##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON D.C. 20549
 FORM 10-K
 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2005
 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
 o þ
 o þ
 þ o
 þ
 o þ o
 o þ
   
 DOCUMENTS INCORPORATED BY REFERENCE




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##### Table of Contents



TABLE OF CONTENTS
 PagePART IItem 1.
    
    Business
    
    
    3Item 1A.
    
    Risk Factors
    
    
    32Item 1B.
    
    Unresolved Staff Comments
    
    
    52Item 2.
    
    Properties
    
    
    53Item 3.
    
    Legal Proceedings
    
    
    53Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    54PART IIItem 5.
    
    Market for Registrants Common Equity and Related  Stockholder Matters and Issuer Purchases of Securities
    
    
    55Item 6.
    
    Selected Financial Data
    
    
    55Item 7.
    
    Managements Discussion and Analysis of Financial  Condition and Results of Operation
    
    
    56Item 7A.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    72Item 8.
    
    Financial Statements and Supplementary Data
    
    
    74Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    75Item 9A.
    
    Controls and Procedures
    
    
    75Item 9B.
    
    Other information
    
    
    79PART IIIItem 10.
    
    Directors and Executive Officers of the Registrant
    
    
    79Item 11.
    
    Executive Compensation
    
    
    79Item 12.
    
    Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder Matters
    
    
    79Item 13.
    
    Certain Relationships and Related Transactions
    
    
    79Item 14.
    
    Principal Accounting Fees and Services
    
    
    79PART IVItem 15.
    
    Exhibits, Financial Statement Schedules
    
    
    79Consent 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 906First Amended and Restated Loan AgreementSubsidiariesConsent 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
 1




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FORWARD-LOOKING STATEMENTS
 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 our plans and objectives or our management or Board
of Directors including those relating to products or services, (iii) statements of future economic
performance and (iv) statements of assumptions underlying such statements. Words such as
believes, anticipates, expects, intends, targeted, may, will and similar expressions
are intended to identify forward-looking statements but are not the exclusive means of identifying
such statements.
 Forward-looking statements involve risks and uncertainties, which may cause actual results to
differ materially from those in such statements. Factors that could cause actual results to differ
from those discussed in the forward-looking statements include, but are not limited to: (i) the
strength of foreign and U.S. economies in general and the strength of the local economies where our
policyholders reside; (ii) the effects of and changes in trade, monetary and fiscal policies and
laws; (iii) inflation, interest rates, market and monetary fluctuations and volatility; (iv) the
timely development of and acceptance of new products and services and perceived overall value of
these products and services by existing and potential customers; (v) changes in consumer spending,
borrowing and saving habits; (vi) a concentration of business from persons residing in Latin
America and the Pacific Rim; (vii) uncertainties in assimilating acquisitions; (viii) the
persistency of existing and future insurance policies sold by the Company and its subsidiaries;
(ix) the dependence of the Company on its Chairman of the Board; (x) the ability to control
expenses; (xi) the effect of changes in laws and regulations (including laws and regulations
concerning insurance) with which the Company and its subsidiaries must comply, (xii) the effect of
changes in accounting policies and practices, as may be adopted by the regulatory agencies as well
as the Financial Accounting Standards Board, (xiii) changes in the Companys organization and
compensation plans; (xiv) the costs and effects of litigation and of unexpected or adverse
outcomes in such litigation; and (xv) the success of the Company at managing the risks involved in
the foregoing.
 Such forward-looking statements speak only as of the date on which such statements are made, and
the Company undertakes no obligation to update any forward-looking statement to reflect events or
circumstances after the date on which such statement is made to reflect the occurrence of
unanticipated events.
 We make
available, free of charge, through our Internet website
( http://www.citizensinc.com ), our
Annual Report on Form 10-K, Quarterly Reports on
Form 10-Q, Current Reports on Form 8-K, Section 16 reports filed by officers and directors, news
releases, and, if applicable, amendments to those reports filed or furnished pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably
practicable after we electronically file such reports with, or furnish such reports to, the
Securities and Exchange Commission. We are not including any of the information contained on our
website as part of, or incorporating it by reference into, this Annual Report on Form 10-K.
 2




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PART I
 
 ITEM 1. Business
 Overview
  
    
    the issuance of ordinary life insurance in U.S. dollar denominated amounts to
significant net worth foreign nationals through outside marketing consultants,
principally in Latin America and the Pacific Rim; and
    
    offering final expense ordinary life insurance through the home service
distribution channel.
   
    
    building assets through the issuance of cash accumulation and final expense
ordinary life insurance products;
    
    strategic acquisitions of domestic life insurance companies; and
    
    expanding our distribution channels of ordinary life insurance.
  3




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For the Year Ended December 31,2005
    
    2004(In thousands)SegmentOperating
    
    
    
    
    
    Segment
    
    
    
    
    
    incomeBusiness Segment
    
    
    
    
    
    income
    
    
    
    
    
    (loss)and Principal
    
    
    
    
    
    before
    
    
    
    
    
    beforeDistribution
    
    Total
    
    income
    
    Total
    
    incomeChannel
    
    Revenue
    
    tax
    
    Revenue
    
    taxInternational Life
- Approximately
2,150 marketing
consultants in 35
countries
    
    $
    79,675
    
    
    $
    5,762
    
    
    $
    72,886
    
    
    $
    8,841Home Service
Business (1) -
Approximately 350
employee agents
    
    
    49,692
    
    
    
    5,902
    
    
    
    12,346
    
    
    
    2,511Domestic Life -
Approximately 850
independent agents
    
    
    14,049
    
    
    
    34
    
    
    
    16,806
    
    
    
    (2,946
    )
 
 (1)
    
    We initiated this segment on October 1, 2004, upon our acquisition of Security Plan.
Revenues and segment income before tax are for the quarter ended December 31, 2004
only. 4




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##### Table of Contents



Our Operating Segments
  
    
    International Life;
    
    Home Service Business (which we acquired on October 1, 2004,
and as such, all 2004 income statement amounts are for one quarter only); and
    
    Domestic Life.
   Year Ended December 31,2005
    
    
    2004
    
    
    2003(In thousands)RevenueInternational Life
    
    $
    79,675
    
    
    
    72,886
    
    
    
    63,346Home Service Business
    
    
    49,692
    
    
    
    12,346
    
    
    
    Domestic Life
    
    
    14,048
    
    
    
    16,806
    
    
    
    18,020Domestic Health
    
    
    900
    
    
    
    788
    
    
    
    13,736Total consolidated revenue
    
    $
    144,315
    
    
    
    102,826
    
    
    
    95,102Premiums and Annuity and Universal Life
ConsiderationInternational Life
    
    $
    68,444
    
    
    
    59,214
    
    
    
    51,972Home Service Business
    
    
    37,720
    
    
    
    9,587
    
    
    
    Domestic Life
    
    
    11,603
    
    
    
    13,579
    
    
    
    11,270Domestic Health
    
    
    900
    
    
    
    788
    
    
    
    14,785Total consolidated premium income
    
    $
    118,667
    
    
    
    83,168
    
    
    
    78,027Net Investment IncomeInternational Life
    
    $
    10,142
    
    
    
    11,414
    
    
    
    9,540Home Service Business
    
    
    11,573
    
    
    
    2,876
    
    
    
    Domestic Life
    
    
    1,853
    
    
    
    2,715
    
    
    
    4,594Domestic Health
    
    
    
    
    
    
    
    
    
    
    188Total consolidated net investment income
    
    $
    23,568
    
    
    
    17,005
    
    
    
    14,322
 5




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Year Ended December 31,2005
    
    
    2004
    
    
    2003(In thousands)Income (loss) before federal income tax:International Life
    
    $
    5,762
    
    
    
    8,841
    
    
    
    4,960Home Service Business
    
    
    5,902
    
    
    
    2,511
    
    
    
    Domestic Life
    
    
    34
    
    
    
    (2,946
    )
    
    
    (302
    )Domestic Health
    
    
    98
    
    
    
    (318
    )
    
    
    (1,369
    )Total consolidated
income before federal income
tax
    
    $
    11,796
    
    
    
    8,088
    
    
    
    3,289
 December 31,2005
    
    
    2004(In thousands)Assets:International Life
    
    $
    233,530
    
    
    
    225,360Home Service Business
    
    
    300,946
    
    
    
    298,396Domestic Life
    
    
    115,321
    
    
    
    123,160Domestic Health
    
    
    12,092
    
    
    
    14,295Total
    
    $
    661,889
    
    
    
    661,211
  Year ended December 31,2005
    
    
    2004
    
    
    2003(In thousands)Revenue:U.S.
    
