, Veterinary Medical
Education Texas A&M University College
Station, TXSteven F. Shelton
    
    
    49
    
    
    Farmer/Rancher
Lamar, COTimothy T. Timmerman
    
    
    44
    
    
    President Commerce Properties, Inc.;
Partner, Realcom Management, Austin, TXMark A. Oliver
    
    
    46
    
    
    President of the Company, Austin, TXDr. Richard C. Scott
    
    
    70
    
    
    Vice President, Development
Baylor University
Waco, TXGrant Teaff
    
    
    71
    
    
    Executive Director, American
Football Coaches Association
Waco, TXMarcia F. Emmons
    
    
    49
    
    
    Vice President, General Counsel and
Secretary, Austin, TXRay A. Riley*
    
    
    44
    
    
    Executive Vice President, Chief Operating
Officer, Austin, TX
 
 *
    
    Harold E. Riley is the father of Rick D. Riley and Ray A. Riley.
There are no other family relationships between or among our directors
or executive officers. 
 78




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##### Table of Contents



Harold E. Riley
 Rick D. Riley
 Dr. E. Dean Gage
 Steven F. Shelton
 Timothy T. Timmerman
 Mark A. Oliver
 
 79




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Dr. Richard C. Scott
 Grant Teaff
 Marcia F. Emmons
 Ray A. Riley
   
 80




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##### Table of Contents



Board and Committee Information
  Audit Committee
 
 
    
    Assists the Board in fulfilling its oversight responsibilities as they
relate to the Companys accounting policies, internal controls,
financial reporting practices and legal and regulatory compliance;
    
    Hires the independent auditors;
    
    Monitors the independence and performance of the Companys independent
auditors and internal auditors;
    
    Maintains, through regularly scheduled meetings, a line of
communication between the Board and the Companys financial
management, internal auditors and independent auditors; and
    
    Oversees compliance with the Companys policies for conducting
business, including ethical business standards.
 
 81




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##### Table of Contents




    
    Oversees the Companys assessment of internal controls as required by
the Sarbanes-Oxley Act.
    Compensation Committee
 
 
    
    Assists the Board in overseeing the management of the Companys human resources including:
 Ø
    
    compensation and benefits programsØ
    
    Chief Executive Officer performance and compensation; andØ
    
    executive development and succession and diversity efforts;
 
    
    Oversees the evaluation of management; and
    
    Prepares the report of the Committee on executive compensation.
  
 82




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##### Table of Contents



Code of Ethics
   
    
    We will comply with all laws, rules and regulations;
    
    Our directors, officers and employees are to avoid conflicts of
interest and are prohibited from competing with us or personally
exploiting our corporate opportunities;
    
    Our directors, officers and employees are to protect our assets and
maintain our confidentiality;
    
    We are committed to promoting values of integrity and fair dealing; and
    
    We are committed to accurately maintaining our accounting records
under generally accepted accounting principles and timely filing our
periodic reports.
  COMPENSATION COMMITTEE
 Report on Executive Compensation
    
 83




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84




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COMPARATIVE 5-YEAR CUMULATIVE TOTAL RETURN
AMONG CITIZENS, INC.,
NYSE MARKET INDEX AND COREDATA GROUP INDEX
  
 COMPARISON OF CUMULATIVE TOTAL RETURN OF ONE OR MORE
COMPANIES, PEER GROUPS, INDUSTRY
 INDEXES AND/OR BROAD MARKETS
 COMPANY
    
    12/29/2000
    
    12/31/2001
    
    12/31/2002
    
    12/31/2003
    
    12/31/2004Citizens, Inc.
    
    
    107.92
    
    
    
    195.02
    
    
    
    132.90
    
    
    
    178.72
    
    
    
    129.12Life Insurance
    
    
    118.19
    
    
    
    88.06
    
    
    
    59.96
    
    
    
    84.30
    
    
    
    101.04NYSE Market Index
    
    
    102.38
    
    
    

    93.26
    
    
    
    76.18
    
    
    
    98.69
    
    
    
    111.45
 Source:
    
    COREDATA333 E. Franklin St.Richmond, VA 23219
 
 85




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##### Table of Contents



Item 11. Executive Compensation.
  SUMMARY COMPENSATION TABLE
  Name and
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    All OtherPrincipal
    
    
    
    
    
    
    
    
    
    
    
    
    
    Annual
    
    
    CompensationPosition
    
    Year
    
    Salary
    
    Bonus
    
    Compensation
    
    
    (1)Harold E. Riley,
    
    
    2004
    
    
    $
    571,362
    
    
    
    -0-
    
    
    
    (2
    )
    
    
    $
    31,456Chairman
    
    
    2003
    
    
    $
    571,365
    
    
    
    
    
    
    
    
    
    
    
    $
    35,7582002
    
    
    $
    571,164
    
    
    
    
    
    
    
    
    
    
    
    $
    32,765Rick D. Riley, Vice
    
    
    2004
    
    
    $
    257,219
    
    
    
    -0-
    
    
    
    (2
    )
    
    
    $
    31,456Chairman and Chief
    
    
    2003
    
    
    $
    257,220
    
    
    
    
    
    
    
    
    
    
    
    $
    35,758Executive Officer
    
    
    2002
    
    
    $
    233,655
    
    
    
    
    
    
    
    
    
    
    
    $
    32,765Clayton D. Dunham,
    
    
    2004
    
    
    $
    275,142
    
    
    
    -0-
    
    
    
    
    
    
    
    $
    5,242Executive Vice
    
    
    2003
    
    
    $
    255,200
    
    
    
    
    
    
    
    
    
    
    
    $
    5,498President, Chief
    
    
    2002
    
    
    $
    276,062
    
    
    
    
    
    
    
    
    
    
    
    $
    4,829Marketing Officer (3)Mark A. Oliver,
    
    
    2004
    
    
    $
    229,527
    
    
    
    -0-
    
    
    
    (2
    )
    
    
    $

    22,135President, Chief
    
    
    2003
    
    
    $
    233,855
    
    
    
    
    
    
    
    
    
    
    
    $
    24,722Investment Officer
    
    
    2002
    
    
    $
    193,662
    
    
    
    
    
    
    
    
    
    
    
    $
    23,456and TreasurerRay A. Riley,
    
    
    2004
    
    
    $
    182,969
    
    
    
    -0-
    
    
    
    
    
    
    
    $
    4,660Executive Vice
    
    
    2003
    
    
    $
    157,277
    
    
    
    
    
    
    
    
    
    
    
    $
    4,811President and Chief
    
    
    2002
    
    
    $
    103,916
    
    
    
    
    
    
    
    
    
    
    
    $
    4,139Operations Officer
 
 (1)
    
    Company contribution to qualified profit-sharing plan. The 2004 amounts represent the results
of the 2003 plan year credited in 2004. The 2004 results will not be available until late
2005.(2)
    
    Includes the use of a Company automobile, the incremental cost of which is less than the
lower of 10% of the total annual cash compensation or $50,000.(3)
    
    Mr. Dunham served as an officer of the Company until February 1999, and continued to serve as
an officer of the Companys subsidiaries until June 2005. 
 86




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##### Table of Contents



Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
    
    
    by each of our executive officers and directors,
    
    by all of our executive officers and directors as a group, and
    
    by each person who is known by us to own beneficially more than 5% of our outstanding Class A or Class B common stock.
 
 87




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##### Table of Contents



Shares Owned and
    
    Percent ofName and Address
    
    Nature of Ownership(1)
    
    ClassHarold E. Riley400 E. Anderson Lane
    
    4,668,919 Class A(2)
    
    
    12.5
    %Austin, TX 78752
    
    936,181 Class B(2)
    
    
    100.0
    %Rick D. Riley
400 E. Anderson Lane
Austin, TX 78752
    
    784,586 Class A(3)
    
    
    2.1
    %Ray A. Riley
400 E. Anderson Lane
Austin, TX 78752
    
    473,964 Class A(4)
    
    
    1.3
    %Timothy T. Timmerman
4903 Whitethorn Court
Austin, TX 78746
    
    8,493 Class A
    
    
    
    (6)Steven F. Shelton
7359 Road X
Lamar, CO 81052
    
    2,840 Class A

    
    
    
    (6)Mark A. Oliver
400 E. Anderson Lane
Austin, TX 78752
    
    13,123 Class A
    
    
    
    (6)Marcia F. Emmons
400 E. Anderson Lane
Austin, TX 78752
    
    42 Class A
    
    
    
    (6)Dr. E. Dean Gage
Texas A&M University
College of Veterinary Medicine
College Station, TX 77843
    
    1,163 Class A
    
    
    
    (6)Dr. Richard C. Scott
Baylor University
University Development
Robinson Tower, 8th Floor
Waco, TX 76798
    
    2,220 Class A
    
    
    
    (6)Grant G. Teaff
8265 Forest Ridge
Waco, TX 76712
    
    1,441 Class A
    
    
    
    (6)All executive officersand directors as
    
    5,956,791 Class A
    
    
    15.9
    %a group (ten persons)
    
    936,181 Class B
    
    
    100.0
    %Gala Management Services, Inc. (as trusteeof
four non-U.S. trusts and/or record holder)Ave. Federico Boyd y Calle 51 Este #18Edicifco Scotia Plaza, Piso 10Panama City, Panama
    
    14,644,180 Class A (5)
    
    
    39.1
    %
 
 88




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##### Table of Contents



(1)
    
    Except as otherwise indicated, each person named in the table has
sole voting and investment power with respect to all shares
beneficially owned, subject to applicable community property law.(2)
    
    Owns 4,283,787 Class A shares directly and spouse owns 385,132
Class A shares. The Harold E. Riley Trust, of which Mr. Riley is
the controlling Trustee, owns all of the 936,181 issued and
outstanding shares of Class B common stock.(3)
    
    Owns 459,976 Class A shares directly, 24,421 Class A shares as
joint tenant with spouse, and 275,664 and 24,525 Class A shares
indirectly as trustee for minor children and spouse,
respectively.(4)
    
    Owns 280,289 Class A shares directly, 16,209 Class A shares as
joint tenant with spouse, and 170,319 and 7,147 Class A shares
indirectly as trustee for minor children and spouse,
respectively.(5)
    
    This share number was obtained from our stock transfer records.
Gala Management Services, Inc. (Gala), an unaffiliated
Panamanian trust administrative services company, as trustee
and/or record holder, disclaims beneficial ownership of these
shares in its name, which are held for the benefit of
approximately 74,000 non-U.S. beneficiaries. Gala held
proxies to vote all of the shares but since March 31,
2005 has relinquished all such proxies. The beneficiaries are (i)
non-U.S. CICA policyholders who, since 1987, have assigned their
life insurance policy dividends, paid and payable by CICA, to two
trusts administered by Gala and (ii) non-U.S. insurance sales
associates of CICA who, since 1987, have assigned various life
insurance policy sales commissions paid and payable to them to
two other trusts administered by Gala. The purpose of each trust is to
accumulate Class A common stock for its beneficiaries. In order
to join a trust, a policyholder or sales associate must certify
that he or she is neither a citizen nor a resident of the United
States.(6)
    
    Less than one percent (1%). 
 Item 13. Certain Relationships and Related Transactions.
  
 89




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##### Table of Contents



Item 14. Principal Accounting Fees and Services.
  2004
    
    2003Audit Fees
    
    $
    964,800
    
    
    $
    344,387Audit Related Fees
    
    
    -0-
    
    
    
    -0-Tax Fees
    
    
    -0-
    
    
    
    85,125All Other Fees
    
    
    -0-
    
    
    
    -0-Total
    
    $
    964,800
    
    
    $
    429,512
  
 90




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##### Table of Contents



PART IV 
 Item 15. Exhibits, Financial Statement Schedules (a) (1) and (2) Filings as Part of this Report The financial statements and schedules listed on the following index to financial
statements and financial statement schedules are filed under Item 8 as part of this
Form 10-K. (b) (3) Exhibits  See the Exhibit Index CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Index to Consolidated Financial Statements and
Financial Statement Schedules PageReferenceReport
of independent registered public accounting firm
    
    92Consolidated statements of financial position at December 31, 2004 and 2003
    
    93Consolidated statements of operations  years ended December 31, 2004, 2003 and 2002
    
    95Consolidated statements of stockholders equity and comprehensive income  years ended December 31, 2004, 2003 and 2002
    
    97Consolidated statements of cash flows  years ended December 31, 2004, 2003 and 2002
    
    99Notes to consolidated financial statements
    
    102Schedules at December 31, 2004 and 2003:Schedule II  Condensed Financial Information of Registrant
    
    131Schedules for each of the years in the three-year period ended December 31, 2004:Schedule III  Supplementary Insurance Information
    
    134Schedule IV  Reinsurance
    
    136
 All other schedules have been omitted because the required information is inapplicable
or the information required is presented in the financial statements or the notes
thereto filed elsewhere herein. 
 91




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##### Table of Contents



Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders
Citizens, Inc. We have audited the accompanying consolidated statements of financial position of Citizens, Inc.
and subsidiaries (the Company) as of December 31, 2004 and 2003, and the related consolidated
statements of operations, stockholders equity and comprehensive income and cash flows for each of
the years in the three-year period ended December 31, 2004. In connection with our audits of the
consolidated financial statements, we also have audited the financial statement schedules II to IV.
These consolidated financial statements and financial statement schedules are the responsibility of
the Companys management. Our responsibility is to express an opinion on these consolidated
financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Citizens, Inc. and subsidiaries as of
December 31, 2004 and 2003, and the results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 2004, in conformity with U.S. generally
accepted accounting principles. Also, in our opinion, the related financial statement schedules,
when considered in relation to the basic consolidated financial statements taken as a whole,
present fairly in all material respects, the information set forth therein. We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the effectiveness of Citizens, Inc.s internal control over financial
reporting as of December 31, 2004, based on criteria established in Internal Control  Integrated
Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO),
and our report dated March 30, 2005 expressed an unqualified opinion on managements assessment of,
and an adverse opinion on the effective operation of, internal control over financial reporting. /s/ KPMG LLP Dallas, Texas
March 30, 2005 92




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES 
 Consolidated Statements of Financial Position December 31, 2004 and 2003 2004
    
    
    2003AssetsInvestments:Fixed maturities held-to-maturity, at amortized cost
    
    $
    7,514,224
    
    
    $
    11,699,899Fixed maturities available-for-sale, at fair value
    
    
    440,052,698
    
    
    
    237,505,966Equity securities available-for-sale, at fair value
    
    
    1,063,917
    
    
    
    1,142,352Mortgage loans on real estate
    
    
    349,611
    
    
    
    547,469Policy loans
    
    
    24,316,468
    
    
    
    21,873,634Other long-term investments
    
    
    2,505,025
    
    
    
    2,418,812Total investments
    
    
    475,801,943
    
    
    
    275,188,132Cash and cash equivalents
    
    
    31,720,787
    
    
    
    15,016,254Accrued investment income
    
    
    6,113,474
    
    
    
    3,341,483Reinsurance recoverable
    
    
    17,806,573
    
    
    
    3,337,761Deferred policy acquisition costs
    
    
    56,335,361
    
    
    
    49,730,572Other intangible assets
    
    
    2,331,069
    
    
    
    3,086,165Deferred federal income tax
    
    
    
    
    
    
    1,887,048Cost of customer relationships acquired
    
    
    44,904,581
    
    
    
    16,884,456Excess of cost over net assets acquired
    
    
    12,401,990
    
    
    
    12,938,862Property, plant and equipment
    
    
    8,797,445
    
    
    
    5,942,726Other assets
    
    
    4,998,339
    
    
    
    2,739,838Total assets
    
    $
    661,211,562
    
    
    $
    390,093,297
 (Continued) 93




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Financial Position, Continued
December 31, 2004 and 2003 2004
    
    
    2003Liabilities and Stockholders EquityLiabilities:Future policy benefit reserves:Life insurance
    
    $
    413,106,928
    
    
    $
    205,126,613Annuities
    
    
    16,913,432
    
    
    
    15,309,266Accident and health
    
    
    13,604,150
    
    
    
    13,128,579Dividend accumulations
    
    
    4,932,124
    
    
    
    4,823,504Premium deposits
    
    
    7,938,529
    
    
    
    6,509,089Policy claims payable
    
    
    8,282,508
    
    
    
    5,648,288Other policyholders funds
    
    
    5,689,378
    
    
    
    3,876,787Total policy liabilities
    
    
    470,467,049
    
    
    
    254,422,126Commissions payable
    
    
    2,325,503
    
    
    
    2,272,216Federal income tax payable
    
    
    1,307,249
    
    
    
    613,123Payable for securities in the process of settlement
    
    
    7,052,398
    
    
    
    3,750,000Notes payable
    
    
    30,000,000
    
    
    
    Deferred Federal income tax
    
    
    805,387
    
    
    
    Liabilities for options and warrants
    
    
    2,738,062
    
    
    
    Other liabilities
    
    
    5,483,564
    
    
    
    2,009,110Total liabilities
    
    
    520,179,212
    
    
    
    263,066,575Cumulative convertible preferred stock  Series A-1
($500 stated value, 50,000 shares authorized, 12,500
shares issued and outstanding in 2004)
    
    
    5,901,271
    
    
    
    Stockholders equity:Common stock:Class A, no par value, 100,000,000 shares
authorized, 40,364,332 shares issued
in 2004 and 37,674,293 shares issued
in 2003, including shares in treasury of
2,930,596 in 2004 and 2,738,874 in 2003
    
    
    198,266,955
    
    
    
    178,065,965Class B, no par value, 2,000,000 shares
authorized, 936,181 shares issued and
outstanding in 2004 and 874,935 shares
issued and outstanding in 2003
    
    
    2,827,191
    
    
    
    2,437,052Retained deficit
    
    
    (55,321,287
    )
    
    
    (46,077,094
    )Accumulated other comprehensive income (loss):Unrealized gains (losses) on securities, net of tax
    
    
    (749,199
    )
    
    
    1,272,107145,023,660
    
    
    
    135,698,030Treasury stock, at cost
    
    
    (9,892,581
    )
    
    
    (8,671,308
    )Total stockholders equity
    
    
    135,131,079
    
    
    
    127,026,722$
    661,211,562
    
    
    $
    390,093,297
 See accompanying notes to consolidated financial statements. 94




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES 
 Consolidated Statements of Operations Years ended December 31, 2004, 2003 and 2002 2004
    
    
    2003
    
    
    2002Revenues:Premiums:Life insurance
    
    $
    77,747,241
    
    
    $
    60,858,687
    
    
    $
    54,453,730Accident and health
    
    
    787,547
    
    
    
    14,784,958
    
    
    
    13,473,966Casualty
    
    
    1,113,189
    
    
    
    
    
    
    
    Annuity and universal life
considerations
    
    
    3,519,523
    
    
    
    2,383,768
    
    
    
    283,185Net investment income
    
    
    17,004,672
    
    
    
    14,322,275
    
    
    
    14,251,907Realized gains (losses)
    
    
    389,028
    
    
    
    1,883,105
    
    
    
    477Decrease in fair value of options
and warrants
    
    
    256,088
    
    
    
    
    
    
    
    Other income
    
    
    2,008,390
    
    
    
    869,970
    
    
    
    540,633Total revenues
    
    
    102,825,678
    
    
    
    95,102,763
    
    
    
    83,003,898Benefits and expenses:Insurance benefits paid or provided:Increase in future policy benefit reserves
    
    
    18,627,335
    
    
    
    7,904,091
    
    
    
    6,051,671Policyholdersdividends
    
    
    4,141,674
    
    
    
    3,666,260
    
    
    
    3,477,381Claims and surrenders
    
    
    36,830,646
    
    

    
    40,445,007
    
    
    
    38,107,119Annuity expenses
    
    
    576,091
    
    
    
    245,891
    
    
    
    280,789Total insurance benefits paid or provided
    
    
    60,175,746
    
    
    
    52,261,249
    
    
    
    47,916,960Commissions
    
    
    21,273,661
    
    
    
    18,227,851
    
    
    
    16,339,205Other underwriting, acquisition
and insurance expenses
    
    
    17,391,443
    
    
    
    18,966,120
    
    
    
    15,064,065Capitalization of deferred policy
acquisition costs
    
    
    (17,240,670
    )
    
    
    (16,557,855
    )
    
    
    (14,422,757
    )Amortization of deferred policy
acquisition costs
    
    
    8,438,447
    
    
    
    11,806,640
    
    
    
    10,039,403Amortization of cost of customer relationships acquired,
and other intangibles
    
    
    4,136,375
    
    
    
    7,110,436
    
    
    
    2,527,996Loss on coinsurance agreement
    
    
    562,916
    
    
    
    
    
    
    
    Total benefits and expenses
    
    
    94,737,918
    
    
    
    91,814,441
    
    
    
    77,464,872
 (Continued) 95




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Operations, Continued Years ended December 31, 2004, 2003 and 2002 2004
    
    
    2003
    
    
    2002Income before Federal income
tax
    
    $
    8,087,760
    
    
    $
    3,288,322
    
    
    $
    5,539,026Federal income tax expense
    
    
    356,021
    
    
    
    162,057
    
    
    
    1,284,809Net income
    
    $
    7,731,739
    
    
    $
    3,126,265
    
    
    $
    4,254,217Basic and diluted
earnings per share
of common stock
    
    $
    .18
    
    
    $
    .08
    
    
    $
    .12
 See accompanying notes to consolidated financial statements. 96




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES 
 Consolidated Statements of Stockholders Equity and Comprehensive Income Years ended December 31, 2004, 2003 and 2002 AccumulatedRetained

    
    
    otherCommon stock
    
    
    earnings
    
    
    comprehensive
    
    
    Treasury
    
    
    StockholdersClass A
    
    
    Class B
    
    
    (deficit)
    
    
    income (loss)
    
    
    stock
    
    
    equityBalance at December 31, 2001
    
    $
    79,701,590
    
    
    $
    910,482
    
    
    $
    5,274,768
    
    
    $
    727,519
    
    
    $
    (3,892,561
    )
    
    $
    82,721,798Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    4,254,217
    
    
    
    
    
    
    
    
    
    
    
    4,254,217Unrealized investment gains, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,854,506
    
    
    
    
    
    
    
    2,854,506Comprehensive income
    
    
    
    
    
    
    
    
    
    
    4,254,217
    
    
    
    2,854,506
    
    
    
    
    
    
    
    7,108,723Acquisition of Combined
    
    
    8,513,048
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,513,048Acquisition of Lifeline
    
    
    3,448,736
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,448,736Stock dividend
    
    
    37,461,725
    
    
    
    959,907
    
    
    
    (35,416,772
    )
    
    
    
    
    
    
    (3,004,860
    )
    
    
    Balance at December 31, 2002
    
    $
    129,125,099
    
    
    $
    1,870,389
    
    
    $
    (25,887,787
    )
    
    $
    3,582,025
    
    
    $
    (6,897,421
    )
    
    $
    101,792,305Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    3,126,265
    
    
    
    
    
    
    
    
    
    
    
    3,126,265Unrealized investment losses, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,309,918
    )
    
    
    
    
    
    
    (2,309,918
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    3,126,265
    
    
    
    (2,309,918
    )
    
    
    
    
    
    
    816,347Acquisition of First Alliance
    
    
    17,194,513
    
    
    
    
    
    
    

    
    
    
    
    
    
    
    
    
    
    
    
    17,194,513Acquisition of Mid-American
    
    
    7,223,557
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,223,557Stock dividend
    
    
    24,522,796
    
    
    
    566,663
    
    
    
    (23,315,572
    )
    
    
    
    
    
    
    (1,773,887
    )
    
    
    Balance at December 31, 2003
    
    $
    178,065,965
    
    
    $
    2,437,052
    
    
    $
    (46,077,094
    )
    
    $
    1,272,107
    
    
    $
    (8,671,308
    )
    
    $
    127,026,722Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    7,731,739
    
    
    
    
    
    
    
    
    
    
    
    7,731,739Unrealized investment gains, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,021,306
    )
    
    
    
    
    
    
    (2,021,306
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    7,731,739
    
    
    
    (2,021,306
    )
    
    
    
    
    
    
    5,710,433Beneficial conversion feature on preferred stock
    
    
    3,073,204
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,073,204Accretion of deferred issuance costs and discounts on preferred stock
    
    
    
    
    
    
    
    
    
    
    (679,280
    )
    
    
    
    
    
    
    
    
    
    
    (679,280
    )Common stock dividend on preferred stock
    
    
    249,233
    
    
    
    
    
    
    
    (249,233
    )
    
    
    
    
    
    
    
    
    
    
    Stock dividend
    
    
    16,878,553
    
    
    
    390,139
    
    
    
    (16,047,419
    )
    
    
    
    
    
    
    (1,221,273
    )
    
    
    Balance at December 31, 2004
    
    $
    198,266,955
    
    
    $
    2,827,191
    
    
    $
    (55,321,287
    )
    
    $
    (749,199
    )
    
    $
    (9,892,581
    )
    
    $
    135,131,079
 97




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##### Table of Contents



(Continued) CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Stockholders Equity and Comprehensive Income, Continued Years ended December 31, 2004, 2003 and 2002 A summary of the number of shares of common stock of Class A, Class B and treasury stock issued is
as follows: Common stock
    
    
    TreasuryClass A
    
    
    Class B
    
    
    stockBalance at December 31, 2002
    
    
    31,862,650
    
    
    
    817,696
    
    
    
    (2,559,693
    )Acquisition of First Alliance
    
    
    2,560,994
    
    
    
    
    
    
    
    Acquisition of Mid-American
    
    
    774,229
    
    
    
    
    
    
    
    Stock dividend
    
    
    2,476,420
    
    
    
    57,239
    
    
    
    (179,181
    )Balance at December 31, 2003
    
    
    37,674,293
    
    
    
    874,935
    
    
    
    (2,738,874
    )Stock dividend
    
    
    2,690,039
    
    
    
    61,246
    
    
    
    (191,722
    )Balance at December 31,2004
    
    
    40,364,332
    
    
    
    936,181
    
    
    
    (2,930,596
    )
 See accompanying notes to consolidated financial statements. 98




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES 
 Consolidated Statements of Cash Flows Years ended December 31, 2004, 2003 and 2002 2004
    
    
    2003
    
    
    2002Cash flows from operating activities:Net income
    
    $
    7,731,739
    
    
    $
    3,126,265
    
    
    $
    4,254,217Adjustments to reconcile net income to
net cash provided by operating activities,
net of assets acquired:Realized gains on sale
of investments and other assets
    
    
    (389,028
    )
    
    
    (1,883,105
    )
    
    
    (477
    )Net deferred policy acquisition costs
    
    
    (8,802,223
    )
    
    
    (4,751,215
    )
    
    
    (4,383,354
    )Amortization of cost of customer
relationships acquired, and other
intangibles
    
    
    4,136,375
    
    
    
    7,110,436
    
    
    
    2,527,996Loss on coinsurance agreements
    
    
    562,916
    
    
    
    
    
    
    
    Decrease in fair value of options and
warrants
    
    
    (256,088
    )Depreciation
    
    
    877,596
    
    
    
    688,913
    
    
    
    795,679Deferred Federal income tax
    
    
    (1,117,448
    )
    
    
    (87,812
    )
    
    
    792,216Change in:Accrued investment income
    
    
    (129,788
    )
    
    
    (714,297
    )
    
    
    (215,908
    )Reinsurance recoverable
    
    
    (10,380,750
    )
    
    
    195,380
    
    
    
    387,095Future policy benefit reserves
    
    
    17,615,120
    
    
    
    9,150,762
    
    
    
    5,645,152Other policy liabilities
    
    
    795,358
    
    
    
    2,580,571
    
    
    
    729,970Federal income tax
    
    
    344,125
    
    
    
    316,511
    
    
    
    (160,081
    )Commissions payable and other liabilities
    
    
    (778,338
    )
    
    
    (928,766
    )
    
    
    16,392Other, net
    
    
    (740,800
    )
    
    
    (1,173,405
    )
    
    
    207,228Net cash provided by operating activities
    
    
    9,468,766
    
    
    
    13,630,238
    
    
    
    10,596,125Cash flows from investing activities:Sale of fixed maturities, available-for-sale
    
    
    42,823,651
    
    
    
    11,826,358
    
    
    
    2,239,875Maturity of fixed maturities, available-for-sale
    
    
    89,615,042
    
    
    
    150,447,345
    
    
    
    91,956,779Purchase of fixed maturities, available-for-sale
    
    
    (82,634,306
    )
    
    
    (183,619,375
    )
    
    
    (95,427,418
    )Sale of equity securities, available-for-sale
    
    
    62,500
    
    
    
    838,416
    
    
    
    652,905Purchase of equity securities, available-for-sale
    
    
    
    
    
    
    (1,671
    )
    
    
    Principal payments on mortgage loans
    
    
    272,003
    
    
    
    210,365
    
    
    
    490,463Mortgage loans funded
    
    
    (193,944
    )
    
    
    (138,750
    )
    
    
    Sale of other long-term investments and property, plant
and equipment
    
    
    490,484
    
    
    
    229,660
    
    
    
    113,298
 (Continued) 99




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Statements of Cash Flows, Continued Years ended December 31, 2004, 2003, and 2002 2004
    
    
    2003
    
    
    2002Cash and cash equivalents provided by
mergers and acquisitions
    
    $
    
    
    
    $
    4,600,511
    
    
    $
    2,882,353(Increase) decrease in policy loans, net
    
    
    1,228,264
    
    
    
    (987,213
    )
    
    
    (599,576
    )Purchase of other long-term investments and property,
plant and equipment
    
    
    (3,485,049
    )
    
    
    (1,231,432
    )
    
    
    (486,854
    )Cash paid
for acquisition, net
    
    
    (82,232,223
    )
    
    
    
    
    
    
    Net cash
provided by (used in) investing
activities
    
    
    (34,053,578
    )
    
    
    (17,825,786
    )
    
    
    1,821,825Cash flows from financing activities:Proceeds from issuance of convertible preferred
stock
    
    $
    12,500,000
    
    
    
    
    
    
    
    Payment of convertible preferred stock issuance
costs
    
    
    (1,210,655
    )
    
    
    
    
    
    
    Proceeds from note payable
    
    
    30,000,000
    
    
    
    
    
    
    
    Net cash provided by financing activities
    
    
    41,289,345
    
    
    
    
    
    
    
    Net increase (decrease) in cash and cash equivalents
    
    
    16,704,533
    
    
    
    (4,195,548
    )
    
    
    12,417,950Cash and cash equivalents at beginning of year
    
    
    15,016,254
    
    
    
    19,211,802
    
    
    
    6,793,852Cash and cash equivalents at end of year
    
    $
    31,720,787
    
    
    $
    15,016,254
    
    
    $
    19,211,802
 Supplemental: 2004
    
    
    2003
    
    
    2002Cash paid (recovered) during the year for:Interest
    
    $
    
    
    
    $
    
    
    
    $
    Income taxes
    
    $
    779,343
    
    
    $
    (51,370
    )
    
    $
    665,139
 Supplemental disclosures of non-cash investing and financing activities: In the first quarter of 2003, the Company issued 2,560,994 Class A common shares in connection with
the acquisition of FAIC. In the third quarter of 2003, the Company issued 774,229 Class A common
shares in connection with the acquisition of Mid-American. In the first quarter of 2002, the
Company issued 752,701 Class A common shares in connection with the acquisition of Combined
Underwriters Life Insurance Company (now CNLIC) and issued 304,928 Class A common shares in
connection with the acquisition of all the capital stock of Lifeline Underwriters Life Insurance
Company (now part of CNLIC). On October 1, 2004, Citizens
Insurance Company of America acquired 100% of the outstanding stock
of Security Plan Life Insurance Company (SPLIC) and paid
$85 million in cash plus acquisition costs of $1,012,790 of
related expenses  see Note 9. In conjunction with the acquisitions, cash and cash equivalents were
provided by acquisitions as follows: 100




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##### Table of Contents



Consolidated Statements
of Cash Flows (Continued) 2004
    
    
    2003
    
    
    2002Fair value of capital stock issued
    
    
    
    
    
    $
    24,418,070
    
    
    $
    11,961,784Fair value of tangible assets acquired
excluding cash and cash equivalents
    