    $
    64,640
    
    
    
    29,940
    
    
    
    31,757Non-U.S.
    
    
    79,675
    
    
    
    72,886
    
    
    
    63,346Total consolidated revenue
    
    $
    144,315
    
    
    
    102,826
    
    
    
    95,103
 International Life
  
    
    policies are typically larger face amounts than in the U.S. resulting in lower
underwriting and administrative costs per policy;
    
    the premiums are paid annually rather than monthly or quarterly, which saves us
administrative expenses and accelerates our cash flow;
    
    persistency is higher than U.S. policies;
 6




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
    
    the mortality is as good or better than that experienced in the U.S. because our
insureds are in the top income brackets in their countries;
    
    the marketing consultants from whom applications are received are highly
professional;
    
    we do not advance any commissions relating to this business, so we do not have
financial exposure in the event monies are advanced and insurance revenues do not cover
the advances; and
    
    the profit margins are higher for us than for typical U.S. policies.
    Country
    
    2005
    
    
    2004
    
    
    2003(Dollars in thousands)Colombia
    
    $
    20,572
    
    
    
    30.1
    %
    
    $
    18,487
    
    
    
    31.2
    %
    
    $
    16,172
    
    
    
    31.1
    %Argentina
    
    
    8,419
    
    
    
    12.3
    
    
    
    8,592
    
    
    
    14.5
    
    
    
    9,394
    
    
    
    18.1Venezuela
    
    
    7,178
    
    
    
    10.5
    
    
    
    6,557
    
    
    
    11.1
    
    
    
    5,492
    
    
    
    10.6Uruguay
    
    
    3,202
    
    
    
    4.7
    
    
    
    3,527
    
    
    
    6.0
    
    
    
    4,159
    
    
    
    8.0Taiwan
    
    
    7,008
    
    
    
    10.2
    
    
    
    3,748
    
    
    
    6.3
    
    
    
    2,092
    
    
    
    4.0Other Non-U.S.
    
    
    22,065
    
    
    
    32.2
    
    
    
    18,303
    
    
    
    30.9
    
    
    
    14,663
    
    
    
    28.2Total
    
    $
    68,444
    
    
    
    100.0
    %
    
    $
    59,214
    
    
    
    100.0
    %
    
    $
    51,972
    
    
    
    100.0
    %
 7




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8




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Home Service
      Domestic Life
  9




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State
    
    2005
    
    
    2004
    
    
    2003(Dollars in thousands)Texas
    
    $
    9,172
    
    
    
    38.6
    %
    
    $
    10,212
    
    
    
    36.9
    %
    
    $
    10,548
    
    
    
    35.6
    %Kentucky
    
    
    2,936
    
    
    
    12.3
    
    
    
    4,377
    
    
    
    15.8
    
    
    
    5,636
    
    
    
    19.0Oklahoma
    
    
    3,481
    
    
    
    14.6
    
    
    
    4,262
    
    
    
    15.4
    
    
    
    4,687
    
    
    
    15.8Mississippi
    
    
    1,658
    
    
    
    7.0
    
    
    
    1,811
    
    
    
    6.5
    
    
    
    2,021
    
    
    
    6.8Other States
    
    
    6,545
    
    
    
    27.5
    
    
    
    7,029
    
    
    
    25.4
    
    
    
    6,749
    
    
    
    22.8Total
    
    $
    23,792
    
    
    
    100.0
    %
    
    $
    27,691
    
    
    
    100.0
    %
    
    $
    29,641
    
    
    
    100.0
    %
 Our Products
 International Life
  
    
    U.S.-dollar denominated living cash values;
    
    rates that are competitive with or better than most foreign local companies;
    
    a hedge against local currency inflation;
    
    protection against devaluation of foreign currency;
    
    capital transference to a safe haven (U.S.);
    
    lifetime income;
    
    tax-free earnings on cash build-up; and
    
    cash values beginning in the first policy year.
 10




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Home Service
  Domestic Life
  
    
    cash accumulation/living benefits;
    
    tax-deferred interest earnings;
    
    guaranteed lifetime income at age 65;
    
    monthly income for loved ones;
    
    significant accidental death benefits; and
    
    payment waiver in the event of disability.
   11




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##### Table of Contents



Operations and Technology
   Consolidated Information Regarding Our Insurance Business
   12




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##### Table of Contents



NewIn Force,
    
    Business
    
    Claims, Lapses,Beginning
    
    Issued
    
    Surrenders
    
    Acquisitions
    
    In Force,of Year
    
    During Year
    
    During Year
    
    During Year
    
    End of Year(In millions)2005
    
    $
    3,513
    
    
    
    618
    
    
    
    (444
    )
    
    
    
    
    
    
    3,6872004
    
    
    2,435
    
    
    
    541
    
    
    
    (445
    )
    
    
    982
    
    
    
    3,5132003
    
    
    2,090
    
    
    
    422
    
    
    
    (349
    )
    
    
    272
    
    
    
    2,4352002
    
    
    1,977
    
    
    
    390
    
    
    
    (355
    )
    
    
    78
    
    
    
    2,0902001
    
    
    1,914
    
    
    
    346
    
    
    
    (283
    )
    
    
    
    
    
    
    1,977
  In Force
    
    
    
    
    
    Mean LifeBeginning
    
    In Force
    
    Insurance Inof Year
    
    End of Year
    
    Force(a)
    
    (a)
    
    (a)(In millions)2005
    
    $
    3,513
    
    
    
    3,687
    
    
    
    3,6002004
    
    
    2,435
    
    
    
    3,513
    
    
    
    2,9742003
    
    
    2,090
    
    
    
    2,435
    
    
    
    2,2632002
    
    
    1,977
    
    
    
    2,090
    
    
    
    2,0342001
    
    
    1,914
    
    
    
    1,977
    
    
    
    1,946
 
 (a)
    
    Before assuming and ceding reinsurance from reinsurers.   Reinsurance CededRatio ofLapsesand Surrenders
    
    Gross
    
    ReinsuranceLapses and
    
    to Mean in
    
    Amount of
    
    PremiumSurrenders
    
    Force
    
    Reinsurance
    
    Ceded(Dollars in thousands)2005
    
    $
    339,430
    
    
    
    9.4
    %
    
    $
    221,793
    
    
    $
    1,9072004
    
    
    248,533
    
    
    
    8.4
    
    
    
    265,001
    
    
    
    1,0012003
    
    
    217,888
    
    
    
    9.6
    
    
    
    301,366
    
    
    
    1,3822002
    
    
    177,227
    
    
    
    8.7
    
    
    
    152,103
    
    
    
    1,3212001
    
    
    113,482
    
    
    
    5.8
    
    
    
    206,386
    
    
    
    1,723
 13




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##### Table of Contents



Ordinary
    
    Annuity &
    
    
    
    
    
    Group
    
    Accident &Life (a)
    
    Universal Life
    
    Casualty
    
    Life
    
    Health (a)
    
    Total(In thousands)2005
    
    $
    109,891
    
    
    
    3,021
    
    
    
    3,627
    
    
    
    567
    
    
    
    1,560
    
    
    
    118,6672004
    
    
    77,111
    
    
    
    3,520
    
    
    
    1,113
    
    
    
    636
    
    
    
    788
    
    
    
    83,1682003
    
    
    60,395
    
    
    
    2,384
    
    
    
    
    
    
    
    464
    
    
    
    14,785
    
    
    
    78,0272002
    
    
    54,033
    
    
    
    283
    
    
    
    
    
    
    
    420
    
    
    
    13,474
    
    
    
    68,2112001
    
    
    48,142
    
    
    
    217
    
    
    
    
    
    
    
    544
    
    
    
    5,060
    
    
    
    53,963
 
 (a)
    
    After deduction for reinsurance ceded.   Commissions, Underwriting and OperatingExpenses, Policy Reserve Increases,Commissions, Underwriting and
    
    Policyholder Benefits and Dividends toOperating Expenses
    
    PolicyholdersInsurance
    
    
    
    
    
    Ratio toPremiums
    
    
    
    
    
    Insurance
    
    
    
    
    
    Ratio to Insurance(a)
    
    Amount (a)
    
    Premiums
    
    Amount (a)
    
    Premiums(Dollars in thousands)2005
    
    $
    118,667
    
    
    $
    58,414
    
    
    