    
    (259,141,988
    )
    
    
    (28,583,673
    )
    
    
    (14,883,146
    )Fair value of intangible assets acquired
    
    
    (34,012,464
    )
    
    
    (16,027,217
    )
    
    
    (13,234,978
    )Liabilities assumed
    
    
    207,141,662
    
    
    
    24,793,331
    
    
    
    19,038,693Cash and cash equivalents provided by
mergers and acquisitions
    
    $
    (86,012,790
    )
    
    $
    4,600,511
    
    
    $
    2,882,353Issuance of 2,560,994 Class A shares
    
    
    
    
    
    $
    17,194,513Issuance of 774,229 Class A shares
    
    
    
    
    
    $
    7,223,557Issuance of 1,057,629 Class A shares
    
    
    
    
    
    
    
    
    
    $
    11,961,784
 On March 9, 2004, the Company entered into coinsurance agreements, effective January 1, 2004,
ceding the majority of its accident and health premiums and corresponding benefits and claims. Due
to this cession, the Company ceded its January 1, 2004, deferred policy acquisition costs and cost
of customer relationships acquired and increased reinsurance recoverable and funds withheld under
coinsurance agreements by $2,197,434, $2,886,060, $14,960,408 and $10,439,830, respectively,
resulting in a loss of $634,461 and a deferred gain of $71,545. The deferred gain was fully
amortized to earnings in 2004. On July 12, 2004, the Company completed a private placement of $12.5 million of Series A-1 Senior
Convertible Preferred Stock to four unaffiliated institutional investors. The Company initially
recognized deferred issuance costs of $1,210,655, discounts on beneficial conversion features of
$3,073,204 and discounts on fair value of options and warrants of $2,994,150, respectively. The
Company has subsequently recognized accretion of those deferrals and discounts amounting to
$679,280. These discounts and deferrals have decreased the carrying amount of the Convertible
Preferred Stock in the statement of financial position. See accompanying notes to consolidated financial statements. 101




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES 
 Notes to Consolidated Financial Statements December 31, 2004, 2003 and 2002  (1)
    Summary of Significant Accounting Policies  (a)
    Nature of BusinessThe consolidated financial statements include the accounts and operations of Citizens,
Inc. (Citizens), incorporated in the state of Colorado on November 8, 1977 and its
wholly-owned subsidiaries, Citizens Insurance Company of America (CICA), Computing
Technology, Inc. (CTI), Funeral Homes of America, Inc. (FHA), Insurance Investors, Inc.
(III), Citizens USA Life Insurance Company (CUSA), Citizens National Life Insurance
Company (CNLIC), First Alliance Insurance Company (FAIC), KYWIDE Insurance Management,
Inc. (KYWIDE), Mid-American Alliance Corporation (Mid-American), Mid American Century
Life Insurance Company (MACLIC), Security Alliance Insurance Company (SAIC), Security
Plan Life Insurance Company (SPLIC), Security Plan Fire Insurance Company, (SPFIC),
Mid-American Associates, Agency, Inc. (MAAAI), Mid-American Alliance Insurance Agency,
Inc. (MAAIA) and Industrial Benefits, Inc. (IBI). Citizens and its consolidated
subsidiaries are collectively referred to as the Company.During 2004, Citizens acquired SPLIC and its subsidiary, SPFIC. In addition, First
Alliance Corporation and Alliance Insurance Management, a dormant subsidiary, were
dissolved, and Combined Underwriters Life Insurance Company was renamed CNLIC.Citizens provides life and health insurance policies through six of its subsidiaries -
CICA, CUSA, CNLIC, FAIC, SPLIC and SAIC. CICA issues ordinary whole-life policies
international and domestically, and burial insurance, pre-need policies, accident and
health specified disease, hospital indemnity and accidental death policies, throughout
the southern United States. CUSA sells life insurance business in four states and
administers an in-force block of life insurance. CNLIC markets life and accident and
health insurance business throughout the southern United States. Effective January 1,
2004, CNLIC entered into a coinsurance agreement with Texas International Life Insurance
Company (TILIC), whereby CNLIC coinsured 100% of its accident and health insurance
business with TILIC. Effective December 31, 2004, CNLIC entered into an administrative
services agreement with TILIC whereby TILIC assumed all administration duties and
responsibilities of and for the accident and health insurance business of CNLIC. FAIC
offers life and annuity business primarily in Kentucky, MACLIC markets life and annuity
business throughout Missouri and SAIC is a dormant life insurer. SPLIC offers home
service life insurance in Louisiana and Mississippi, and SPFIC, a wholly owned
subsidiary of SPLIC, writes a limited amount of casualty insurance in Louisiana.III provides aviation transportation to the Company. CTI provides data processing
systems and services as well as furniture and equipment to the Company. FHA is a
funeral home operator. KYWIDE, MAAAI and MAAIA are insurance agencies. In 102




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Notes to Consolidated
Financial Statements  2004, the Company entered into a contract to sell MAAIA. It is expected to close in
April 2005. IBI is inactive and has minimal assets and liabilities.(b)
    Basis of PresentationThe accompanying consolidated financial statements of the Company and its wholly owned
subsidiaries have been prepared in conformity with accounting principles generally
accepted in the United States of America (U.S. GAAP). All significant intercompany
accounts and transactions have been eliminated.(c)
    Investments, Other than AffiliatesFixed maturities consist primarily of bonds. Fixed maturities, which the Company has
the ability and intent to hold to maturity, are carried at amortized cost. Fixed
maturities, which may be sold prior to maturity to support the Companys investment
strategies, are considered held as available-for-sale and carried at fair value as of
the balance sheet date. Equity securities (including non-redeemable preferred stock)
are considered available-for-sale and are reported at fair value.Unrealized appreciation (depreciation) of equity securities and fixed maturities held as
available-for-sale is shown as a separate component of stockholders equity, net of tax,
and is a separate component of comprehensive income.Mortgage loans on real estate and policy loans are reported at unpaid principal balances
less an allowance for uncollectible amounts. Mortgage loans have an allowance for
uncollectible amounts of $50,000 at December 31, 2004 and 2003 which was estimated by
the Company based upon historical amounts that proved uncollectible.Other long-term investments consist primarily of real estate that is recorded at the
lower of fair value, minus estimated costs to sell, or cost. If the fair value of the
real estate is less than the carrying value, an impairment loss is recognized and
charged to earnings.A decline in the fair value of any available-for-sale or held-to-maturity security below
cost that is deemed other than temporary is charged to earnings resulting in the
establishment of a new cost basis for the security.Premiums and discounts are amortized or accreted over the life of the related security
as an adjustment to yield using the effective interest method. Dividend and interest
income is recognized when earned. Realized gains and losses for securities classified
as available-for-sale and held-to-maturity are included in earnings and are derived
using the specific identification method for determining the cost of securities sold.Policy loans and other investments are primarily reported at cost.The Company had assets with a fair value of $30,564,326 and $30,409,236 at December 31,
2004 and 2003, respectively, on deposit with various state regulatory authorities to
fulfill statutory requirements. 103




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Notes to Consolidated
Financial Statements  (d)
    Premium Revenue and Related ExpensesPremiums on life and accident and health policies are reported as earned when due or,
for short duration contracts, over the contract period on a pro rata basis. Benefits and expenses are
associated with earned premiums so as to result in recognition of profits over the
estimated life of the contracts. This matching is accomplished by means of provisions
for future benefits and the capitalization and amortization of deferred policy
acquisition costs.Annuities are accounted for in a manner consistent with accounting for interest bearing
financial instruments. Premium receipts are not reported as revenues but rather as
deposit liabilities to annuity contracts. The annuity products issued do not include
fees or other such charges.(e)
    Deferred Policy Acquisition Costs and Cost of Customer Relationships AcquiredAcquisition costs, consisting of commissions and policy issuance, underwriting and
agency expenses that relate to and vary with the production of new business, are
deferred. These deferred policy acquisition costs are amortized primarily over the
estimated premium paying period of the related policies in proportion to the ratio of
the annual premium recognized to the total premium revenue anticipated using the same
assumptions as were used in computing liabilities for future policy benefits.The Company utilizes the factor method to determine the amount of costs to be
capitalized and the ending asset balance. The factor method ensures that policies that
lapsed or surrendered during the reporting period are no longer included in the deferred
policy acquisition costs or the cost of customer relationships acquired calculation.
The factor method limits the amount of deferred costs to its estimated realizable value,
provided actual experience is comparable to that contemplated in the factors. A
recoverability test that considers among other things, actual experience and projected
future experience, is performed at least annually.The value of customer relationships acquired in the Companys various acquisitions,
which is included in cost of customer relationships acquired in the accompanying
consolidated financial statements, was determined based on the present value of future
profits discounted at a risk rate of return. The cost of customer relationships
acquired is being amortized over the anticipated premium paying period of the related
policies.Deferred policy acquisition costs on universal life contracts are capitalized and
amortized over the life of the contract at a constant rate based on the present value of
the estimated gross profit amounts expected to be earned over the life of the universal
life contracts.(f)
    Policy Liabilities and AccrualsFuture policy benefit reserves have been computed by the net level premium method with
assumptions as to investment yields, dividends on participating business, mortality and
withdrawals based upon the Companys and industry experience, which provide for possible
unfavorable deviation. 104




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Notes to Consolidated
Financial Statements  Annuity benefits are carried at accumulated contract values
based on consideration paid by
participants, annuity rates of return ranging from 3.0% to 7.0% (primarily at 4.0% to
5.5%) and annuity withdrawals.Premium deposits accrue interest at rates ranging from 3.5% to 8.25% per annum. Cost of
insurance is included in premium when collected and interest is credited annually to the
deposit account.Policy and contract claims are based on case-basis estimates for reported claims, and on
estimates, based on experience, for incurred but unreported claims and loss expenses.Premiums collected on universal life contracts are not reported as revenues in the
statement of operations but are included in the liability for policy benefits for
universal life contracts based on policyholders account balances. Revenues from
universal life contracts are amounts assessed the policyholder for mortality and
expenses and are reported when assessed based upon one-year service periods. Amounts
assessed for services to be provided in future periods are reported as unearned revenue
and are recognized in income over the benefit period.The liability for policy benefits for universal life contracts is based on the balance
that accrues to the benefit of policyholders. It includes any amounts assessed to
compensate the Company for services to be performed over future periods, any amounts
previously assessed by the Company against the policyholders that are refundable at
termination of the contract and any premium deficiency.(g)
    Excess of Cost Over Net Assets Acquired and Other Intangible AssetsEffective January 1, 2002, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 142, Goodwill and Other Intangible Assets. Under the guidelines
of SFAS No. 142, excess of cost over net assets acquired (goodwill) and other intangible
assets determined to have an indefinite useful life will no longer be amortized.
Instead goodwill and other intangible assets with indefinite lives
are subjected to annual impairment
analyses under SFAS No. 142 while intangibles with definitive
lives are amortized over the life of the asset. The Company performed assessments of whether there was an indication that
goodwill and intangible assets were impaired on December 31, 2003 and concluded there
was no goodwill or intangible impairment as of those dates. The Companys 2004
assessment determined that intangible assets totaling $668,000 were impaired, and
amortized the entire amount in 2004.The Company continually monitors long-lived assets and certain intangible assets, such
as excess of cost over net assets acquired, cost of customer relationships acquired and
other intangible assets, for impairment. An impairment loss is recorded in the period
in which the carrying value of the assets exceeds the fair value of expected future cash
flows. Any amounts deemed to be impaired are charged, in the period in which such
impairment was determined, as an expense against earnings, no such loss was recorded in
2004, 2003 or 2002.(h)
    Participating Policies 105




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Notes to Consolidated
Financial Statements  At December 31, 2004 and 2003, participating business approximated 45% and 48%,
respectively, of life insurance in force.Policyholder dividends are determined based on the discretion of the Companys Board of
Directors. The Company utilizes contractual life insurance dividend scales as shown in
published dividend illustrations at the date the insurance contracts are issued
(unrelated to the Companys net income) in determining policyholder dividends.
Policyholder dividends are accrued over the premium paying periods of the insurance
contracts.(i)
    Earnings Per ShareBasic and diluted earnings per share have been computed using the weighted average
number of shares of common stock outstanding during each period. The
weighted average shares outstanding for the year ended December 31, 2004, were 38,333,404, compared to
37,121,922 for 2003 and 34,187,672 for 2002. The per share amounts have been adjusted
retroactively for all periods presented to reflect the change in capital structure
resulting from 7% stock dividends paid in 2004 and 2003, and a 15% common stock dividend
paid in 2002. The 2004 stock dividend resulted in the issuance of
2,690,039 Class A shares (including 191,722 treasury shares) and 61,246 Class B shares. The 2003 stock
dividend resulted in the issuance of 2,476,420 Class A shares (including 179,181 shares
in treasury) and 57,239 Class B shares. In addition, 2,560,994 Class A shares were
issued in February 2003 in conjunction with the acquisition of First Alliance and
774,229 Class A shares were issued in November 2003 for the acquisition of Mid-American.On March 4, 2004, at a special meeting of the Companys shareholders, the Companys
Articles of Incorporation were amended to increase the number of authorized shares of
its Class A and Class B common stock from 50,000,000 to 100,000,000 and from 1,000,000
to 2,000,000, respectively. In addition, a class of 25,000,000 shares of preferred
stock was authorized to be available for future issuance in series with terms and
preferences designated by the Companys Board of Directors. As discussed in Note 8, the
Company completed a private placement of $12.5 million of Series A-1 Convertible
Preferred Stock in July 2004. In addition, on September 30, 2004, the Company declared
its initial 4% dividend to the Series A-1 Convertible Preferred Stock shareholders. On
December 31, 2004, the Company paid the second quarterly dividend, consisting of 20,948
shares of its Class A common Stock valued at $133,439. The Company paid the initial
dividend in early October 2004 by issuing 19,396 shares of its Class A common stock
valued at $115,794.The following table sets forth the computation of basic and dilutive earnings per share: 106




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Notes to Consolidated
Financial Statements   Year endedDecember 312004
    
    
    2003
    
    
    2002Basic and diluted income per share:Numerator:Net income
    
    $
    7,731,739
    
    
    $
    3,126,265
    
    
    $
    4,254,217Less: Preferred stock dividend
    
    
    (249,233
    )
    
    
    
    
    
    
    Accretion of deferred
issuance costs and
discounts
on preferred stock
    
    
    (679,280
    )
    
    
    
    
    
    
    Net income to common stockholders
    
    $
    6,803,226
    
    
    $
    3,126,265
    
    
    
    4,254,217Denominator:Weighted average shares outstanding
    
    
    38,333,404
    
    
    
    37,121,922
    
    
    
    34,187,672Basic and diluted income per share
    
    $
    0.18
    
    
    $
    0.08
    
    
    $
    0.12
  The effects of Series A-1 Convertible Preferred Stock and warrants are antidilutive for
both periods; therefore, diluted loss per share is reported the same as basic loss per
share. The Series A-1 Convertible Preferred Stock is antidilutive because the amount of
the dividend and accretion of deferred issuance costs and discounts for the year ended
December 31, 2004 per common stock obtainable on conversion exceeds basic income per
share. The warrants are antidilutive because the exercise price is in excess of the
average Class A common stock market price for the twelve months ended December 31, 2004.The Series A-1 Convertible Preferred Stock is convertible at the option of the holders
at any time into Class A common shares at a conversion price of $6.77 per share, and are
mandatorily redeemable in five years. Conversion can be exercised into an aggregate of
1,846,381 Class A common shares. The Company may, if certain conditions have been met,
redeem the Series A-1 Convertible Preferred Stock into shares of its Class A common
shares at a minimum price of $6.54 per share. This redemption would result in the
issuance of 1,911,315 Class A common shares. The exercise prices have been adjusted for
the stock dividend paid December 31, 2004.On July 12, 2004, the Company also issued to the purchasers of Series A-1 Convertible
Preferred Stock unit warrants entitling the investors to purchase from the Company for a
period of approximately 12 months up to $5 million of Series A-2 Convertible Preferred
Stock. If issued, the Series A-2 Convertible Preferred Stock would be convertible into
Class A common shares at a conversion price calculated as 110% of the average market
closing price of the Class A common stock for the 30 trading days prior to the date of
issuance of the Series A-2 Convertible Preferred Stock, but not less than $6.54 or
greater than $10.75 per share. Using the floor price of $6.54 per share and the ceiling
price of $10.75 per share, the holders at conversion could acquire an aggregate of
between 465,116 and 764,526 shares of the Companys Class A common stock if the Series
A-2 Convertible Preferred Stock were issued. If issued, the Series A-2 Convertible
Preferred Stocks redemption period would expire on July 12, 2009. The exercise prices
have been adjusted for the stock dividend paid December 31, 2004. 107