    49.2
    %
    
    $
    140,713
    
    
    
    118.6
    %2004
    
    
    83,168
    
    
    
    38,665
    
    
    
    46.5
    
    
    
    98,840
    
    
    
    118.92003
    
    
    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
    
    
    
    117.2
 
 (a)
    
    After premiums ceded to reinsurers. 14




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Participating
    
    Non-participatingTotal NewBusiness
    
    Amount
    
    Percent
    
    Amount
    
    Percent(Dollars in thousands)2005
    
    $
    725,199
    
    
    $
    399,008
    
    
    
    55.0
    %
    
    $
    326,191
    
    
    
    45.0
    %2004
    
    
    570,462
    
    
    
    339,008
    
    
    
    59.4
    
    
    
    231,454
    
    
    
    40.62003
    
    
    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
    
    
    
    31.9
   Whole LifeTotal New
    
    and Endowment
    
    Term
    
    CreditBusiness
    
    Amount
    
    Percent
    
    Amount
    
    Percent
    
    Amount
    
    Percent(Dollars in thousands)2005
    
    $
    725,199
    
    
    $
    569,933
    
    
    
    78.6
    %
    
    $
    79,025
    
    
    
    10.9
    %
    
    $
    76,241
    
    
    
    10.5
    %2004
    
    
    570,462
    
    
    
    406,075
    
    
    
    71.2
    
    
    
    82,839
    
    
    
    14.5
    
    
    
    81,548
    
    
    
    14.32003
    
    
    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
    
    
    
    10.2
  15




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##### Table of Contents



Total FaceAmount of New
    
    Deferred PolicyBusiness
    
    Acquisition CostsIssued
    
    Capitalized
    
    Amortized(In thousands)2005
    
    $
    725,199
    
    
    
    24,388
    
    
    
    10,3132004
    
    
    570,462
    
    
    
    17,241
    
    
    
    8,4382003
    
    
    433,697
    
    
    
    16,558
    
    
    
    11,8072002
    
    
    410,352
    
    
    
    14,423
    
    
    
    10,0392001
    
    
    346,132
    
    
    
    11,112
    
    
    
    8,568
  Investments
   Valuation of Investments in Fixed Maturity and Equity Securities
  16




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December 31, 2005Percent of TotalCarrying Value
    
    
    Carrying Value(Dollars in thousands)Fixed Maturity Securities:U.S. government and government
agencies (1)
    
    $
    238,097
    
    
    
    47.3
    %Mortgage-backed(1)
    
    
    51,578
    
    
    
    10.2Corporate
    
    
    111,591
    
    
    
    22.2Municipal bonds
    
    
    56,305
    
    
    
    11.2Total fixed maturity securities
    
    
    457,571
    
    
    
    90.9Cash and cash equivalents
    
    
    18,311
    
    
    
    3.6Other investments:Policy loans
    
    
    23,918
    
    
    
    4.8Equity securities
    
    
    610
    
    
    
    0.1Mortgage loans
    
    
    833
    
    
    
    0.2Other invested assets
    
    
    1,879
    
    
    
    0.4Total
    
    $
    503,122
    
    
    
    100.0
    %
 
 (1)
    
    U.S. Government and government agencies include U.S. Government Agency securities
($24,866,000) and private corporations of U.S. government-sponsored enterprises ($264,809,000).  17




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##### Table of Contents



Fixed maturities held-to-maturityAmortizedcost
    
    
    Fair valueDue after ten years
    
    $
    7,639,505
    
    
    $
    9,143,212
 Fixed maturities available-for-saleAmortizedcost
    
    
    Fair valueDue in one year or less
    
    $
    15,130,057
    
    
    
    14,944,322Due after one year through five years
    
    
    39,676,838
    
    
    
    38,641,376Due after five years through ten years
    
    
    31,692,412
    
    
    
    30,939,025Due after ten years
    
    
    316,534,810
    
    
    
    313,828,531403,034,117
    
    
    
    398,353,254Securities not due at a single maturity date
    
    
    54,352,226
    
    
    
    51,577,913Totals
    
    $
    457,386,343
    
    
    
    449,931,167
    Ratio of NetInvestment IncomeYear Ended
    
    Mean Amount of
    
    Net Investment
    
    to Mean AmountDecember 31,
    
    Invested Assets
    
    Income (a)
    
    of Invested Assets (a)(In thousands)2005
    
    $
    480,306
    
    
    $
    23,568
    
    
    
    4.9
    %2004
    
    
    375,495
    
    
    
    17,005
    
    
    
    4.52003
    
    
    250,598
    
    
    
    14,322
    
    
    
    5.72002
    
    
    216,352
    
    
    
    14,252
    
    
    
    6.62001
    
    
    200,450
    
    
    
    13,296
    
    
    
    6.6
 
 (a)
    
    Does not include realized and unrealized gains and losses on investments.  18




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Reserves
  Reinsurance
  Insurance Ceded
    19




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##### Table of Contents



20




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##### Table of Contents



nd st
 Insurance Assumed
  AmountType of
    
    
    in force atBusiness
    
    
    end of yearName of Company
    
    Assumed
    
    
    (In thousands)Prudential Insurance
Company (Prudential)
    
    Group Life
    
    $
    592,636
  Competition
  International Market
 21




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##### Table of Contents



Locally Operated Companies with Local Currency Policies.
   U.S. Companies issuing U.S. Dollar Policies.
  Foreign Operated Companies with Local Currency Policies.
  Home Service
 Domestic Market
 22




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##### Table of Contents



Employees
  Other Operations
  REGULATION
 General
    23




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##### Table of Contents



U.S. Insurance Regulation
   Insurance holding company regulation
  Policy forms
  24




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##### Table of Contents



Dividend limitations
  
    
    10% of the insurers statutory surplus as of the immediately prior year end; or
    
    the statutory net gain from the insurers operations (if a life insurer) or the
statutory net income (if not a life insurer) during the prior calendar year.
  Market conduct regulation
  Financial examinations
  Guaranty funds or associations
  25




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Change of control
  Policy and contract reserve sufficiency analysis
  26




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##### Table of Contents



Surplus and capital requirements
  Statutory accounting principles
   Insurance Regulatory Information System
   27




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##### Table of Contents



Risk-Based Capital (RBC) Requirements
    Regulation of investments
  28




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##### Table of Contents



Federal initiatives
  Changes in tax laws
  Other Laws and Regulations
 USA Patriot Act
  29




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##### Table of Contents



The International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001
   The Bank Secrecy Act of 1970
  The Money Laundering Control Act of 1986
  Privacy of consumer information
  30




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##### Table of Contents



The Terrorism Risk Insurance Act
    Gramm-Leach-Bliley Act
  31




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##### Table of Contents



Environmental considerations
  Legislative Developments
    
 Item 1A. Risk Factors
  32




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##### Table of Contents



From
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
 Citizens Insurance Company of America, Citizens, Inc., Harold E. Riley and Mark A. Oliver,
Petitioners v. Fernando Hakim Daccach, Respondent, in the Supreme
Court of Texas,
     33




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##### Table of Contents



Our business is subject to risks related to litigation and regulatory actions.
 Daccach
 
    
    other possible 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 Daccachcase, or
that U.S. or Texas securities laws otherwise apply, we could face the
possibility of other securities law claims within the United States.
We also could face claims in foreign countries relating to
noncompliance with their securities laws in connection with
policyholders who participate in a non-U.S. trust and who beneficially
own our Class A common stock. We cannot, for example, ensure that our
foreign sales associates are in compliance with foreign securities and
insurance laws, because we do not have oversight over such persons.
We have not obtained any opinion of counsel as to the applicability of
foreign securities laws to the above actions. Also, the estimation of any liabilities from any possible claims would be
difficult to determine;
    
    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 in foreign
countries;
    
    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.
   34




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A substantial amount of our revenue 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.
  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 due to past and future acquisitions.
  35




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##### Table of Contents




    
    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.
  Sales of our products may be reduced if we are unable to attract and retain marketing
representatives or develop and maintain distribution sources.
   36




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##### Table of Contents



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.
  Our investment portfolio is subject to several risks that may diminish the value of our invested
assets and negatively affect profitability.
 37




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##### Table of Contents



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.
      38




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##### Table of Contents



Our investment portfolio is subject to credit risk.
  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.
    39




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##### Table of Contents



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.
  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.
  40




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##### Table of Contents



Our international operations face competition from several sources.
  Locally operated companies with local currency policies.
 ompanies foreign to the countries in which policies are sold but that issue local currency
policies.
 41




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##### Table of Contents



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;
    
    admitting statutory assets;
    
    mandating certain insurance benefits;
 42




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##### Table of Contents




    
    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;
    
    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.
   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.
  43




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Changes in U.S. regulation may reduce our profitability and limit our prospective growth.
    44




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##### Table of Contents



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.
     The failure to effectively maintain and modernize our information systems could adversely affect
our business.
  45




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##### Table of Contents




    
    inadequate information on which to base pricing, underwriting and reserve 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.
  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
 46




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##### Table of Contents




    
    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.
  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.
 47




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##### Table of Contents



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.
  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 stockholders will always be minority holders 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.
  48




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##### Table of Contents



Our articles of incorporation, bylaws and insurance laws may discourage takeovers and business
combinations that our stockholders might consider in their best interests.
    
    
    provide that our Class B common stock elects a simple majority of our board of
directors; all of such stock 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.
 49




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##### Table of Contents



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.
       50




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##### Table of Contents



Provisions of our Series A Preferred Stock may prevent or make it more difficult for us to raise
funds or take certain other actions.
  Holders of our Series A Preferred Stock have the right to require us to redeem their Series A
Preferred Stock at any time, and we will be required to redeem any shares of Series A Preferred
Stock that remain outstanding on the fifth anniversary of their issuance.
  51




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##### Table of Contents




    
    the average closing price of our Class A common stock is $3.50 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;
    
    we have not filed for protection under applicable bankruptcy laws; and
    
    certain other enumerated conditions.
   
 Item 1B. Unresolved Staff Comments
  52




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##### Table of Contents



Item 2. Properties
   
 Item 3. Legal Proceedings
 Cause Number 03-0505; Citizens Insurance Company of America, Citizens, Inc., Harold E. Riley and Mark A. Oliver, Petitioners v. Fernando Hakim Daccach, Respondent, in the Supreme Court of Texas.
      53




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Item 4. Submission of Matters to a Vote of Security Holders
  54




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##### Table of Contents



PART II
 
 Item 5.
    
    Market for Registrants Common Equity and Related Stockholder Matters and
Issuer Purchases of Securities
  2005
    
    
    2004Quarter Ended
    
    High
    
    
    Low
    
    
    High
    
    
    LowMarch 31
    
    $
    5.80
    
    
    
    5.01
    
    
    
    8.73
    
    
    
    6.39June 30
    
    
    5.79
    
    
    
    4.79
    
    
    
    7.33
    
    
    
    5.27September 30
    
    
    6.93
    
    
    
    5.70
    
    
    
    6.97
    
    
    
    4.28December 31
    
    
    6.05
    
    
    
    4.92
    
    
    
    6.19
    
    
    
    4.74
      Securities Authorized for Issuance Under Equity Compensation Plans
  
 Item 6.
    
    Selected Financial Data
  55




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Year Ended December 31,(In thousands except per share data)2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001Total Revenues
    
    $
    144,315
    
    
    
    102,826
    
    
    
    95,103
    
    
    
    83,004
    
    
    
    67,647Net Income
    
    
    7,302
    
    
    
    7,732
    
    
    
    3,126
    
    
    
    4,254
    
    
    
    3,963Net Income Per Share
    
    
    .13
    
    
    
    .17
    
    
    
    .08
    
    
    
    .12
    
    
    
    .11Total Assets at December 31
    
    
    661,889
    
    
    
    661,212
    
    
    
    390,093
    
    
    
    326,291
    
    
    
    282,086Long-term Debt
    
    
    
    
    
    
    30,000
    
    
    
    
    
    
    
    
    
    
    
    Total Liabilities
    
    
    513,380
    
    
    
    520,179
    
    
    
    263,066
    
    
    
    224,499
    
    
    
    199,364Total Stockholders Equity
    
    
    136,963
    
    
    
    135,131
    
    
    
    127,027
    
    
    
    101,792
    
    
    
    82,722Book Value Per Share
    
    
    3.33
    
    
    
    3.29
    
    
    
    3.10
    
    
    
    2.76
    
    
    
    2.34
  
 Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of
Operations
 Overview
  
    
    the issuance of ordinary life insurance in U.S. dollar denominated amounts to
foreign nationals with significant net worth; and
    
    offering final expense ordinary life insurance through the home service
distribution channel in Louisiana.
  International Life.
 56




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##### Table of Contents



Home Service Life.
    57




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##### Table of Contents



Domestic Life.
   Marketplace Conditions and Trends
  
    
    As an increasing percentage of the world population reaches retirement age, we
believe we will benefit from increased demand for living products rather than death
products, as aging baby boomers will require cash accumulation to provide expenses to
meet their lifetime needs. Our ordinary life products are designed for our
policyowners to accumulate cash values to provide for living expenses in the insureds
later years while continuously providing a death benefit.
    
    The volatility in the equity markets over the past few years has posed a number of
problems for some companies in the life insurance industry. Even though the capital
markets have recovered, not all companies have participated evenly in the recovery. We
historically have had minimal equity exposure, including less than 1% of total
invested assets as of December 31, 2005 and December 31, 2004, and we plan to continue
to have minimal assets in equity investments in the future.
    
    Corporate bond defaults and credit downgrades, which have resulted in other-than-
temporary impairment in the value of many securities, have had a material
 58




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impact on life insurers in the past few years. We have not incurred significant losses
from bond defaults for many years. The majority of our investment portfolio is held in
debt instruments carrying the full faith and credit of the U.S. Government, or U.S.
government-sponsored enterprises. We intend to manage our investment portfolio
conservatively in the future in these type of debt instruments.
    
    Some life insurance companies have recently suffered significant reductions in
capital due to losses, and will have to improve their capital adequacy ratios to
support their business or divest a portion of their business. We have not experienced
any capital reductions and do not anticipate this trend will affect us. We did reduce
capital on a regulatory basis by approximately $20 million when we acquired Security
Plan; however, we maintain more than adequate levels of capital.
    
    Because of the trends described above coupled with increasing costs of regulatory
compliance such as the Sarbanes-Oxley Act of 2002, we believe there is a trend towards
consolidation of domestic life insurance companies. We believe this should be a
benefit to our acquisition strategy because there should be more complementary
acquisition candidates available for us to consider acquiring.
    
    Many of the events and trends affecting the life insurance industry have had an
impact on the life reinsurance industry. These events led to a decline in the
availability of reinsurance. While we currently cede a limited amount of our primary
insurance business to reinsurers, we may find it difficult to obtain reinsurance in
the future, forcing us to seek reinsurers who are more expensive to us. If we cannot
obtain affordable reinsurance coverage, either our net exposures will increase or we
would have to reduce our underwriting commitments.
 Significant Recent Transactions
 Cessation of Accident and Health Business
  59




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Acquisition of Security Plan
   Consolidated Results
  Year Ended
    
    
    
    
    
    Net Income Per
    
    
    Change fromDecember 31
    
    Net Income
    
    
    Class A & B Share
    
    
    Previous Year2005
    
    $
    7,302,000
    
    
    $
    0.13
    
    
    
    (5.6
    %)2004
    
    
    7,732,000
    
    
    
    0.17
    
    
    
    147.3
    %2003
    
    
    3,126,000
    
    
    
    0.08
    
    
    
    (26.5
    %)
   60




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Premium Income
 Net Investment Income
 Reserves
 Policy Dividends
 Claims and Surrenders
 61




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Year ended December 31,2005
    
    
    2004
    
    
    2003Death claims
    
    $
    22,404,000
    
    
    
    10,224,000
    
    
    
    6,399,000Surrender expenses
    
    
    16,940,000
    
    
    
    18,406,000
    
    
    
    17,986,000Endowments
    
    
    9,021,000
    
    
    
    7,509,000
    
    
    
    6,416,000Casualty claims
    
    
    3,685,000
    
    
    
    562,000
    
    
    
    Other policy benefits
    
    
    792,000
    
    
    
    766,000
    
    
    
    780,000Accident and health benefits
    
    
    446,000
    
    
    
    (60,000
    )
    
    
    9,110,000Total claims and
surrenders
    
    $
    53,288,000
    
    
    
    37,407,000
    
    
    
    40,691,000
      62




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Commissions
 Underwriting, Acquisition and Insurance Expense
 Deferred Policy Acquisition Costs
 Cost of Customer Relationships Acquired
 Federal Income Tax We expect our effective Federal tax rate to
approximately 34.0% in coming years.
 63