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Notes to Consolidated
Financial Statements  Series A-1 Convertible Preferred Stock warrants can be exercised by the investors and
finder to purchase an aggregate of 508,028 shares and 92,369 shares of Class A common
stock, respectively, at an exercise price of $7.44 per share. These warrants expire on
July 12, 2009. Series A-2 Convertible Preferred Stock warrants could be exercised to
purchase an aggregate of between approximately 200,000 to 205,000 shares of Class A
common stock if the Series A-2 Convertible Preferred Stock is issued. These warrants,
if issued, would expire on July 12, 2009. The exercise prices have been adjusted for
the stock dividend paid December 31, 2004.(j)
    Income TaxesFor the year ended December 31, 2004, the Company filed ten separate tax returns as
follows: 1) Citizens, Inc., CICA, CUSA and all its direct non-life subsidiaries, 2)
KYWIDE, 3) CNLIC, 4) FAIC, 5) MACLIC, 6) SAIC, and its direct non-life subsidiaries, 7)
MAAIA, 8) MAAAI, and 9) SPLIC and 10) SPFIC.For the year ended December 31, 2003, the Company filed nine separate tax
returns as follows: 1) Citizens, Inc., CICA, CUSA and all its direct non-life
subsidiaries, 2) Excalibur, 3) Combined, 4) Lifeline, 5) FAIC, 6) MACLIC, 7) SAIC, and
its direct non-life subsidiaries, 8) FAC and its direct non-life subsidiaries and 9)
Mid-American and all direct non-life subsidiaries.For the year ended December 31, 2002, the Company filed four separate tax returns as
follows: 1) Citizens, Inc., CICA, CILIC and all direct non-life subsidiaries, 2)
Excalibur, 3) Combined and 4) Lifeline.Deferred tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates in effect for the year in
which those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date.(k)
    Accounting PronouncementsOn January 1, 2002, the Company adopted Statement of Financial Accounting Standard
(SFAS) No. 142, Goodwill and Other Intangible Assets. Under the guidelines of SFAS
No. 142, excess of cost over net assets acquired (goodwill) amounting to $12,401,990 and
$12,938,862 and other intangible assets amounting to $2,331,069 and $3,086,165 as of
December 31, 2004, and December 31, 2003, respectively, were determined to have an
indefinite useful life and will no longer be amortized. Instead goodwill and other
intangible assets will be subjected to annual impairment analyses under the provisions
of SFAS No. 142.In October 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144
superseded and amended SFAS No. 121 and relevant portions of SFAS No. 30. SFAS No. 144
was adopted on January 1, 2002. SFAS No. 144 did not have a 108




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Notes to Consolidated
Financial Statements  material effect on the financial position, results of operation or liquidity of the
Company.In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44
and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS No. 145
affected income statement classification of gains and losses from extinguishment of debt
and made certain other technical corrections. SFAS No. 145 was adopted on January 1,
2003. SFAS No. 145 did not have a material effect on the financial position, results of
operations or liquidity of the Company.In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit
or Disposal Activities. SFAS No. 146 spread out the reporting of expenses related to
restructurings initiated after 2002. Commitment to a plan to exit an activity or
dispose of long-lived assets will no longer be enough evidence to record a charge for
most anticipated exit or disposal activities. Companies will instead record exit or
disposal costs when they are incurred and can be measured by fair value and the
recorded liability will subsequently be adjusted for changes in estimated cash flows.
SFAS No. 146 also revised accounting for specified employee and contract terminations
that are part of restructuring activities. The Company adopted SFAS No. 146 on January
1, 2003. SFAS No. 146 did not have a material effect on the financial position, results
of operations or liquidity of the Company.In November 2002, the FASB issued Interpretation No. 45, Guarantors Accounting
Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to
Others, an Interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB
Interpretation No. 34. This Interpretation elaborated on the disclosures to be made by
a guarantor in its interim and annual financial statements about its obligations under
guarantees issued and also clarified that a guarantor is required to recognize, at
inception of a guarantee, a liability for the fair value of the obligation undertaken.
The Company adopted FASB Interpretation No. 45 on January 1, 2003. FASB Interpretation
No. 45 did not have a material effect on the financial position, results of operations
or liquidity of the Company.In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation
 Transition and Disclosure, an amendment of FASB No. 123. This statement amends SFAS
No. 123, Accounting for Stock Based Compensation, to provide alternative methods of
transition for a voluntary change to the fair value method of accounting for stock-based
employee compensation. In addition, SFAS No. 148 amended the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both annual and interim financial
statements. Certain of the disclosure modifications are required for fiscal years ended
after December 31, 2002. The Company currently offers no stock-based employee
compensation. The Company adopted SFAS No. 148 on January 1, 2003. SFAS No. 148 did
not have a material effect on the financial position, results of operations or liquidity
of the Company.In December 2003 the FASB issued a revision to Interpretation No. 46, Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51. that was originally issued
in January 2003. This interpretation as revised addresses the consolidation by business
enterprises of variable interest entities as defined in the Interpretation. The
Interpretation applies immediately to variable interests in variable interest entities
created after January 31, 2003, and to variable interests in variable
interest entities obtained after January 31, 2003. This interpretation requires certain 109




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\

Notes to Consolidated
Financial Statements  disclosures in financial statements issued after January 31, 2003. The Company adopted
FASB Interpretation No. 46 as revised on December 31, 2003. FASB Interpretation 46 as
revised did not have a material effect on the financial position, results of operations
or liquidity of the Company.In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative
Instruments and Hedging Activities. This statement clarifies financial accounting and
reporting for derivative instruments, including certain derivative instruments embedded
in other contracts and for hedging activities. This statement is generally effective
for contracts entered into or modified after September 30, 2003, and all provisions
should be applied prospectively. The Company adopted SFAS No. 149 on September 30,
2003. SFAS No. 149 did not have a material effect on the financial position, results of
operations or liquidity of the Company.In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments
with Characteristics of Both Liabilities and Equities. This statement established
standards for how an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. SFAS No. 150 requires that an issuer
classify a financial instrument within its scope as a liability (or an asset in some
circumstances). Many of the instruments within the scope of SFAS No. 150 were
previously classified as equity. Based on current operations, the Company does not
anticipate that SFAS No. 150 will have a material effect on the financial position,
results of operations or liquidity of the Company.In December 2003, the FASB issued a revision to SFAS No. 132, Employers Disclosures
about Pensions and Other Postretirement Benefits. This statement requires that
companies provide more details about their plan assets, benefit obligations, cash flows,
benefit costs and other relevant information. This statement is effective for fiscal
years ending after December 15, 2003. The Company adopted the revision to SFAS No. 132
on December 31, 2003. SFAS No. 132, as revised, did not have a material effect on the
financial position, results of operations or liquidity of the Company.In 2004, the FASB issued a revision of SFAS No. 123, Accounting for Stock-Based
Compensation. This Statement supersedes APB Opinion No. 25, Accounting for Stock
Issued to Employees, and its related implementation guidance and establishes standards
for the accounting for transactions in which an entity exchanges its equity instruments
for goods or services. It also addresses transactions in which an entity incurs
liabilities in exchange for goods or services that are based on the fair value of the
entitys equity instruments or that may be settled by the issuance of those equity
instruments. This Statement focuses primarily on accounting for transactions in which
an entity obtains employee services in share-based payment transactions. It does not
change the accounting guidance for share-based payment transactions with parties other
than employees provided in Statement 123 as originally issued and EITF Issue No. 96-18,
Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services, nor does it address the
accounting for employee share ownership plans, which are subject to AICPA Statement of
Position 93-6, Employers Accounting for Employee Stock Ownership Plans. SFAS 123 as
amended is effective for interim reporting periods beginning after June 30, 2005. The
Company does not anticipate the revision of
SFAS No. 123 will have a material effect on the financial position, results of
operations or liquidity of the Company. 110




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Notes to Consolidated
Financial Statements  In July 2003, the American Institute of Certified Public Accountants issued Statement of
Position (SOP) 03-1, Accounting and Reporting by Insurance Enterprises for Certain
Nontraditional Long-Duration Contracts and for Separate Accounts. This statement
provides guidance on separate account presentation and valuation, the accounting for
sales inducements and the classification and valuation of long-duration contract
liabilities. The Company adopted this statement on January 1, 2004. The adoption of
SOP 03-1 did not have a material effect on the financial position, results of operations
or liquidity of the Company.(l)
    Cash EquivalentsThe Company considers as cash equivalents all securities whose duration does not exceed
90 days at the date of acquisition.(m)
    DepreciationDepreciation is calculated on a straight-line basis using estimated useful lives ranging
from 3 to 10 years. Building improvements are depreciated over the estimated life of
30 years.(n)
    Use of EstimatesThe 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 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 these estimates.(o)
    ReclassificationsCertain reclassifications have been made to the 2003 and 2002 amounts to conform to the
2004 presentation.  (2)
    Investments  The cost, gross unrealized gains and losses and fair value of investments of fixed
maturities and equity securities available-for-sale, as of December 31, 2004 and 2003,
are as follows: 111




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Notes to Consolidated
Financial Statements   December 31, 2004Gross
    
    
    Grossunrealized
    
    
    unrealized
    
    
    FairCost
    
    
    gains
    
    
    (losses)
    
    
    valueFixed maturities held-to-maturity:US Treasury securities
    
    $
    7,514,224
    
    
    $
    1,312,726
    
    
    $
    
    
    
    $
    8,826,950Fixed maturities available-for-sale:US Treasury securities and
obligations of U.S. government
corporations and agencies
    
    
    16,693,290
    
    
    
    300,262
    
    
    
    (54,666
    )
    
    
    16,938,886Public utilities
    
    
    3,265,725
    
    
    
    45,440
    
    
    
    (10,283
    )
    
    
    3,300,882Debt securities issued by States
of the United States and political
subdivisions of the States
    
    
    31,921,003
    
    
    
    287,562
    
    
    
    (62,684
    )
    
    
    32,145,881Corporate debt securities
    
    
    124,753,714
    
    
    
    903,773
    
    
    
    (400,670
    )
    
    
    125,256,817Securities not due at a single maturity
date
    
    
    264,894,605
    
    
    
    843,885
    
    
    
    (3,328,258
    )
    
    
    262,410,232Total fixed maturities
available-for-sale
    
    $
    441,528,337
    
    
    $
    2,380,922
    
    
    $
    (3,856,561
    )
    
    $
    440,052,698Total equity securities
available-for-sale
    
    $
    723,428
    
    
    $
    343,579
    
    
    $
    (3,090
    )
    
    $
    1,063,917
 December 31, 2003Gross
    
    
    Grossunrealized
    
    
    unrealized
    
    
    FairCost
    
    
    gains
    
    
    (losses)
    
    
    valueFixed maturities held-to-maturity:US Treasury securities
    
    $
    11,699,899
    
    
    $
    1,778,871
    
    
    $
    
    
    
    $
    13,478,770Fixed maturities available-for-sale:US Treasury securities and
obligations of U.S. government
corporations and agencies
    
    
    15,856,886
    
    
    
    1,537,195
    
    
    
    
    
    
    
    17,394,081Public utilities
    
    
    657,335
    
    
    
    9,922
    
    
    
    
    
    
    
    667,257Debt securities issued by States
of the United States and political
subdivisions of the States
    
    
    671,410
    
    
    
    49,203
    
    
    
    
    
    
    
    720,613Corporate debt securities
    
    
    11,320,691
    
    
    
    779,329
    
    
    
    (67,329
    )
    
    
    12,032,691Securities not due at a single maturity
date
    
    
    207,428,536
    
    
    
    1,748,787
    
    
    
    (2,485,999
    )
    
    
    206,691,324Total fixed maturities
available-for-sale
    
    $
    235,934,858
    
    
    $
    4,124,436
    
    
    $
    (2,553,328
    )
    
    $
    237,505,966Total equity securities
available-for-sale
    
    $
    786,026
    
    
    $
    359,575
    
    
    $
    (3,249
    )
    
    $
    1,142,352
  For investments of fixed maturities and equity securities available-for-sale that have
unrealized losses as of December 31, 2004, the cost, gross unrealized losses that have
been in a continuous unrealized loss position for less than 12 months, gross unrealized
losses that have been in a continuous unrealized loss position for 12 months or longer
and fair value are as follows: 112




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Notes to Consolidated
Financial Statements   Unrealized (losses) more than and less than 12 monthsDecember 31, 2004Gross
    
    
    Grossunrealized
    
    
    unrealized(losses) less
    
    
    (losses) morethan 12
    
    
    than 12
    
    
    FairCost
    
    
    months
    
    
    months
    
    
    valueFixed maturities held-to-maturity
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Fixed maturities available-for-sale:US Treasury securities and
obligations of U.S. government
corporations and agencies
    
    
    5,883,965
    
    
    
    (54,665
    )
    
    
    
    
    
    
    5,829,300Public utilities
    
    
    100,000
    
    
    
    
    
    
    
    (2,488
    )
    
    
    97,512Public utilities
    
    
    1,049,345
    
    
    
    (7,794
    )
    
    
    
    
    
    
    1,041,551Debt securities issued by States of
the United States and political
subdivisions of the States
    
    
    14,098,769
    
    
    
    (62,685
    )
    
    
    
    
    
    
    14,036,084Corporate debt securities
    
    
    230,303
    
    
    
    
    
    
    
    (2,533
    )
    
    
    227,770Corporate debt securities
    
    
    68,697,712
    
    
    
    (398,139
    )
    
    
    
    
    
    
    68,299,573Securities not due at a single
maturity date
    
    
    81,402,300
    
    
    
    
    
    
    
    (2,012,884
    )
    
    
    79,389,416Securities not due at a single
maturity date
    
    
    82,597,505
    
    
    
    (1,315,373
    )
    
    
    
    
    
    
    81,282,132Total fixed maturities
available-for-sale
    
    $
    254,059,899
    
    
    $
    (1,838,656
    )
    
    $
    (2,017,905
    )
    
    $
    250,203,338Equity securities
available-for-sale
    
    $
    29,408
    
    
    $
    
    
    
    $
    (3,090
    )
    
    $
    26,318
  The fixed maturities available-for-sale in a gross unrealized loss situation for more than 12
months are primarily investments in callable instruments issued by U.S. government agencies.
It is remote that unrealized losses on these instruments will result in realized losses,
because the Company has the intent and believes it has the ability to hold these securities to
the call date or maturity date. These securities are being closely monitored by the Company
to determine if the unrealized loss as of December 31, 2004 indicates that there is a loss
which is other-than-temporary. As of December 31, 2004, the Company has determined that there
is no need to establish a new cost basis for these securities.The majority of the fixed maturities available-for-sale that have been in a continuous loss
situation for less than 12 months are from investments owned by SPLIC. The losses are due to
the coupon interest rate being less than the prevailing market interest rates at December 31,
2004. The Company has determined that there is no need to establish a new cost basis for
these securities since a loss has not occurred. 113




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Notes to Consolidated
Financial Statements  Gross unrealized losses on equity securities available-for-sale were $3,090 as of December 31,
2004. The entire $3,090 at December 31, 2004 have
been in a continuous loss situation for more than 12 months. As of December 31, 2004, the
Company has determined that there is no need to establish a new cost
basis for these securities.The amortized cost and fair value of fixed maturities at December 31, 2004 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. Fixed maturities held-to-maturity Amortizedcost
    
    
    Fair valueDue after ten years
    
    $
    7,514,224
    
    
    $
    8,826,950
 Fixed maturities available-for-sale Amortizedcost
    
    
    Fair valueDue in one year or less
    
    $
    5,308,811
    
    
    $
    5,298,047Due after one year through five years
    
    
    55,929,301
    
    
    