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Liquidity and Capital Resources
        64




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65




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Contractual
    
    
    
    
    
    Less than
    
    
    1 to 3
    
    
    3 to 5
    
    
    More thanObligation
    
    Total
    
    
    1 year
    
    
    years
    
    
    years
    
    
    5 years(In Thousands)Operating leases
    
    $
    893
    
    
    
    439
    
    
    
    336
    
    
    
    118
    
    
    
    Other
    
    
    276
    
    
    
    190
    
    
    
    86
    
    
    
    
    
    
    
    Total operating
leases and other
    
    $
    1,169
    
    
    
    629
    
    
    
    422
    
    
    
    118
    
    
    
    Future policy benefit reserves:Life insurance
    
    $
    436,717
    
    
    
    162
    
    
    
    911
    
    
    
    8,551
    
    
    
    427,093Annuities
    
    
    19,440
    
    
    
    4,806
    
    
    
    2,931
    
    
    
    5,345
    
    
    
    6,358Accident and health
    
    
    11,580
    
    
    
    11,580
    
    
    
    
    
    
    
    
    
    
    
    Total future policy
benefit reserves
    
    $
    467,737
    
    
    
    16,548
    
    
    
    3,842
    
    
    
    13,896
    
    
    
    433,451Policy claims payable:Life insurance
    
    $
    6,173
    
    
    
    6,173
    
    
    
    
    
    
    
    
    
    
    
    Accident and health
    
    
    1,740
    
    
    
    1,740
    
    
    
    
    
    
    
    
    
    
    
    Casualty
    
    
    3,314
    
    
    
    3,314
    
    
    
    
    
    
    
    
    
    
    
    Total policy
claims payable
    
    $
    11,227
    
    
    
    11,227
    
    
    
    
    
    
    
    
    
    
    
    Convertible preferred stock
    
    $
    16,251
    
    
    
    
    
    
    
    
    
    
    
    16,251
    
    
    
    Total contractual obligations
    
    $
    496,384
    
    
    
    28,404
    
    
    
    4,264
    
    
    
    30,265
    
    
    
    433,451
  Parent Company Liquidity and Capital Resources
   66




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Critical Accounting Policies
  Policy Liabilities
     Deferred Policy Acquisition Costs
   67




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Valuation of Investments in Fixed Maturity and Equity Securities
   68




---



##### Table of Contents



Accounting Pronouncements
  69




---



##### Table of Contents



70
    Table of Contents       71




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##### Table of Contents



Item 7A.
    
    Quantitative and Qualitative Disclosures about Market Risk
 General
  Market Risk Related to Interest Rates
  72




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##### Table of Contents



Decreases in Interest Rates100 Basis
    
    
    200 Basis
    
    
    300 BasisPoints
    
    
    Points
    
    
    PointsDecember 31, 2005
    
    $
    23,279,000
    
    
    
    42,730,000
    
    
    
    65,930,000December 31, 2004
    
    
    28,368,000
    
    
    
    47,412,000
    
    
    
    69,321,000
 Increases in Interest Rates100 Basis
    
    
    200 Basis
    
    
    300 BasisPoints
    
    
    Points
    
    
    PointsDecember 31, 2005
    
    $
    (42,198,000
    )
    
    
    (73,921,000
    )
    
    
    (102,269,000
    )December 31, 2004
    
    
    (20,298,000
    )
    
    
    (48,702,000
    )
    
    
    ( 74,613,000
    )
   Market Risk Related to Equity Prices
 See also Item 7.
Managements Discussion and Analysis of Financial Condition and Results of Operations.
 73




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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
    
    
    81Consolidated statements of financial position at December 31, 2005 and 2004
    
    
    82Consolidated statements of operations- years ended December 31, 2005, 2004 and 2003
    
    
    84Consolidated statements of stockholders equity and comprehensiveincome  years ended December 31, 2005, 2004 and 2003
    
    
    86Consolidated statements of cash flows- years ended December 31, 2005, 2004 and 2003
    
    
    88Notes to consolidated financial statements
    
    
    91Schedules at December 31, 2005 and 2004:Schedule II  Condensed FinancialInformation of Registrant
    
    
    127Schedules for each of the years in the three-year period ended December 31, 2005:Schedule III  Supplementary Insurance Information
    
    
    130Schedule IV  Reinsurance
    
    
    132
  74




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##### Table of Contents



Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
  
 Item 9A.
    
    Controls and Procedures
 (a) Disclosure Controls and Procedures
   (b) Management Report on Internal Control over Financial Reporting
 Internal Control  Integrated
Framework
  (c) Change in Internal Control over Financial Reporting
   75




---



##### Table of Contents




    
    Hired a new Chief Financial Officer with significant experience in U.S. GAAP
and SEC reporting who is responsible for the preparation and supervision of the
Companys financial statements. This individual reports directly to the Chief
Executive Officer.
    
    Hired new personnel to work with the Chief Financial Officer to develop
additional expertise in U.S. GAAP and SEC reporting and to ensure that adequate
depth is developed in the Companys financial reporting area.
    
    Strengthened 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.
    
    Provided additional training of accounting department personnel in U.S. GAAP
and SEC reporting.
    
    Adopted procedures to seek a more thorough and timely review process by senior
management of the financial statement process.
  76




---



##### Table of Contents



Internal Control  Integrated
Framework
    77




---



##### Table of Contents



Internal
ControlIntegrated Framework Internal ControlIntegrated Framework
   
 78




---



##### Table of Contents



Item 9B. Other Information
  
 PART III
 10, 11, 12, 13 14
 
 PART IV
 
 Item 15. Exhibits, Financial Statement Schedules
 (a)
    
    (1) and (2) Filings as Part of this Report
  (b)
    
    (3) Exhibits  See the Exhibit Index
 79




---



##### 



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 Index to Consolidated Financial Statements and
Financial Statement Schedules
 PageReferenceReport of independent registered public accounting firm
    
    
    81Consolidated statements of financial position at December 31, 2005 and 2004
    
    
    82Consolidated statements of operations
- years ended December 31, 2005, 2004 and 2003
    
    
    84Consolidated statements of stockholders equity and comprehensive
income  years ended December 31, 2005, 2004 and 2003
    
    
    86Consolidated statements of cash flows
- years ended December 31, 2005, 2004 and 2003
    
    
    88Notes to consolidated financial statements
    
    
    91Schedules at December 31, 2005 and 2004:
Schedule II  Condensed Financial
Information of Registrant
    
    
    127Schedules for each of the years in the three-yearperiod ended December 31, 2005:Schedule III  Supplementary Insurance Information
    
    
    130Schedule IV  Reinsurance
    
    
    132
   80




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
    Internal Control  Integrated
Framework
  
 81




---



##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 
 Consolidated Statements of Financial Position
December 31, 2005 and 2004
 Assets
    
    2005
    
    
    2004Investments:Fixed maturities held-to-maturity, at amortized cost
    
    $
    7,639,505
    
    
    
    7,514,224Fixed maturities available-for-sale, at fair value
    
    
    449,931,167
    
    
    
    440,052,698Equity securities available-for-sale, at fair value
    
    
    609,760
    
    
    
    1,063,917Mortgage loans on real estate
    
    
    833,464
    
    
    
    349,611Policy loans
    
    
    23,918,241
    
    
    
    24,316,468Other long-term investments
    
    
    1,878,886
    
    
    
    2,505,025Total investments
    
    
    484,811,023
    
    
    
    475,801,943Cash and cash equivalents
    
    
    18,311,105
    
    
    
    31,720,787Accrued investment income
    
    
    6,477,499
    
    
    
    6,113,474Reinsurance recoverable
    
    
    19,118,009
    
    
    
    17,806,573Deferred policy acquisition costs
    
    
    70,410,334
    
    
    
    56,335,361Other intangible assets
    
    
    2,095,125
    
    
    
    2,331,069Cost of customer relationships acquired
    
    
    39,259,276
    
    
    
    44,904,581Excess of cost over net assets acquired
    
    
    12,401,990
    
    
    
    12,401,990Property, plant and equipment
    
    
    7,736,623
    
    
    
    8,797,445Other assets
    
    
    1,267,827
    
    
    
    4,998,339Total assets
    
    $
    661,888,811
    
    
    
    661,211,562
  82




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Financial Position, Continued
December 31, 2005 and 2004
 Liabilities and Stockholders Equity
    
    2005
    
    
    2004Liabilities:Future policy benefit reserves:Life insurance
    
    $
    436,716,912
    
    
    
    413,106,928Traditional annuities
    
    
    19,440,486
    
    
    
    16,913,432Accident and health
    
    
    11,579,870
    
    
    
    13,604,150Dividend accumulations
    
    
    5,066,828
    
    
    
    4,932,124Premium deposits
    
    
    9,942,096
    
    
    
    7,938,529Policy claims payable
    
    
    11,226,907
    
    
    
    8,282,508Other policyholders funds
    
    
    5,473,358
    
    
    
    5,689,378Total policy liabilities
    
    
    499,446,457
    
    
    
    470,467,049Commissions payable
    
    
    2,666,764
    
    
    
    2,325,503Federal income tax payable
    
    
    447,829
    
    
    
    1,307,249Payable for securities in the process of settlement
    
    
    
    
    
    
    7,052,398Notes payable
    
    
    
    
    
    
    30,000,000Deferred Federal income tax
    
    
    1,620,839
    
    
    
    805,387Liabilities for options and warrants
    
    
    1,587,151
    
    
    
    2,738,062Other liabilities
    
    
    7,611,138
    
    
    
    5,483,564Total liabilities
    
    
    513,380,178
    
    
    
    520,179,212Commitments and contingencies (Note 10)Cumulative convertible preferred stock  Series A-1
(Series A-1 - $500 stated value per share, 50,000
shares authorized, 25,000 shares issued and
outstanding in 2005 and 2004; Series A-2 - $935
stated value per share, 4,014 shares authorized,
issued and outstanding in 2005)
    
    
    11,545,543
    
    
    
    5,901,271Stockholders equity:Common stock:Class A, no par value, 100,000,000 shares
authorized, 43,300,934 shares issued
in 2005 and 40,364,332 shares issued
in 2004, including shares in treasury of
3,135,738 in 2005 and 2,930,596 in 2004
    
    
    214,307,665
    
    
    
    198,266,955Class B, no par value, 2,000,000 shares
authorized, 1,001,714 shares issued and
outstanding in 2005 and 936,181 shares
issued and outstanding in 2004
    
    
    3,184,350
    
    
    
    2,827,191Retained deficit
    
    
    (64,717,088
    )
    
    
    (55,321,287
    )Accumulated other comprehensive loss:Unrealized losses on securities, net of tax
    
    
    (4,801,231
    )
    
    
    (749,199
    )147,973,696
    
    
    
    145,023,660Treasury stock, at cost
    
    
    (11,010,606
    )
    
    
    (9,892,581
    )Total stockholders equity
    
    
    136,963,090
    
    
    
    135,131,079Total liabilities and stockholders equity
    
    $
    661,888,811
    
    
    
    661,211,562
  83




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 
 Consolidated Statements of Operations
Years ended December 31, 2005, 2004 and 2003
 2005
    
    
    2004
    
    
    2003Revenues:Premiums:Life insurance
    
    $
    110,458,402
    
    
    
    77,747,241
    
    
    
    60,858,687Accident and health
    
    
    1,560,136
    
    
    
    787,547
    
    
    
    14,784,958Casualty
    
    
    3,626,809
    
    
    
    1,113,189
    
    
    
    Traditional annuity and
universal life considerations
    
    
    3,021,299
    
    
    
    3,519,523
    
    
    
    2,383,768Net investment income
    
    
    23,568,184
    
    
    
    17,004,672
    
    
    
    14,322,275Realized gains
    
    
    419,273
    
    
    
    389,028
    
    
    
    1,883,105Decrease in fair value of options
and warrants
    
    
    488,893
    
    
    
    256,088
    
    
    
    Other income
    
    
    1,172,327
    
    
    
    2,008,390
    
    
    
    869,970Total revenues
    
    
    144,315,323
    
    
    
    102,825,678
    
    
    
    95,102,763Benefits and expenses:Insurance benefits paid or provided:Increase in future
policy benefit reserves
    
    
    24,222,564
    
    
    
    18,627,335
    
    
    
    7,904,091Policyholders dividends
    
    
    4,788,773
    
    
    
    4,141,674
    
    
    
    3,666,260Claims and surrenders
    
    
    53,287,619
    
    
    
    37,406,737
    
    
    
    40,690,898Total insurance
benefits
paid or provided
    
    
    82,298,956
    
    
    
    60,175,746
    
    
    
    52,261,249Commissions
    
    
    32,985,384
    
    
    
    21,273,661
    
    
    
    18,227,851Other underwriting, acquisition
and insurance expenses
    
    
    25,428,786
    
    
    
    17,391,443
    
    
    
    18,966,120Capitalization of deferred policy
acquisition costs
    
    
    (24,388,003
    )
    
    
    (17,240,670
    )
    
    
    (16,557,855
    )Amortization of deferred policy
acquisition costs
    
    
    10,313,030
    
    
    
    8,438,447
    
    
    
    11,806,640Amortization of cost of customer
relationships acquired,
and other intangibles
    
    
    5,881,249
    
    
    
    4,136,375
    
    
    
    7,110,436Loss on coinsurance agreement
    
    
    
    
    
    
    562,916
    
    
    
    Total benefits and expenses
    
    
    132,519,402
    
    
    
    94,737,918
    
    
    
    91,814,441
  84




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Operations, Continued
Years ended December 31, 2005, 2004 and 2003
 2005
    
    
    2004
    
    
    2003Income before Federal income
tax
    
    $
    11,795,921
    
    
    
    8,087,760
    
    
    
    3,288,322Federal income tax expense
    
    
    4,493,429
    
    
    
    356,021
    
    
    
    162,057Net income
    
    $
    7,302,492
    
    
    
    7,731,739
    
    
    
    3,126,265Net income applicable to common stock
    
    $
    5,325,807
    
    
    
    6,803,226
    
    
    
    3,126,265Basic and diluted earnings
per share of common stock
    
    $
    0.13
    
    
    
    0.17
    
    
    
    0.08
  85




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 
 Consolidated Statements of Stockholders Equity and Comprehensive Income
 Years ended December 31, 2005, 2004 and 2003
 AccumulatedotherCommon stock
    
    
    Retained
    
    
    comprehensive
    
    
    Treasury
    
    
    StockholdersClass A
    
    
    Class B
    
    
    deficit
    
    
    income (loss)
    
    
    stock
    
    
    equityBalance 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 losses, 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
    )
    
    
    135,131,079Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    7,302,492
    
    
    
    
    
    
    
    
    
    
    
    7,302,492Unrealized investment losses, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,052,032
    )
    
    
    
    
    
    
    (4,052,032
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    7,302,492
    
    
    
    (4,052,032
    )
    
    
    
    
    
    
    3,250,460Accretion of deferred issuance
costs and discounts on
preferred stock
    
    
    
    
    
    
    
    
    
    
    (1,418,449
    )
    
    
    
    
    
    
    
    
    
    
    (1,418,449
    )Common stock dividend on
preferred stock
    
    
    558,236
    
    
    
    
    
    
    
    (558,236
    )
    
    
    
    
    
    
    Stock dividend
    
    
    15,482,474
    
    
    
    357,159
    
    
    
    (14,721,608
    )
    
    
    
    
    
    
    (1,118,025
    )
    
    
    Balance at December 31, 2005
    
    $
    214,307,665
    
    
    
    3,184,350
    
    
    
    (64,717,088
    )
    
    
    (4,801,231
    )
    
    
    (11,010,606
    )
    
    
    136,963,090
 86




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Stockholders Equity and Comprehensive Income
Continued
Years ended December 31, 2005, 2004 and 2003
  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 dividends
    
    
    2,690,039
    
    
    
    61,246
    
    
    
    (191,722
    )Balance at December 31, 2004
    
    
    40,364,332
    
    
    
    936,181
    
    
    
    (2,930,596
    )Stock dividends
    
    
    2,936,602
    
    
    
    65,533
    
    
    
    (205,142
    )Balance at December 31, 2005
    
    
    43,300,934
    
    
    
    1,001,714
    
    
    
    (3,135,738
    )
  87




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 
 Consolidated Statements of Cash Flows
Years ended December 31, 2005, 2004 and 2003
 2005
    
    
    2004
    
    
    2003Cash flows from operating activities:Net income
    
    $
    7,302,492
    
    
    
    7,731,739
    
    
    