    55,788,865Due after five years through ten years
    
    
    31,258,615
    
    
    
    31,359,167Due after ten years
    
    
    84,137,005
    
    
    
    85,196,387176,633,732
    
    
    
    177,642,466Securities not due at a single
maturity date
    
    
    264,894,605
    
    
    
    262,410,232Totals
    
    $
    441,528,337
    
    
    $
    440,052,698
  The securities not due at a single maturity date are obligations of the U.S. government
corporations and agencies.The Company had no investments in any one entity that exceeded 10% of stockholders equity at
December 31, 2004 other than investments guaranteed by the U.S. government.The Companys investment in mortgage loans is concentrated 68% in Texas, 19% in Colorado and
13% in Louisiana as of December 31, 2004. 114




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Notes to Consolidated
Financial Statements   Major categories of net investment income are summarized as follows: Year ended December 31,2004
    
    
    2003
    
    
    2002Investment income on:Fixed maturities
    
    $
    15,442,537
    
    
    $
    12,713,559
    
    
    $
    12,204,716Equity securities
    
    
    35,770
    
    
    
    34,582
    
    
    
    53,422Mortgage loans on real estate
    
    
    36,510
    
    
    
    50,215
    
    
    
    64,962Policy loans
    
    
    1,392,498
    
    
    
    1,541,237
    
    
    
    1,582,200Long-term investments
    
    
    1,303,747
    
    
    
    916,346
    
    
    
    865,027Other
    
    
    292,680
    
    
    
    122,365
    
    
    
    568,98818,503,742
    
    
    
    15,378,304
    
    
    
    15,339,315Investment expenses
    
    
    (1,499,070
    )
    
    
    (1,056,029
    )
    
    
    (1,087,408
    )Net investment income
    
    $
    17,004,672
    
    
    $
    14,322,275
    
    
    $
    14,251,907
 Proceeds and gross realized gains (losses) from sales and maturities of fixed maturities
available-for-sale, and fixed maturities held to maturity for 2004, 2003 and 2002 are summarized as
follows: Year ended December 31,2004
    
    
    2003
    
    
    2002Proceeds
    
    $
    132,438,693
    
    
    $
    162,273,703
    
    
    $
    94,196,654Gross realized gains
    
    $
    1,714,888
    
    
    $
    1,543,954
    
    
    $
    274,078Gross realized (losses)
    
    $
    (1,350,862
    )
    
    $
    (311,801
    )
    
    $
    (323,367
    )
 Proceeds and gross realized gains (losses) from sales of equity securities available-for-sale for
2004, 2003 and 2002 are summarized as follows: Year ended December 31,2004
    
    
    2003
    
    
    2002Proceeds
    
    $
    62,500
    
    
    $
    838,416
    
    
    $
    652,905Gross realized gains
    
    $
    
    
    
    $
    18,344
    
    
    $
    36,295Gross realized (losses)
    
    $
    (98
    )
    
    $
    (676
    )
    
    $
    (14,272
    )
 Realized gains (losses) are as follows: Year ended December 31,2004
    
    
    2003
    
    
    2002Realized gains (losses):Fixed maturities & held to maturity
    
    $
    364,026
    
    
    $
    1,232,153
    
    
    $
    (49,289
    )Equity securities
    
    
    (98
    )
    
    
    17,668
    
    
    
    22,023Loss from early extinguishment of a
liability
    
    
    
    
    
    
    563,055
    
    
    
    Gain from the sale of property,
plant
and equipment
    
    
    45,064
    
    
    
    70,229
    
    
    
    27,743Loss on sale of other assets
    
    
    (19,964
    )
    
    
    
    
    
    
    Net realized gains
    
    $
    389,028
    
    
    $
    1,883,105
    
    
    $
    477
 As a result of the coinsurance agreement discussed in note 5, a subsidiary sold held to maturity
securities to enable the subsidiary to settle its obligations under the coinsurance agreement. 115




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Notes to Consolidated
Financial Statements  (3)
    Cost of Customer Relationships Acquired and Excess of Cost Over Net Assets AcquiredCost of customer relationships acquired is summarized as follows: Year ended December 31,2004
    
    
    2003
    
    
    2002Balance at beginning of period
    
    $
    16,884,456
    
    
    $
    14,191,172
    
    
    $
    5,150,351Increase (decrease) related to:Acquisitions
    
    
    33,942,464
    
    
    
    8,835,099
    
    
    
    11,568,817Amortization (1)
    
    
    (5,922,339
    )
    
    
    (6,141,815
    )
    
    
    (2,527,996
    )Balance at end of period
    
    $
    44,904,581
    
    
    $
    16,884,456
    
    
    $
    14,191,172
   (1)
    
    See note 5 below regarding the coinsurance agreements entered into effective January 1,
2004. Estimated amortization of cost of customer relationships acquired in each of the next five years is
as follows. Actual future amortization will differ from these estimates due to variances from
estimated future withdrawal assumptions. Year
    
    Amount2005
    
    
    4,656,5932006
    
    
    4,109,8632007
    
    
    4,095,4152008
    
    
    3,462,8572009
    
    
    3,437,265Thereafter
    
    
    25,142,588
  Excess of cost over net assets acquired is summarized as follows: Year ended December 31,AccumulatedGross
    
    
    amortization
    
    
    NetBalance at December 31, 2001
    
    $
    11,835,543
    
    
    $
    (5,068,299
    )
    
    $
    6,767,244Acquisition
    
    
    1,016,161
    
    
    
    
    
    
    
    1,016,161Balance at December 31, 2002
    
    $
    12,851,704
    
    
    $
    (5,068,299
    )
    
    $
    7,783,405Acquisition
    
    
    5,155,457
    
    
    
    
    
    
    
    5,155,457Balance at December 31, 2003
    
    $
    18,007,161
    
    
    $
    (5,068,299
    )
    
    $
    12,938,862Adjustment of purchase
accounting on acquisition
    
    
    (536,872
    )
    
    
    
    
    
    
    (536,872
    )Balance at December 31, 2004
    
    $
    17,470,289
    
    
    $
    (5,068,299
    )
    
    $
    12,401,990
 116




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##### Table of Contents



Notes to Consolidated
Financial Statements  (4)
    Policy LiabilitiesVarious assumptions used to determine the future policy benefit reserves include the
following: a) valuation interest rates from 4 to 9%, b) mortality assumptions are from the
1955 to 1960, 1965 to 1970, and 1975 to 1980 Select and Ultimate mortality tables and c)
withdrawals are based primarily on actual historical termination rates.The following table presents information on changes in the liability for life and accident
and health policy and contract claims for the years ended December 31, 2004, 2003, and 2002. 2004
    
    
    2003
    
    
    2002Policies and contract claims payable at
January 1
    
    $
    5,648,288
    
    
    
    4,794,096
    
    
    
    2,982,469Less: reinsurance recoverable
    
    
    1,143,562
    
    
    
    266,841
    
    
    
    136,898Net balance at January 1
    
    
    4,504,726
    
    
    
    4,527,255
    
    
    
    2,845,571Acquisitions of Combined, Lifeline, First
Alliance, Mid-American and Security
Plan
    
    
    3,714,520
    
    
    
    21,339
    
    
    
    2,301,867Less: reinsurance recoverable
    
    
    
    
    
    
    
    
    
    
    229,938Net acquired balance
    
    
    3,714,520
    
    
    
    21,339
    
    
    
    2,071,929Add: claims incurred, related to:Current year
    
    
    6,415,703
    
    
    
    16,378,033
    
    
    
    16,149,215Prior years
    
    
    (1,832,821
    )
    
    
    (489,130
    )
    
    
    (683,020
    )4,582,882
    
    
    
    15,888,903
    
    
    
    15,466,195Deduct: claims paid, related to:Current year
    
    
    5,184,946
    
    
    
    12,671,422
    
    
    
    11,797,910Prior years
    
    
    2,048,393
    
    
    
    3,261,349
    
    
    
    4,058,5307,233,339
    
    
    
    15,932,771
    
    
    
    15,856,440Net balance December 31
    
    
    5,568,789
    
    
    
    4,504,726
    
    
    
    4,527,255Plus: reinsurance recoverable
    
    
    2,713,719
    
    
    
    1,143,562
    
    
    
    266,841Policy and contracts payable, December 31
    
    $
    8,282,508
    
    
    $
    5,648,288
    
    
    $
    4,794,096
  The development of prior year claim reserves reflects claims settling at amounts less than
actuarial estimates. These settlements, predominantly on accident and health policies, can
vary significantly from the actuarially computed expected experience, particularly on a
closed block of business, where policies may lapse resulting in a lower incurred claim
amount than would otherwise be expected.(5)
    ReinsuranceIn the normal course of business, the Company reinsures portions of certain policies that it
underwrites to limit disproportionate risks. During 2004 and 2003, the Company retained
varying amounts of individual insurance up to a maximum retention of $100,000 on any life.
Our health insurance policies are substantially all reinsured on a 100% coinsurance
basis. The Company remains contingently liable to the extent that the reinsuring companies
cannot meet their obligations under these reinsurance treaties. 117




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Notes to Consolidated
Financial Statements Assumed and ceded reinsurance activity as of December 31, 2004 and 2003 is summarized as
follows: 2004
    
    
    2003Aggregate assumed life insurance in
force
    
    $
    488,312,000
    
    
    $
    485,038,000Aggregate ceded life insurance in force
    
    $
    (265,001,000
    )
    
    $
    (301,366,000
    )Net life insurance in force
    
    $
    4,224,667,000
    
    
    $
    3,104,205,000
 Premiums and claims and surrenders assumed and ceded for the years ended December 31, 2004,
2003 and 2002 2004
    
    
    2003
    
    
    2002Premiums assumed
    
    $
    636,361
    
    
    $
    463,629
    
    
    $
    420,321Premiums ceded
    
    $
    (15,388,824
    )
    
    $
    (1,793,912
    )
    
    $
    (2,212,715
    )Claims and surrenders assumed
    
    $
    626,592
    
    
    $
    457,899
    
    
    $
    409,798Claims and surrenders ceded
    
    $
    (12,217,456
    )
    
    $
    (1,809,188
    )
    
    $
    (1,987,816
    )
 Amounts paid or deemed to have been paid for reinsurance contracts are recorded as
reinsurance receivables. The cost of reinsurance related to long duration contracts is
accounted for over the life of the underlying reinsured policies using assumptions consistent
with those used to account for the underlying policies. On March 9, 2004, the Company entered into coinsurance agreements, effective January 1, 2004,
and ceded approximately $15 million of its annual accident and health premium and
corresponding benefits and claims. In consideration for these cessions, the Company made a
closing settlement payment of $10,439,830 to the reinsurer in June 2004. Due to this
cession, the Company reduced its January 1, 2004 deferred policy acquisition costs, cost of
customer relationships acquired and policy benefit reserve of $2,197,434, $2,886,060 and
$14,960,408, respectively, and recorded an amount payable to the reinsurer of $10,439,830,
resulting in a loss of $562,916. The coinsurance agreement provides that this ceded business
will revert to the reinsurer when a parallel assumption reinsurance agreement is approved by
the various state insurance departments holding jurisdiction. No approvals had been obtained
at December 31, 2004. The Company also participates in future profits on the accident and
health business subject to the coinsurance agreements over a 10-year period.  (6)
    Stockholders Equity and Restrictions The two classes of common stock of the Company are equal in all respects, except (a) each
Class A share receives twice the cash dividends paid on a per share basis to the Class B
common stock; and (b) the Class B common stock elects a simple majority of the Board of
Directors of Citizens and the Class A common stock elects the remaining directors. Generally, the net assets of the insurance subsidiaries available for transfer to the Company
are limited to the greater of the subsidiary net gain from operations during the preceding
year or 10% of the subsidiary net statutory surplus as of the end of the preceding year as
determined in accordance with accounting practices prescribed or permitted by insurance
regulatory authorities. Payments of dividends in excess of such amounts would generally
require approval by the regulatory authorities. Based upon statutory net gain from operations
and surplus of the individual insurance companies as of and for the year ended 118




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Notes to Consolidated
Financial Statements December 31, 2004 approximately $15,405,554 of dividends could be paid to the Company without prior
regulatory approval in 2005. CICA, CUSA, CNLIC, FAIC, MACLIC and SAIC and SPLIC have calculated their risk based capital
(RBC) in accordance with the National Association of Insurance Commissioners Model Rule and
the RBC rules as adopted by their respective state of domicile. The RBC as calculated for
CICA, CUSA, CNLIC, FAIC, MACLIC, SAIC and SPLIC as of December 31, 2004 exceeded levels
requiring company or regulatory action.  (7)
    Revolving Line of Credit and Term Loan On March 22, 2004, the Company entered into a revolving loan agreement with a bank
establishing a commitment for a line of credit of $30,000,000 that matures on March 22, 2005.
The line of credit has a maximum of $5,000,000 for general corporate purposes not related to
acquisition of insurance companies and any borrowings up to the maximum for general corporate
purposes are unsecured. The line of credit bears interest at the lesser of the thirty-day
LIBOR (London InterBank Offered Rate) plus 180 basis points or the highest lawful rate. The
Company paid a loan origination fee ($112,500) equal to 37.5 basis points of the line of
credit. The loan is secured by 100% of the common stock of any company acquired by the
Company or any of its subsidiaries if the line of credit is used for any part of an
acquisition. On October 1, 2004, the Company entered into a Second Amendment to the Loan Agreement that
converted into a term loan a $30 million advance against the line of credit made for the
purpose of acquiring SPLIC. Under the term loan, the Company is required to repay the
principal portion of the loan in ten semi-annual installments of $3,000,000 beginning on May
1, 2005, with the final installment of principal and any accrued and unpaid interest on
November 1, 2009. Interest on the unpaid principal balance of the loan is required to be paid
on the fifth day of each month following the end of the fiscal quarter of the Company. The
interest rate is equal to a 30-day LIBOR plus 1.8% per year. In connection with the
acquisition of SPLIC, the Companys borrowed funds on its term loan were loaned to CICA. After funding the term loan, the Companys line of credit has been drawn down to zero. Under
the Amended Loan Agreement, upon any prepayment or repayment of the term loan described above,
the line of credit will be reinstated to an aggregate amount equal to the difference between
(a) $30 million minus (b) the aggregate outstanding principal amount under the term loan. Because CICA is an insurance company formed under the laws of Colorado, under the subordinated
debenture, any principal and accrued interest is not a legal liability of CICA until repayment
of interest or principal has received the prior written approval of the Commissioner of
Insurance for the State of Colorado. CICA has pledged 100% the stock of SPLIC to the bank as
collateral.  (8)
    Convertible Preferred Stock On July 12, 2004, the Company completed a private placement of $12.5 million of Series A-1
Senior Convertible Preferred Stock to four unaffiliated institutional investors. The
25,000 shares of Series A-1 Convertible Preferred Stock carry a 4% per annum dividend, payable
in cash or shares of the Companys Class A common stock, are convertible at the option of the
investor at any time into Class A common shares at a conversion price of $6.77 per share and
are mandatorily redeemable in five years if not converted prior to
the redemption date. The conversion price has 119




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##### Table of Contents



Notes to Consolidated
Financial Statements been adjusted for the 7%
stock dividend paid on December 31, 2004. The Company may, if certain conditions have been
met, pay dividends and redemptions in shares of Class A common stock at a minimum price of
$4.00. The Company may, at its option, subject to certain conditions, increase the issue to
$25 million. In connection with the sale of the Series A-1 Convertible Preferred Stock, the Company issued
to the investors and finders seven-year warrants to purchase up to 508,028 and 92,369,
respectively, Class A common shares at an exercise price of $7.44 per share. The exercise
price has been adjusted for the 7% stock dividend paid on December 31, 2004. To the extent
the Company increases the issue from $12.5 million, the number of Class A common shares
purchased pursuant to the seven-year warrants would increase proportionately. The Company also issued to the investors unit warrants entitling the investors to purchase
from the Company for a period of approximately 12 months up to $5 million of Series A-2
Convertible Preferred Stock (5,000 shares) and additional seven-year warrants to purchase
approximately 200,000 to 205,000 additional Class A common shares at an exercise price of
$7.44. The exercise price has been adjusted for the 7% stock dividend paid on December 31,
2004. If issued, the Series A-2 Convertible Preferred Stock would be convertible into Class A
common shares at a conversion price calculated as 110% of the average market closing price of
the Class A common stock for the 30 trading days prior to the date of issuance of the Series
A-2 Convertible Preferred Stock, but not less than $6.54 or greater than $10.75 per share.
The conversion price has been adjusted for the 7% stock dividend paid on December 31, 2004.
Otherwise, the Series A-2 Convertible Preferred Stock has substantially identical terms to the
Series A-1 Convertible Preferred Stock. The Company utilized the net proceeds from the sale
of the Series A-1 Convertible Preferred Stock as part of the
purchase price for the acquisition
of SPLIC discussed above. The Company would be required to redeem the Series A-1 Preferred stock no earlier than seven
months after the issuance date if the average market price (for a consecutive 42 day trading
period) is $5.50 per share or less. The Company can choose to redeem for cash or Class A
common stock. If the average price is less than $4.00 per share, the redemption must be in
cash. The holder may receive cash in place of Class A common stock. Redemption rights
terminate if the Class A common stock exceeds 130% ($8.80) of the conversion price of the
Series A-1 Convertible Preferred Stock for any 25 consecutive trading days period. At July 12, 2004, the Company initially recognized deferred issuance costs of $1,210,655,
a discount on the beneficial conversion feature of $3,073,204 and discounts on fair values of
options and warrants of $2,994,150, respectively, as offsets against the $12.5 million
issuance of the Series A-1 Convertible Preferred Stock. The beneficial conversion feature
represents the difference at July 12, 2004 between the $6.77 redemption price per share of the
Series A-1 Convertible Preferred Stock and the effective conversion price, taking into account
embedded warrants and options based upon the number of shares to be converted at inception.
This intrinsic value of the beneficial conversion feature at July 12, 2004 reduced the
carrying value of the Series A-1 Convertible Preferred Stock on the statement of financial
position with an equal amount credited to the Class A common stock. This
discount for the beneficial conversion feature is reduced and amortized to retained earnings
over the five-year redemption period of the Series A-1 Convertible Preferred Stock using the
effective interest method. These deferred issuance and discount costs are being amortized to
retained deficit over the period until redemption using the effective interest 120




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##### Table of Contents



Notes to Consolidated
Financial Statements method. At December 31, 2004, there was $1,097,660 in unaccreted deferred issuance costs and $5,501,069
in unaccreted discount costs. The initial July 12, 2004 recognition of the beneficial conversion feature and discounts on
fair values of options and warrants resulted in $3,073,204 of additional paid-in capital for
the Class A common stock and $2,994,150 of liabilities for options and warrants. Changes in
the fair value of options and warrants are recognized in the statement of operations with a
corresponding change in the liabilities for options and warrants. For the period ended
December 31, 2004, there was a decrease in fair value of options
and warrants of $256,088 and
corresponding decrease in the related liabilities. On September 30, 2004, the Company declared its initial 4% dividend to the Series A-1
Convertible Preferred Stock shareholders. The Company paid the dividend by issuing 19,396
shares of its Class A common stock valued at $115,794. On December 31, 2004, the Company declared the second quarterly dividend, consisting of 20,948
shares of its Class A common Stock valued at $133,439.  (9)
    Mergers and Acquisitions On March 19, 2002, the Company acquired Combined in exchange for 752,701 shares of its Class A
common stock. On March 19, 2002, the Company also acquired Lifeline in exchange for 304,928
shares of its Class A common stock. On February 18, 2003, the Company acquired First Alliance in exchange for 2,560,994 shares of
its Class A common stock. On November 18, 2003, the Company acquired Mid-American in exchange for 774,229 shares of its
Class A common stock. On October 1, 2004, CICA acquired 100% of the outstanding common stock of SPLIC. The results
of SPLIC (and its subsidiary, SPFIC) have been included in the consolidated financial
statements since that date. SPLIC is a provider of home service life insurance products,
primarily in Louisiana. The aggregate purchase price was $85 million of cash, plus $1,012,790 of related expenses. To
fund the acquisition, Citizens borrowed $30 million from Regions Bank under a line of credit
it had established earlier in 2004, and loaned the money to CICA in exchange for a surplus
debenture, plus made an $11 million capital contribution. The following table summarizes the estimated fair value of the assets acquired and liabilities
assumed at the date of acquisition. 121




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Notes to Consolidated
Financial Statements At October 1, 2004Investments
    
    $
    251,720,773Cash and cash equivalents
    
    
    3,780,567Accrued investment income
    
    
    2,642,203Other intangible assets
    
    
    70,000Cost of customer relationships acquired
    
    
    33,942,464Federal income tax recoverable
    
    
    22,095Property, plant an equipment
    
    
    612,922Other assets
    
    
    363,428Total assets acquired
    
    
    293,154,452Future policy benefit reserves
    
    
    192,444,931Policy claims payable
    
    
    3,714,520Other policyholders funds
    
    
    1,474,993Commissions payable
    
    
    509,801Deferred federal income taxes
    
    
    4,851,162Other liabilities
    
    
    4,146,255Total liabilities assumed
    
    
    207,141,662Net assets acquired
    
    $
    86,012,790
 Of the acquired intangible assets, $70,000 was assigned to state insurance department licenses
that are not subject to amortization and $33,942,464 was assigned to cost of customer
relationships acquired that will be amortized over the anticipated premium paying period of
the related policies. No goodwill was recognized. The unaudited
pro forma results from operations for the years ending
December 31, 2004, 2003, and 2002, as if SPLIC
had been owned since January 1 of each year, are shown below. Year Ended December 31, 2004As Reported
    
    
    Pro FormaRevenue
    
    $
    102,825,678
    
    
    $
    144,254,188Net Income
    
    
    7,731,739
    
    
    
    12,552,165Net Income Per Share
    
    
    .18
    
    
    
    .30
 Year Ended December 31, 2003As Reported
    
    
    Pro FormaRevenue
    
    $
    95,102,763
    
    
    $
    149,692,761Net Income
    
    
    3,126,265
    
    
    
    9,023,982Net Income Per Share
    
    
    .08
    
    
    
    .24
 Year Ended December 31, 2002As Reported
    
    
    Pro FormaRevenue
    
    $
    83,003,898
    
    
    $
    139,850,440Net Income
    
    
    4,254,217
    
    
    
    11,221,068Net Income Per Share
    
    
    .12
    
    
    
    .33
  (10)
    Contingencies On April 24, 2003, the Court of Appeals for the Third District of Texas affirmed in part and
modified in part, a July 31, 2002, class action certification granted by a Travis County, 122




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Notes to Consolidated
Financial Statements Texas district court judge to the Plaintiffs in a lawsuit filed in 1999 styled Delia
Bolanos Andrade, et al v. Citizens Insurance Company of America, Citizens, Inc., Negocios
Savoy, S.A., Harold E. Riley, and Mark A. Oliver, Case Number 99-09099. The suit
alleges that life insurance policies offered or sold to certain non-U.S. residents by CICA are
actually securities that were offered or sold in Texas by unregistered dealers in violation
of the registration provisions of the Texas securities laws. The suit seeks class action
status naming as a class all non-U.S. residents who purchased insurance policies or made
premium payments since August 1996 and assigned policy dividends to an overseas trust for the
purchase of the Companys Class A common stock. The remedy sought is rescission of the
insurance premium payments. The Supreme Court of Texas granted the Companys Petition for
Review and heard oral arguments on the case on October 21, 2004. The Company believes the
Plaintiffs claim under the Texas Securities Act is not valid and the class defined is not
appropriate for class certification and does not meet the legal requirements for class action
treatment under Texas law. Recent decisions from the Texas Supreme Court indicate a more defense-oriented approach to
class certification cases, especially in class action cases encompassing claimants from more
than one state or jurisdiction. Although a decision is not expected until sometime in 2005,
the Company expects the Supreme Court of Texas will ultimately rule in the Companys favor,
decertify the class and remand the matter to district court for further action. During the
time of the Companys appeal to the Texas Supreme Court, there are no further district court
proceedings in the case. The Company is unable to determine the potential magnitude of the claims in the event of a
final class certification and the Plaintiffs prevailing on the substantive action, although
the Company would expect a significant adverse financial impact relating to any final class
action judgment. The Company is a party to various legal proceedings incidental to its business. The Company
has been named as a defendant in various legal actions seeking payments for claims denied by
the Company and other monetary damages. In the opinion of management, the ultimate
liability, if any, resulting from any contingent liabilities that might arise from litigation
are not considered material in relation to the financial position or results of operations of
the Company. Reserves for claims payable are based on the expected claim amount to be paid
after a case-by-case review of the facts and circumstances relating to each claim. A
contingency exists with regard to these reserves until the claims are adjudicated and paid.  (11)
    Segment Information Historically, the Company has had three reportable segments: International Life Business,
Domestic Health Business and Domestic Life Business. During 2004, following the acquisition
of SPLIC and SPFIC, a new segment, Home Service Business, was established. During 2003, the
Company changed its reportable segments by further segmenting the Domestic Business into its
Health and Life components to reflect the growth, through acquisition, of its health insurance
segment. The segment information from prior periods
has been restated. In 2002, the Company had two reportable segments: International Business
and Domestic Business. International Life Business, consisting of ordinary whole-life business, is sold primarily
throughout Central and South America. The Company has no assets, offices or employees outside
of the United States of America (U.S.) and requires that all transactions be in U.S. 123




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##### Table of Contents



Notes to Consolidated
Financial Statements dollars paid in the U.S. Domestic Health Business, consisting of accident and health specified
disease, hospital indemnity and accidental death policies, is sold throughout the southern
U.S. Domestic Life Business, consisting of traditional life, burial insurance and pre-need
policies, is sold throughout the southern U.S. The accounting policies of the segments are in
accordance with U.S. GAAP and are the same as those described in the summary of significant
accounting policies. The Company evaluates performance based on U.S. GAAP net income before
federal income taxes for its three reportable segments. Geographic Areas- The following summary represents financial data of the Companys continuing
operations based on their location. 2004
    
    
    2003
    
    
    2002RevenuesU.S.
    
    $
    29,939,769
    
    
    $
    31,756,796
    
    
    $
    23,893,723Non-U.S.
    
    
    72,885,909
    
    
    
    63,345,967
    
    
    
    59,110,175Total Revenues
    
    $
    102,825,678
    
    
    $
    95,102,763
    
    
    $
    83,003,898
 The following summary, representing revenues and pre-tax income from continuing operations and identifiable assets for the Companys
reportable segments as of and for the years ended December 31, 2004, 2003 and 2002, is as follows: Years Ended December 31
    
    2004
    
    
    2003
    
    
    2002RevenueDomestic Life
    
    $
    16,806,481
    
    
    $
    18,020,466
    
    
    $
    7,497,634Domestic Health
    
    
    787,547
    
    
    
    13,736,330
    
    
    
    16,396,089Home Service Business
    
    
    12,345,741
    
    
    
    
    
    
    
    International Life
    
    
    72,885,909
    
    
    
    63,345,967
    
    
    
    59,110,175Total consolidated revenue
    
    $
    102,825,678
    
    
    $
    95,102,763
    
    
    $
    83,003,898
 2004
    
    
    2003
    
    
    2002Premiums and
Annuity and Universal Life ConsiderationDomestic Life
    
    $
    13,579,045
    
    
    $
    11,270,023
    
    
    $
    6,161,400Domestic Health
    
    
    787,547
    
    
    
    14,784,958
    
    
    
    13,473,966Home Service Business
    
    
    9,587,052
    
    
    
    
    
    
    
    International Life
    
    
    59,213,856
    
    
    
    51,972,432
    
    
    
    48,575,515Total consolidated premium income
    
    $
    83,167,500
    
    
    $
    78,027,413
    
    
    $
    68,210,881Net Investment IncomeDomestic Life
    
    $
    2,715,166
    
    
    $
    4,594,403
    
    
    $
    3,769,232Domestic Health
    
    
    
    
    
    
    188,103
    
    
    
    333,360Home Service Business
    
    
    2,875,368
    
    
    
    
    
    
    
    International Life
    
    
    11,414,138
    
    
    
    9,539,769
    
    
    
    10,149,315Total consolidated net investment
income
    
    $
    17,004,672
    
    
    $
    14,322,275
    
    
    $
    14,251,907Amortization expense:Domestic Life
    
    $
    4,253,083
    
    
    $
    4,216,119
    
    
    $
    1,253,718
 124




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##### Table of Contents



Notes to Consolidated
Financial Statements 2004
    
    
    2003
    
    
    2002Domestic Health
    
    
    
    
    
    
    5,665,479
    
    
    
    2,422,896Home Service Business
    
    
    848,572
    
    
    
    
    
    
    
    International Life
    
    
    7,473,167
    
    
    
    9,035,478
    
    
    
    8,890,785Total consolidated amortization
expense
    
    $
    12,574,822
    
    
    $
    18,917,076
    
    
    $
    12,567,399Realized gains (losses)Domestic Life
    
    $
    151,169
    
    
    $
    628,808
    
    
    $
    137Domestic Health
    
    
    
    
    
    
    
    
    
    
    Home Service Business
    
    
    (397,633
    )
    
    
    
    
    
    
    International Life
    
    
    635,492
    
    
    
    1,254,297
    
    
    
    340Total consolidated realized
gains (losses)
    
    $
    389,028
    
    
    $
    1,883,105
    
    
    $
    477Income (loss) before federal
income tax:Domestic Life
    
    $
    (2,946,087
    )
    
    $
    (302,259
    )
    
    $
    2,678,127Domestic Health
    
    
    (317,706
    )
    
    
    (1,369,040
    )
    
    
    (538,643
    )Home Service Business
    
    
    2,510,941
    
    
    
    
    
    
    
    International Life
    
    
    8,840,612
    
    
    
    4,959,621
    
    
    
    3,399,542Total consolidated income
before Federal income taxes
    
    $
    8,087,760
    
    
    $
    3,288,322
    
    
    $
    5,539,026
 2004
    
    
    2003Assets as of December 31:Domestic Life
    
    $
    123,160,286
    
    
    $
    139,642,798Domestic Health
    
    
    14,295,390
    
    
    
    15,827,325Home Service Business
    
    
    298,396,206
    
    
    
    International Life
    
    
    225,359,680
    
    
    
    234,623,174Total
    
    $
    661,211,562
    
    
    $
    390,093,297
 Major categories of premiums are summarized as follows: Year ended December 31,2004
    
    
    2003
    
    
    2002Premiums and annuity and
universal life considerations:Ordinary life
    
    $
    77,110,880
    
    
    $
    60,395,058
    
    
    $
    54,033,409Annuity and universal life
    
    
    3,519,523
    
    
    
    2,383,768
    
    
    
    283,185Group life
    
    
    636,361
    
    
    
    463,629
    
    
    
    420,321Accident and health
    
    
    787,547
    
    
    
    14,784,958
    
    
    
    13,473,966Casualty
    
    
    1,113,189
    
    
    
    
    
    
    
    Total premiums and annuity and
universal life
considerations
    
    $
    83,167,500
    
    
    $
    78,027,413
    
    
    $
    68,210,881
 The following table sets forth the Companys total yearly percentage of premiums income by
geographic area for the years indicated: 125




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Notes to Consolidated
Financial Statements Area
    
    2004
    
    
    2003
    
    
    2002Colombia
    
    
    22.0
    %
    
    
    20.4
    %
    
    
    21.2
    %Argentina
    
    
    10.3
    
    
    
    11.8
    
    
    
    16.3Venezuela
    
    
    7.8
    
    
    
    6.9
    
    
    
    7.4Uruguay
    
    
    4.2
    
    
    
    5.2
    
    
    
    6.8Other Foreign
    
    
    26.8
    
    
    
    22.3
    
    
    
    19.6Texas
    
    
    3.6
    
    
    
    13.3
    
    
    
    14.0Kentucky
    
    
    4.8
    
    
    
    7.1
    
    
    
    .1Oklahoma
    
    
    .7
    
    
    
    5.9
    
    
    
    6.3Mississippi
    
    
    .4
    
    
    
    2.5
    
    
    