    3,126,265Adjustments to reconcile net income to
net cash provided by operating activities,
net of assets acquired:Realized gains on sale
of investments and other assets
    
    
    (419,273
    )
    
    
    (389,028
    )
    
    
    (1,883,105
    )Net deferred policy acquisition costs
    
    
    (14,074,973
    )
    
    
    (8,802,223
    )
    
    
    (4,751,215
    )Amortization of cost of customer
relationships acquired, and other
intangibles
    
    
    5,881,249
    
    
    
    4,136,375
    
    
    
    7,110,436Loss on coinsurance agreements
    
    
    
    
    
    
    562,916
    
    
    
    Decrease in fair value of options and
warrants
    
    
    (488,893
    )
    
    
    (256,088
    )
    
    
    Depreciation
    
    
    897,435
    
    
    
    877,596
    
    
    
    688,913Amortization of premiums and discounts
on fixed maturities
    
    
    1,153,968
    
    
    
    447,790
    
    
    
    (274,777
    )Deferred Federal income tax expense (benefit)
    
    
    2,902,862
    
    
    
    (1,117,448
    )
    
    
    (87,812
    )Change in:Accrued investment income
    
    
    (364,025
    )
    
    
    (129,788
    )
    
    
    (714,297
    )Reinsurance recoverable
    
    
    (1,311,436
    )
    
    
    (10,380,750
    )
    
    
    195,380Future policy benefit reserves
    
    
    23,003,246
    
    
    
    16,834,681
    
    
    
    9,610,586Other policy liabilities
    
    
    4,866,650
    
    
    
    795,358
    
    
    
    2,580,571Federal income tax
    
    
    (859,420
    )
    
    
    344,125
    
    
    
    316,511Commissions payable and other liabilities
    
    
    2,468,835
    
    
    
    (778,338
    )
    
    
    (928,766
    )Other, net
    
    
    3,546,901
    
    
    
    (1,188,590
    )
    
    
    (898,628
    )Net cash provided by operating activities
    
    
    34,505,618
    
    
    
    8,688,327
    
    
    
    14,090,062Cash flows from investing activities:Sale of fixed maturities, available-for-sale
    
    
    14,568,577
    
    
    
    42,823,651
    
    
    
    11,826,358Maturity of fixed maturities, available-for-sale
    
    
    93,745,640
    
    
    
    89,615,042
    
    
    
    150,447,345Purchase of fixed maturities, available-for-sale
    
    
    (132,556,686
    )
    
    
    (82,634,306
    )
    
    
    (183,619,375
    )Sale of equity securities, available-for-sale
    
    
    615,945
    
    
    
    62,500
    
    
    
    838,416Purchase of equity securities, available-for-sale
    
    
    
    
    
    
    
    
    
    
    (1,671
    )Principal payments on mortgage loans
    
    
    89,141
    
    
    
    272,003
    
    
    
    210,365Mortgage loans funded
    
    
    (100,000
    )
    
    
    (193,944
    )
    
    
    (138,750
    )Sale of other long-term investments and property, plant
and equipment
    
    
    686,081
    
    
    
    490,484
    
    
    
    229,660Principal payments on note receivable
    
    
    396,333
    
    
    
    
    
    
    
    
  88




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
Years ended December 31, 2005, 2004, and 2003
 2005
    
    
    2004
    
    
    2003Cash and cash equivalents provided by
mergers and acquisitions
    
    $
    
    
    
    
    
    
    
    
    4,600,511(Increase) decrease in policy loans, net
    
    
    398,227
    
    
    
    1,228,264
    
    
    
    (987,213
    )Purchase of other long-term investments and property,
plant and equipment
    
    
    (431,875
    )
    
    
    (3,485,049
    )
    
    
    (1,231,432
    )Cash paid for acquisition, net
    
    
    
    
    
    
    (82,232,223
    )
    
    
    Net cash used in investing activities
    
    
    (22,588,617
    )
    
    
    (34,053,578
    )
    
    
    (17,825,786
    )Cash flows from financing activities:Proceeds from issuance of convertible preferred
stock
    
    
    3,751,404
    
    
    
    12,500,000
    
    
    
    Payment of convertible preferred stock issuance
costs
    
    
    (187,599
    )
    
    
    (1,210,655
    )
    
    
    Proceeds from note payable
    
    
    
    
    
    
    30,000,000
    
    
    
    Payoff of note payable
    
    
    (30,000,000
    )
    
    
    
    
    
    
    Annuity and universal life deposits
    
    
    3,021,299
    
    
    
    3,519,523
    
    
    
    2,383,768Annuity and universal life withdrawals
    
    
    (1,911,787
    )
    
    
    (2,739,084
    )
    
    
    (2,843,592
    )Net cash
provided by (used in) financing activities
    
    
    (25,326,683
    )
    
    
    42,069,784
    
    
    
    (459,824
    )Net increase (decrease) in cash and cash equivalents
    
    
    (13,409,682
    )
    
    
    16,704,533
    
    
    
    (4,195,548
    )Cash and cash equivalents at beginning of year
    
    
    31,720,787
    
    
    
    15,016,254
    
    
    
    19,211,802Cash and cash equivalents at end of year
    
    $
    18,311,105
    
    
    
    31,720,787
    
    
    
    15,016,254Supplemental:
 2005
    
    
    2004
    
    
    2003Cash paid (recovered) during the year for:Interest
    
    $
    695,408
    
    
    
    
    
    
    
    Income taxes
    
    $
    2,449,987
    
    
    
    779,343
    
    
    
    (51,370
    )
 Supplemental disclosures of non-cash investing and financing activities:
    89




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
Years ended December 31, 2005, 2004, and 2003
 2005
    
    
    2004
    
    
    2003Fair value of capital stock issued
    
    $
    
    
    
    
    
    
    
    
    24,418,070Fair value of tangible assets acquired
excluding cash and cash
equivalents
    
    
    
    
    
    
    (255,361,421
    )
    
    
    (28,583,673
    )Fair value of intangible assets
acquired
    
    
    
    
    
    
    (34,012,464
    )
    
    
    (16,027,217
    )Liabilities assumed
    
    
    
    
    
    
    207,141,662
    
    
    
    24,793,331Cash and cash equivalents provided
by (used in) mergers and
acquisitions
    
    
    
    
    
    
    (82,232,223
    )
    
    
    4,600,511Issuance of 2,560,994 Class A shares
    
    
    
    
    
    
    
    
    
    
    17,194,513Issuance of 774,229 Class A shares
    
    
    
    
    
    
    
    
    
    
    7,223,557
     90




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 
 Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003
 (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, CICA Life 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 (MAAC), 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), and Mid-American Alliance Insurance
Agency, Inc. (MAAIA). 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. On
March 1, 2005, FAIC was merged into CICA, and on April 1, 2005, MAAIA was sold to an
unrelated party for an immaterial amount. On August 10, 2005, Citizens Insurance
Company of America was renamed CICA LIFE Insurance Company of America. On December 8,
2005, MAAC was dissolved, and on December 31, 2005, MACLIC was merged into CICA.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 midwestern and 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 and CICA entered into a coinsurance agreement with Texas
International Life Insurance Company (TILIC), whereby CNLIC and CICA coinsured 100% of
its accident and health insurance business with TILIC. Effective December 31, 2004,
CNLIC and CICA 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. FAIC was merged into CICA on March 1, 2005. MACLIC markets
life and annuity business throughout Missouri and SAIC is a dormant life insurer.
MACLIC was
 91




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2005, 2004 and 2003
   (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 inter-company
accounts and transactions have been eliminated.(c)
    
    InvestmentsFixed 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 uncollectable amounts. Mortgage loans have an allowance
for uncollectable amounts of $50,000 at December 31, 2005 and 2004 which was estimated
by the Company based upon historical amounts that proved uncollectable.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.
 92




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2005, 2004 and 2003
    (d)
    
    Premium Revenue and Related ExpensesPremiums on life and accident and health policies are reported as earned when received
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. 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.
 93




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2005, 2004 and 2003
   (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.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.
 94




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2005, 2004 and 2003
 (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, 2005 and concluded there was no goodwill or intangible
impairment as of that date. The Companys 2004 assessment determined that intangible
assets totaling $668,000 were impaired, and amortized the entire amount in 2004. In
2004 and 2005, $432,096 and $235,944, respectively, of intangible assets with
definitive lives were amortized.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 2005 or 2003.(h)
    