    3.0Other States
    
    
    19.4
    
    
    
    4.6
    
    
    
    5.3Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
  (12)
    Income Taxes A reconciliation of Federal income tax expense computed by applying the Federal income tax
rate of 34% to income before Federal income tax expense is as follows: 2004
    
    
    2003
    
    
    2002Expected tax expense
    
    $
    2,749,834
    
    
    $
    1,118,030
    
    
    $
    1,883,269Change in valuation
allowance
    
    
    (1,318,931
    )
    
    
    
    
    
    
    Small life insurance company
deduction
    
    
    (103,167
    )
    
    
    (320,324
    )
    
    
    (565,769
    )Adjustment of prior year
taxes
    
    
    (590,489
    )
    
    
    (658,980
    )
    
    
    (29,963
    )Basis difference in
investments
    
    
    (314,234
    )
    
    
    
    
    
    
    Other
    
    
    (66,992
    )
    
    
    23,331
    
    
    
    (2,728
    )Federal income tax expense
    
    $
    356,021
    
    
    $
    162,057
    
    
    $
    1,284,809
 Income tax expense benefit for the years ended December 31, 2004, 2003 and 2002 consists of: 2004
    
    
    2003
    
    
    2002Current
    
    $
    1,473,469
    
    
    $
    249,869
    
    
    $
    492,593Deferred
    
    
    (1,117,448
    )
    
    
    (87,812
    )
    
    
    792,216$
    356,021
    
    
    $
    162,057
    
    
    $
    1,284,809
 The tax effects of temporary differences that give rise to significant portions of the
deferred tax assets and deferred tax liabilities at December 31, 2004 and 2003 are presented
below. 2004
    
    
    2003Deferred tax assets:Future policy benefit reserves
    
    $
    20,309,812
    
    

    $
    17,612,495Net operating loss carryforwards
    
    
    4,162,646
    
    
    
    4,330,141Due and accrued dividends and expenses
    
    
    1,356,726
    
    
    
    559,180Investments available-for-sale
    
    
    385,951
    
    
    
    Other
    
    
    449,528
    
    
    
    264,496
 126




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##### Table of Contents



Notes to Consolidated
Financial Statements 2004
    
    
    2003Total gross deferred tax assets
    
    
    26,664,663
    
    
    
    22,766,312Valuation allowance
    
    
    
    
    
    
    (1,318,931
    )Total gross deferred tax assets net of
valuation allowance
    
    
    26,664,663
    
    
    
    21,447,381Deferred tax liabilities:Deferred policy acquisition costs, cost of
customer relationships acquired and intangible
assets
    
    
    24,506,530
    
    
    
    18,550,176Investments amortization
    
    
    2,860,059
    
    
    
    Investments
available-for-sale
    
    
    
    
    
    
    655,329Other
    
    
    103,461
    
    
    
    354,828Total gross deferred tax liabilities
    
    
    27,470,050
    
    
    
    19,560,033Net deferred
tax (liability) asset
    
    $
    (805,387
    )
    
    $
    1,887,048
 In addition, the acquisitions of SPLIC, FAIC and Mid-American resulted in the recognition of
deferred tax liabilities of $4,851,162, $376,485 and $93,223 in accordance with SFAS No. 141,
Business Combinations. A summary of the changes in the components of deferred federal
income taxes for 2004 and 2003 is as follows: 2004
    
    
    2003Deferred tax assets (liabilities):Balance January 1
    
    $
    1,887,048
    
    
    $
    1,078,985Deferred tax benefit (expense)
    
    
    1,117,448
    
    
    
    87,812Acquisition of Security Plan
    
    
    (4,851,162
    )
    
    
    Acquisition of First Alliance
    
    
    
    
    
    
    (376,484
    )Acquisition of Mid-American
    
    
    
    
    
    
    (93,223
    )Investments available-for-sale
    
    
    1,041,279
    
    
    
    1,189,958Balance December 31
    
    $
    (805,387
    )
    
    $
    1,887,048
 The Company and its subsidiaries had net operating losses at December 31, 2004 available to
offset future taxable income of approximately $12,285,000 for Federal income tax substantially
all of which expire through 2024. A portion of the net operating loss carryforward is subject
to limitations under Section 382 of the Internal Revenue Code. As a result of the Companys
income, projected future income, tax planning strategies, and the nature of the items from which its deferred tax assets are derived, the Company
determined that it is more likely than not that its deferred tax assets, net of the
established valuation allowance, would be realized at December 31,
2003. At December 31, 2004, the Company, based on its estimates of
projected future income, determined that no valuation allowance was
appropriate and released the value previously established. At December 31, 2004, the Company had accumulated approximately $3,291,000 in its
policyholders surplus account. This is a special memorandum tax account into which certain
amounts not previously taxed, under prior tax laws, were accumulated. No new additions will
be made to this account. Federal income taxes will become payable thereon at the then current
tax rate (a) when and if distributions to the shareholder, other than stock dividends and
other limited exceptions, are made in excess of the accumulated previously taxed income; or
(b) when a company ceases to be a life insurance company as defined by
the Internal Revenue Code and such termination is not due to another life insurance company
acquiring its assets in a nontaxable transaction. The Company does not anticipate any
transactions that would cause any part of this amount to become taxable. However, should the
balance at December 31, 2004 become taxable, the tax computed at present rates would be
approximately $1,119,000.  (13)
    Fair Value of Financial Instruments 127




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Notes to Consolidated
Financial Statements   Estimates of fair values are made at a specific point in time, based on relevant market prices
and information about the financial instrument. 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 at each year-end were as follows: 2004
    
    
    2003Carrying
    
    
    Fair
    
    
    Carrying
    
    
    Fairamount
    
    
    value
    
    
    amount
    
    
    valueFinancial assets:Fixed maturities
    
    $
    447,566,922
    
    
    $
    448,879,648
    
    
    $
    249,205,865
    
    
    $
    250,984,736Equity securities
    
    
    1,063,917
    
    
    
    1,063,917
    
    
    
    1,142,352
    
    
    
    1,142,352Cash and cash
equivalents
    
    
    31,720,787
    
    
    
    31,720,787
    
    
    
    15,016,254
    
    
    
    15,016,254Mortgage Loans
    
    
    349,611
    
    
    
    471,091
    
    
    
    547,469
    
    
    
    698,063Financial liabilities:Annuities
    
    
    16,913,432
    
    
    
    16,913,432
    
    
    
    15,309,266
    
    
    
    15,309,226
 Fair values for fixed income securities and equity securities are based on quoted market
prices. In cases where quoted market prices are not available, fair values are based on
estimates using present value or other assumptions, including the discount rate and estimates
of future cash flows. Mortgage loans are secured principally by residential properties. Weighted average interest
rates for these loans as of December 31, 2004 and 2003, were approximately 8.9% and 8.3%,
respectively, with maturities ranging from one to fifteen years. Management estimated the
fair value using an interest rate of 6.25% at December 31, 2004 and
2003. The carrying value and fair values for the Companys liabilities under annuity contract
policies are the same as the interest rates credited to these products and are periodically
adjusted by the Company to reflect market conditions. The fair value of liabilities under all
insurance contracts are taken into consideration in the overall management of interest rate
risk, which minimizes exposure to changing interest rates through the matching of investment
maturities with amounts due under insurance contracts. Policy loans have a weighted average interest rate of 7.4% as of both December 31, 2004 and
2003, 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
the Company has in force and cannot be valued separately. For cash and
cash equivalents, accrued investment income, amounts recoverable from reinsurers, 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.  (14)
    Other Comprehensive Income (Loss) 128




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##### Table of Contents



Notes to Consolidated
Financial Statements   The changes in the components of other comprehensive income (loss) are reported net of income
taxes of 34% for the periods indicated as follows: Year ended December 31, 2004Pre-tax
    
    
    Tax
    
    
    NetAmount
    
    
    Effect
    
    
    AmountUnrealized loss on securities:Unrealized holding loss
arising during the period
    
    $
    (2,698,657
    )
    
    $
    917,543
    
    
    $
    (1,781,114
    )Add: reclassification
adjustment for gains included
in net income
    
    
    (363,928
    )
    
    
    123,736
    
    
    
    (240,192
    )Other comprehensive income
(loss)
    
    $
    (3,062,585
    )
    
    $
    1,041,279
    
    
    $
    (2,021,306
    )
 Year ended December 31, 2003Pre-tax
    
    
    Tax
    
    
    NetAmount
    
    
    Effect
    
    
    AmountUnrealized loss on securities:Unrealized holding loss
arising during the period
    
    $
    (2,250,059
    )
    
    $
    765,021
    
    
    $
    (1,485,038
    )Add: reclassification
adjustment for gains included
in net income
    
    
    (1,249,821
    )
    
    
    424,941
    
    
    
    (824,880
    )Other comprehensive income
(loss)
    
    $
    (3,499,880
    )
    
    $
    1,189,962
    
    
    $
    (2,309,918
    )
 Year ended December 31, 2002Pre-tax
    
    
    Tax
    
    
    NetAmount
    
    
    Effect
    
    
    AmountUnrealized gain on securities:Unrealized holding gain
arising during the period
    
    $
    4,297,747
    
    
    $
    (1,461,237
    )
    
    $
    2,836,510Less: reclassification
adjustment for losses
included in net income
    
    
    27,266
    
    
    
    (9,270
    )
    
    
    17,996Other comprehensive income
    
    $
    4,325,013
    
    
    $
    (1,470,507
    )
    
    $
    2,854,506
 129




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##### Table of Contents



Notes to Consolidated
Financial Statements  (15)
    Quarterly Financial Information (Unaudited) The following table contains selected unaudited consolidated financial data for each calendar
quarter. 2004Fourth
    
    
    Third
    
    
    Second
    
    
    FirstQuarter
    
    
    Quarter
    
    
    Quarter
    
    
    QuarterRevenues
    
    $
    37,301,076
    
    
    $
    23,533,953
    
    
    $
    21,885,686
    
    
    $
    20,104,963Expenses
    
    
    33,370,899
    
    
    
    21,285,627
    
    
    
    20,453,023
    
    
    
    19,628,369Federal income tax
expense (benefit)
    
    
    (1,051,886
    )
    
    
    755,341
    
    
    
    547,715
    
    
    
    104,851Net income
    
    
    4,982,063
    
    
    
    1,492,985
    
    
    
    884,948
    
    
    
    371,743Basic and diluted
earnings per share
    
    
    .12
    
    
    
    .03
    
    
    
    .02
    
    
    
    .01
 2003Fourth
    
    
    Third
    
    
    Second
    
    
    FirstQuarter
    
    
    Quarter
    
    
    Quarter
    
    
    QuarterRevenues
    
    $
    26,866,996
    
    
    $
    25,014,247
    
    
    $
    23,516,018
    
    
    $
    19,705,502Expenses
    
    
    24,892,692
    
    
    
    23,166,905
    
    
    
    23,619,892
    
    
    
    20,134,952Federal income tax
expense
    
    
    (210,844
    )
    
    
    532,898
    
    
    
    (69,554
    )
    
    
    (90,443
    )Net income
    
    
    2,185,148
    
    
    
    1,314,444
    
    
    
    (34,320
    )
    
    
    (339,007
    )Basic and diluted
earnings per share
    
    
    .06
    
    
    
    .04
    
    
    
    (.00
    )
    
    
    (.01
    )
 130




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##### Table of Contents



Schedule II CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Condensed Financial Information of Registrant CITIZENS, INC. (Parent Company) Statements of Financial Position December 31, 2004 and 2003 2004
    
    
    2003AssetsInvestment in subsidiaries (1)
    
    $
    138,199,548
    
    
    $
    121,672,194Fixed maturities available-for-sale, at fair value
    
    
    2,888,260
    
    
    
    3,186,281Accrued investment income
    
    
    51,975
    
    
    
    59,870Real estate
    
    
    910,107
    
    
    
    918,336Cash
    
    
    402,070
    
    
    
    117,647Other assets
    
    
    2,767,430
    
    
    
    2,032,817Note Receivable (1)
    
    
    30,000,000
    
    
    
    $
    175,219,390
    
    
    $
    127,987,145Liabilities and Stockholders EquityLiabilities -Accrued expense and other
    
    $
    1,448,978
    
    
    $
    960,423Note Payable
    
    
    30,000,000
    
    
    
    Liabilities for options and warrants
    
    
    2,738,062
    
    
    
    Total Liabilities
    
    
    34,187,040
    
    
    
    960,423Cumulative convertible preferred stock
    
    
    5,901,271
    
    
    
    Stockholders equity:Common stock:Class A
    
    
    198,266,955
    
    
    
    178,065,965Class B
    
    
    2,827,191
    
    
    
    2,437,052Retained deficit
    
    
    (55,321,287
    )
    
    
    (46,077,094
    )Accumulated other comprehensive income:Unrealized investment gain (losses) of
securities held by subsidiaries, net of
tax
    
    
    (749,199
    )
    
    
    1,272,107Treasury stock
    
    
    (9,892,581
    )
    
    
    (8,671,308
    )$
    135,131,079
    
    
    $
    127,026,722$
    175,219,390
    
    
    $
    127,987,145
   (1)
    
    Eliminates in consolidation. See accompanying report of
independent registered public accounting firm. 131




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##### Table of Contents



Schedule II, Continued CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Condensed Financial Information of Registrant CITIZENS, INC. (Parent Company) Statements of Operations Years ended December 31, 2004 and 2003 and 2002 2004
    
    
    2003
    
    
    2002Revenues:Management service fees (1)
    
    $
    17,931,352
    
    
    $
    19,570,459
    
    
    $
    16,139,592Investment income
    
    
    167,996
    
    
    
    134,546
    
    
    
    154,081Other
    
    
    2,355
    
    
    
    12,472
    
    
    
    5,341Realized gain
    
    
    (793
    )
    
    
    4,450
    
    
    
    23,97118,100,910
    
    
    
    19,721,927
    
    
    
    16,322,985Expenses:General
    
    
    17,326,989
    
    
    

    19,080,752
    
    
    
    15,640,428Taxes
    
    
    888,943
    
    
    
    580,490
    
    
    
    639,88118,215,932
    
    
    
    19,661,242
    
    
    
    16,280,309Income (loss) before equity in
income of unconsolidated
subsidiaries
    
    
    (115,022
    )
    
    
    60,685
    
    
    
    42,676Equity in income of
unconsolidated subsidiaries
    
    
    7,846,761
    
    
    
    3,065,580
    
    
    
    4,211,541Net income
    
    $
    7,731,739
    
    
    $
    3,126,265
    
    
    $
    4,254,217
   (1)
    
    Eliminates in consolidation. See accompanying report of independent registered public accounting firm. 132




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##### Table of Contents



Schedule II, Continued CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Condensed Financial Information of Registrant CITIZENS, INC. (Parent Company) Statements of Cash Flows Years ended December 31, 2004, 2003 and 2002 2004
    
    
    2003
    
    
    2002Cash flows provided by (used in) operating
activities:Net income
    
    $
    7,731,739
    
    
    $
    3,126,265
    
    
    $
    4,254,217Adjustments to reconcile net income to net cash
provided by operating activities:Realized gains on sales
    
    
    793
    
    
    
    (4,450
    )
    
    
    (23,971
    )Equity in net income of
unconsolidated subsidiaries
    
    
    (7,846,761
    )
    
    
    (3,065,580
    )
    
    
    (4,211,541
    )Accrued expenses and other liabilities
    
    
    488,555
    
    
    
    13,973
    
    
    
    113,537Depreciation
    
    
    73,708Change in accrued investment income
    
    
    7,895
    
    
    
    (35,952
    )
    
    
    6,359Other
    
    
    (310,961
    )
    
    
    (425,025
    )
    
    
    35,881Net cash provided by (used in)
operating activities
    
    
    144,968
    
    
    
    (390,769
    )
    
    
    174,482Cash flows from investing activities:Purchase of fixed maturities, available-for-sale
    
    
    (450,000
    )
    
    
    (3,750,000
    )
    
    
    (2,237,762
    )Maturities of fixed maturities,
available-for-sale
    
    
    700,000
    
    
    
    3,110,000
    
    
    
    2,405,000Sale of real estate
    
    
    3,027
    
    
    
    
    
    
    
    Issuance of note receivable
    
    
    (30,000,000
    )
    
    
    
    
    
    
    Purchase of real estate
    
    
    (113,572
    )
    
    
    (143,918
    )
    
    
    Net cash provided by (used in)
investing activities
    
    
    (29,860,545
    )
    
    
    (783,918
    )
    
    
    167,238Cash flows from financing activities:Proceeds from note payable
    
    
    30,000,000
    
    
    
    
    
    
    
    Net cash provided by financing activities
    
    
    30,000,000
    
    
    
    
    
    
    
    Net increase (decrease) in cash
    
    
    284,423
    
    
    
    (1,174,687
    )
    
    
    341,720Cash at beginning of year
    
    
    117,647
    
    
    
    1,292,334
    
    
    
    950,614Cash at end of year
    
    $
    402,070
    
    
    $
    117,647
    
    
    $
    1,292,334
 See accompanying report of independent registered public accounting firm. 133




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##### Table of Contents



Schedule III CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Supplementary Insurance Information As of December 31, 2004 and 2003 December 312004
    
    
    2003Deferred policy acquisition cost:Domestic Life
    
    $
    21,301,388
    
    
    $
    17,471,040Domestic Health
    
    
    
    
    
    
    2,348,881Home Service Business
    
    
    279,077
    
    
    
    International Life
    
    
    34,754,896
    
    
    
    29,910,651Total consolidated deferred policy
acquisition costs:
    
    $
    56,335,361
    
    
    $
    49,730,572Future policy benefits, losses, claims
and loss expenses:Domestic Life
    
    $
    91,914,683
    
    
    $
    80,092,410Domestic Health
    
    
    13,604,150
    
    
    
    15,244,873Home Service Business
    
    
    196,422,122
    
    
    
    International Life
    
    
    149,966,063
    
    
    
    143,875,463Total consolidated future policy
benefits, losses, claims and loss
expenses
    
    $
    451,907,018
    
    
    $
    239,212,746Unearned premiums:Domestic Life
    
    $
    239,181
    
    
    $
    220,267Domestic Health
    
    
    
    
    
    
    24,965Home Service Business
    
    
    1,029,575
    
    
    
    International Life
    
    
    390,242
    
    
    
    370,084Total consolidated unearned premiums
    
    $
    1,658,998
    
    
    $
    615,316Other policy claims and benefits payable:Domestic Life
    
    $
    6,275,090
    
    
    $
    5,816,406Domestic Health
    
    
    
    
    
    
    Home Service Business
    
    
    387,639
    
    
    
    International Life
    
    
    10,238,304
    
    
    
    8,777,658Total consolidated other policy claims
and benefits payable
    
    $
    16,901,033
    
    
    $
    14,594,064
 See accompanying report of independent registered public accounting firm. 134




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##### Table of Contents



Schedule III, continued CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Supplementary Insurance Information, continued Years Ended December 31, 2004, 2003 and 2002 2004
    
    
    2003
    
    
    2002Premium revenue and annuity and universal
life considerationsDomestic Life
    
    $
    13,579,045
    
    
    $
    11,270,015
    
    
    $
    6,161,392Domestic Health
    
    
    787,547
    
    
    
    14,784,958
    
    
    
    13,473,966Home Service Business
    
    
    9,587,052
    
    
    
    
    
    
    
    International Life
    
    
    59,213,856
    
    
    
    51,972,440
    
    
    
    48,575,523Total consolidated premium revenue
    
    $
    83,167,500
    
    
    $
    78,027,413
    
    
    $
    68,210,881Net investment income:Domestic Life
    
    $
    2,715,166
    
    
    $
    4,594,403
    
    
    $
    3,769,232Domestic Health
    
    
    
    
    
    
    188,103
    
    
    
    333,360Home Service Business
    
    
    2,875,368
    
    
    
    
    
    
    
    International Life
    
    
    11,414,138
    
    
    
    9,539,769
    
    
    
    10,149,315Total consolidated net investment income
    
    $
    17,004,672
    
    
    $
    14,322,275
    
    
    $
    14,251,907Benefits, claims, losses and settlement
expenses:Domestic Life
    
    $
    9,755,732
    
    
    $
    8,245,538
    
    
    $
    6,498,295Domestic Health
    
    
    (65,976
    )
    
    
    9,108,577
    
    
    
    8,617,726Home Service Business
    
    
    5,105,472
    
    
    
    
    
    
    
    International Life
    
    
    45,380,518
    
    
    
    34,907,134
    
    
    
    32,800,939Total consolidated benefits, claims,
losses and settlement expenses
    
    $
    60,175,746
    
    
    $
    52,261,249
    
    
    $
    47,916,960Amortization of deferred policy
acquisition costs:Domestic Life
    
    $
    1,302,050
    
    
    $
    1,433,829
    
    
    $
    1,214,406Domestic Health
    
    
    
    
    
    
    1,761,316
    
    
    
    469,254Home Service Business
    
    
    
    
    
    
    
    
    
    
    International Life
    
    
    7,136,397
    
    
    
    8,611,495
    
    
    
    8,355,743Total consolidated amortization of
deferred policy acquisition costs
    
    $
    8,438,447
    
    
    $
    11,806,640
    
    
    $
    10,039,403Other operating expenses:Domestic Life
    
    $
    5,342,037
    
    
    $
    4,063,820
    
    
    $
    1,304,536Domestic Health
    
    
    386,630
    
    
    
    4,072,961
    
    
    
    3,784,273Home Service Business
    
    
    1,948,977
    
    
    
    
    
    
    
    International Life
    
    
    9,713,799
    
    
    
    10,829,339
    
    
    
    9,975,256Total consolidated other operating expenses
    
    $
    17,391,443
    
    
    $
    18,966,120
    
    
    $
    15,064,065
 See accompanying report of independent registered public accounting firm. 135




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##### Table of Contents



Schedule IV CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES Reinsurance Years Ended December 31, 2004, 2003 and 2002 Ceded
    
    
    Assumed
    
    
    
    
    
    
    PercentageGross
    
    
    to other
    
    
    from other
    
    
    Net
    
    
    of amountamount
    
    
    companies
    
    
    companies
    
    
    amount
    
    
    assumed to netYear ended December 31, 2004Life insurance in force
    
    $
    4,001,356,000
    
    
    $
    265,001,000
    
    
    $
    488,312,000
    
    
    $
    4,224,667,000
    
    
    
    11.6
    %Premiums:Life insurance
    
    
    78,111,801
    
    
    
    1,000,921
    
    
    
    636,361
    
    
    
    77,747,241
    
    
    
    .8
    %Accident and
health insurance
    
    
    15,085,957
    
    
    
    14,298,410
    
    
    
    
    
    
    
    787,547
    
    
    
    Casualty
    
    
    1,202,682
    
    
    
    89,493
    
    
    
    
    
    
    
    1,113,189Total premiums
    
    $
    94,400,440
    
    
    $
    15,388,824
    
    
    $
    636,361
    
    
    $
    79,647,977
    
    
    
    .8
    %Year ended December 31, 2003Life insurance in force
    
    $
    2,920,533,000
    
    
    $
    301,366,000
    
    
    $
    485,038,000
    
    
    $
    3,104,205,000
    
    
    
    15.6
    %Premiums:Life insurance
    
    
    61,777,374
    
    
    
    1,382,316
    
    
    
    463,629
    
    
    
    60,858,687
    
    
    
    .8
    %Accident and
health insurance
    
    
    15,196,554
    
    
    
    411,596
    
    
    
    
    
    
    
    14,784,958
    
    
    
    Total premiums
    
    $
    76,973,928
    
    
    $
    1,793,912
    
    
    $
    463,629
    
    
    $
    75,643,645
    
    
    
    .6
    %Year ended December 31, 2002Life insurance in force
    
    $
    2,408,004,000
    
    
    $
    152,103,000
    
    
    $
    318,142,000
    
    
    $
    2,574,043,000
    
    
    
    12.4
    %Premiums:Life insurance
    
    
    55,354,800
    
    
    
    1,321,391
    
    
    
    420,321
    
    
    
    54,453,730
    
    
    
    .8
    %Accident and
health insurance
    
    
    14,365,290
    
    
    
    891,324
    
    
    
    
    
    
    
    13,473,966
    
    
    
    Total premiums
    
    $
    69,720,090
    
    
    $
    2,212,715
    
    
    $
    420,321
    
    
    $
    67,927,696
    
    
    
    .6
    %
 See accompanying report of independent registered public accounting firm. 136




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##### Table of Contents



Signatures
  CITIZENS, INC.Date:
September 14, 2005
    By:

/s/ Mark A. OliverMark A. Oliver, Chief Executive Officer By:

/s/ Larry E. CarsonLarry E. Carson, Chief Financial Officer    /s/ Mark A. Oliver
    
    /s/ Mark A. Oliver, for Harold E. RileyMark A. Oliver, Director
    
    By: Mark A. Oliver, Attorney/s/
Mark A. Oliver, for Richard C. Scott
    
    /s/ Mark A. Oliver, for Timothy T. TimmermanBy: Mark A. Oliver, Attorney
    
    By: Mark A. Oliver, Attorney/s/
Mark A. Oliver, for Rick D. Riley
    
    /s/ Mark A. Oliver, for Steve SheltonBy: Mark A. Oliver, Attorney
    
    By: Mark A. Oliver, Attorney/s/
Mark A. Oliver, for E. Dean Gage
    
    /s/ Mark A. Oliver, for Grant G. TeaffBy: Mark A. Oliver, Attorney
    
    By: Mark A. Oliver, Attorney
 
 137




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##### Table of Contents



EXHIBITS
 Exhibit Number
    
    The following exhibits are filed herewith:2.1
    
    Stock Purchase Agreement between Citizens Insurance Company of American and Mayflower
National Life Insurance Company dated June 17, 2004 (a)3.1
    
    Restated and Amended Articles of Incorporation (b)3.2
    
    Bylaws (c)4.1
    
    Amendment to State Series A-1 and A-2 Senior Convertible Preferred Stock (d)10.1
    
    Self-Administered Automatic Reinsurance Agreement  Citizens Insurance Company of America
and Riunione Adriatica di Sicurta, S.p.A. (e)10.2
    
    Bulk Accidental Death Benefit Reinsurance Agreement between Connecticut General Life
Insurance Company and Citizens Insurance Company of America, as amended (f)10.3
    
    Plan and Agreement of Exchange between Citizens, Inc. and Combined Underwriters Life
Insurance Company (g)10.4
    
    Plan and Agreement of Exchange between Citizens, Inc. and Lifeline Underwriters Life
Insurance Company (h)10.5
    
    Plan and Agreement of Merger by and among Citizens, Inc., Citizens Acquisition, Inc. and
First Alliance Corporation (i)10.6
    
    Plan and Agreement of Merger by and among Citizens, Inc., Citizens Acquisition, Inc. and
Mid-American Alliance Corporation. (j)10.7
    
    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. (k)10.8
    
    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. (l)10.9
    
    Loan Agreement, Security Agreement and Note dated March 22, 2004 between Citizens, Inc.
and Regions Bank (m)10.9(a)
    
    Second Amendment to Loan Agreement between Citizens, Inc. and Regions Bank dated October
1, 2004 (o)10.9(b)
    
    Security Agreement between Citizens Insurance Company of America and Regions Bank dated
October 1, 2004 (o)10.9(c)
    
    Subordinated Debenture dated October 1, 2004, issued by Citizens Insurance Company of
America to Citizens, Inc. (o)10.10(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 (m)10.10(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 (n)




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##### Table of Contents



Exhibit Number
    
    The following exhibits are filed herewith:10.10(c)
    
    Unit Warrant dated July 12, 2004, to Mainfield Enterprises, Inc. (n)10.10(d)
    
    Unit Warrant dated July 12, 2004, to Steelhead Investments Ltd. (n)10.10(e)
    
    Unit Warrant dated July 12, 2004, to Portside Growth and Opportunity Fund (n)10.10(f)
    
    Unit Warrant dated July 12, 2004, to Smithfield Fiduciary LLC (n)10.10(g)
    
    Warrant to Purchase Class A Common Stock to Mainfield Enterprises, Inc. (n)10.10(h)
    
    Warrant to Purchase Class A Common Stock to Steelhead Investments Ltd. (n)10.10(i)
    
    Warrant to Purchase Class A Common Stock to Portside Growth and Opportunity Fund (n)10.10(j)
    
    Warrant to Purchase Class A Common Stock to Smithfield Fiduciary LLC (n)10.10(k)
    
    Subordination Agreement among Regions Bank, the Purchasers and Citizens, Inc. dated July
12, 2004 (n)10.10(l)
    
    Non-Exclusive Finders Agreement dated September 29, 2003, between Citizens, Inc. and the
Shemano Group, Inc. (n)10.10(m)
    
    Self-Administered Automatic Reinsurance Agreement, Addendum No. 1 to the Agreement and
Addendum No. 2 to the Agreement between Citizens Insurance Company of America and
Converium Reinsurance (Germany) Ltd.(p)10.10(n)
    
    Self-Administered Automatic Reinsurance Agreement between Citizens Insurance Company of
America and Scottish Re Worldwide (England).(q)11
    
    Statement re: Computation of per share earnings (see financial statements)21
    
    Subsidiaries of Registrant(r)23
    
    Consent of Independent Registered Public Accounting Firm*31.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act*31.2
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act*32.1
    
    Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act*32.2
    
    Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act*
 
 *
    
    Filed herewith.(a)
    
    Filed on June 21, 2004, with the Registrants Current Report on Form 8-K and incorporated herein by reference.(b)
    
    Filed with the Registrants Annual Report on Form 10-K for the year ended December 31, 2003, and incorporated
herein by reference.(c)
    
    Filed with the Registrants Registration Statement on Form S-4, Registration No. 33-59039, on May 2, 1995,
and incorporated herein by reference.(d)
    
    Filed on July 15, 2004, with the Registrants Current Report on Form 8-K and incorporated herein by reference.(e)
    
    Filed as Exhibit 10.8 with the Registration Statement on Form S-4, SEC File No. 333-16163, filed on or about
November 14, 1996 and incorporated herein by reference.(f)
    
    Filed as Exhibit 10.9 with the Registrants Annual Report on Form 10-K for the year ended December 31, 1996
and incorporated herein by reference.(g)
    
    Filed as Appendix A with the Registrants Registration Statement on Form S-4, Registration No. 333-76926
dated January 18, 2002 and incorporated herein by reference.(h)
    
    Filed as Appendix B with the Registrants Registration Statement on Form S-4, Registration No. 333-76926
dated January 18, 2002, and incorporated herein by reference.(i)
    
    Filed as Appendix A with the Registrants Registration Statement on Form S-4, Registration No. 333-102016
dated December 19, 2002, and incorporated herein by reference.




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(j)
    
    Filed as Appendix A with the Registrants Registration Statement
on Form S-4, Registration No. 333-106128 dated June 13, 2003, and
incorporated herein by reference.(k)
    
    Filed on March 22, 2004 as Exhibit 10.8 with the Registrants
Current Report on Form 8-K and incorporated herein by reference.(l)
    
    Filed on March 22, 2004 as Exhibit 10.9 with the Registrants
Current Report on Form 8-K as incorporated herein by reference.(m)
    
    Filed on March 26, 2004 as Exhibit 10.10 with the Registrants
Current Report on Form 8-K as incorporated herein by reference.(n)
    
    Filed on July 15, 2004 under Exhibit 10.12 with the Registrants
Current Report on Form 8-K as incorporated herein by reference.(o)
    
    Filed on October 1, 2004 as Exhibit 10.11 with the Registrants
Current Report on Form 8-K as incorporated herein by reference.(p)
    
    Filed on Monday 31, 2005, as Exhibit 10.10(m) with the
Registrants Annual Report on Form 10-K for the year ended
December 31, 2004 and incorporated herein by reference.(q)
    
    Filed on March 31, 2005 as Exhibit 10.10(n) with the Registrants
Annual Report on Form 10-K for the year ended December 31, 2004
and incorporated herein by reference.(r)
    
    Filed on March 31, 2005 as Exhibit 21 with the Registrants
Annual Report on Form 10-K for the year ended December 31, 2004
and incorporated herein by reference.