    Participating PoliciesAt December 31, 2005 and 2004, participating business approximated 47.2% and 45.3%,
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, 2005, were 41,104,737, compared to
41,016,742 for 2004 and 39,720,456 for 2003. 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 2005, 2004 and 2003.
 95




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2005, 2004 and 2003
     96




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2005, 2004 and 2003
 Year endedDecember 312005
    
    
    2004
    
    
    2003Basic and diluted income per share:Numerator:Net income
    
    $
    7,302,492
    
    
    
    7,731,739
    
    
    
    3,126,265Less: Preferred stock dividend
    
    
    (558,236
    )
    
    
    (249,233
    )
    
    
    Accretion of deferred
issuance costs and
discounts
on preferred stock
    
    
    (1,418,449
    )
    
    
    (679,280
    )
    
    
    Net income to common stockholders
    
    $
    5,325,807
    
    
    
    6,803,226
    
    
    
    3,126,265Denominator:Weighted average shares outstanding
    
    
    41,104,737
    
    
    
    41,016,742
    
    
    
    39,720,456Basic and diluted income per share
    
    $
    0.13
    
    
    
    0.17
    
    
    
    0.08
  (j) Income Taxes
    97




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2005, 2004 and 2003
 (k) Accounting Pronouncements
    98




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2005, 2004 and 2003
     99




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2005, 2004 and 2003
     100




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2005, 2004 and 2003
     (l) Cash Equivalents
  101




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2005, 2004 and 2003
 (m) Depreciation
  (n) Use of Estimates
  (o) Reclassifications
  (2) Investments
  102




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2005, 2004 and 2003
 December 31, 2005Gross
    
    
    Grossunrealized
    
    
    unrealized
    
    
    FairCost
    
    
    gains
    
    
    (losses)
    
    
    valueFixed maturities held-to-maturity:U.S. Treasury securities
    
    $
    5,509,743
    
    
    
    958,269
    
    
    
    
    
    
    
    6,468,012U.S. government-sponsored
    enterprises
    
    
    2,129,762
    
    
    
    545,438
    
    
    
    
    
    
    
    2,675,200Total fixed maturities
held-to-maturity
    
    $
    7,639,505
    
    
    
    1,503,707
    
    
    
    
    
    
    
    9,143,212Fixed maturities available-for-sale:U.S. treasury securities and
obligations of U.S. government
corporations and agencies
    
    $
    14,661,551
    
    
    
    297,626
    
    
    
    (49,057
    )
    
    
    14,910,120U.S. government-sponsored
enterprises
    
    
    221,676,543
    
    
    
    1,595,465
    
    
    
    (4,711,665
    )
    
    
    218,560,343Public utilities
    
    
    2,938,740
    
    
    
    41,408
    
    
    
    (12,148
    )
    
    
    2,968,000Debt securities issued by States
of the United States and political
subdivisions of the States
    
    
    53,504,108
    
    
    
    278,743
    
    
    
    (490,966
    )
    
    
    53,291,885Corporate debt securities
    
    
    110,253,175
    
    
    
    756,413
    
    
    
    (2,386,682
    )
    
    
    108,622,906Securities not due at a single maturity date
    
    
    54,352,226
    
    
    
    35,077
    
    
    
    (2,809,390
    )
    
    
    51,577,913Total fixed maturities
available-for-sale
    
    $
    457,386,343
    
    
    
    3,004,732
    
    
    
    (10,459,908
    )
    
    
    449,931,167Total equity securities
available-for-sale
    
    $
    429,176
    
    
    
    202,052
    
    
    
    (21,468
    )
    
    
    609,760
 103




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2005, 2004 and 2003
 December 31, 2004Gross
    
    
    Grossunrealized
    
    
    unrealized
    
    
    FairCost
    
    
    gains
    
    
    (losses)
    
    
    valueFixed maturities held-to-maturity:U.S. treasury securities
    
    $
    5,526,171
    
    
    
    853,829
    
    
    
    
    
    
    
    6,380,000U.S. government-sponsored
enterprises
    
    
    1,988,053
    
    
    
    458,897
    
    
    
    
    
    
    
    2,446,950Total fixed maturities
held-to-maturity
    
    $
    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
    )
    
    
    16,938,886U.S. government-sponsored
enterprises
    
    
    205,962,439
    
    
    
    489,462
    
    
    
    (2,322,955
    )
    
    
    204,128,946Public 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
    
    
    58,932,166
    
    
    
    354,423
    
    
    
    (1,005,303
    )
    
    
    58,281,286Total 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
  104




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2005, 2004 and 2003
 Unrealized (losses) more than and less than 12 monthsDecember 31, 2005Gross
    
    
    Grossunrealized
    
    
    unrealized(losses) less
    
    
    (losses) morethan 12
    
    
    than 12
    
    
    FairCost
    
    
    months
    
    
    months
    
    
    valueFixed maturities held-to-maturity
    
    $
    
    
    
    
    
    
    
    
    
    
    
    
    Fixed maturities available-for-sale:U.S. Treasury securities and
obligations of U.S. government
corporations and agencies
    
    $
    2,584,374
    
    
    
    (28,274
    )
    
    
    
    
    
    
    2,556,100U.S. Treasury securities and
obligations of U.S. government
corporations and agencies
    
    
    3,047,783
    
    
    
    
    
    
    
    (20,783
    )
    
    
    3,027,000U.S. Government-sponsored
enterprises
    
    
    107,519,751
    
    
    
    (1,921,060
    )
    
    
    
    
    
    
    105,598,691U.S. Government-sponsored
enterprises
    
    
    87,615,990
    
    
    
    
    
    
    
    (2,790,605
    )
    
    
    84,825,385Public utilities
    
    
    923,148
    
    
    
    (12,148
    )
    
    
    
    
    
    
    911,000Debt securities issued by States of
the United States and political
subdivisions of the States
    
    
    24,464,170
    
    
    
    (402,273
    )
    
    
    
    
    
    
    24,061,897Debt securities issued by States of
the United States and political
subdivisions of the States
    
    
    8,448,753
    
    
    
    
    
    
    
    (88,693
    )
    
    
    8,360,060Corporate debt securities
    
    
    22,647,046
    
    
    
    (821,814
    )
    
    
    
    
    
    
    21,825,232Corporate debt securities
    
    
    56,128,679
    
    
    
    
    
    
    
    (1,564,868
    )
    
    
    54,563,811Securities not due at a single
maturity date
    
    
    12,663,940
    
    
    
    (520,506
    )
    
    
    
    
    
    
    12,143,434Securities not due at a single
maturity date
    
    
    40,716,608
    
    
    
    
    
    
    
    (2,288,884
    )
    
    
    38,427,724Total fixed maturities
available-for-sale
    
    $
    366,760,242
    
    
    
    (3,706,075
    )
    
    
    (6,753,833
    )
    
    
    356,300,334Equity securities
available-for-sale
    
    $
    139,408
    
    
    
    (18,370
    )
    
    
    (3,098
    )
    
    
    117,940
  105




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2005, 2004 and 2003
     Fixed maturities held-to-maturity
 Amortizedcost
    
    
    Fair valueDue after ten years
    
    $
    7,639,505
    
    
    
    9,143,212
 Fixed maturities available-for-sale
 Amortizedcost
    
    
    Fair valueDue in one year or less
    
    $
    15,130,057
    
    
    
    14,944,322Due after one year through five years
    
    
    39,676,838
    
    
    
    38,641,376Due after five years through ten years
    
    
    31,692,412
    
    
    
    30,939,025Due after ten years
    
    
    316,534,810
    
    
    
    313,828,531403,034,117
    
    
    
    398,353,254Securities not due at a single maturity date
    
    
    54,352,226
    
    
    
    51,577,913Totals
    
    $
    457,386,343
    
    
    
    449,931,167
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2005, 2004 and 2003
    Year ended December 31,2005
    
    
    2004
    
    
    2003Investment income on:Fixed maturities
    
    $
    21,571,720
    
    
    
    15,442,537
    
    
    
    12,713,559Equity securities
    
    
    15,586
    
    
    
    35,770
    
    
    
    34,582Mortgage loans on real estate
    
    
    330,156
    
    
    
    36,510
    
    
    
    50,215Policy loans
    
    
    1,494,196
    
    
    
    1,392,498
    
    
    
    1,541,237Long-term investments
    
    
    1,325,513
    
    
    
    1,303,747
    
    
    
    916,346Other
    
    
    578,766
    
    
    
    292,680
    
    
    
    122,36525,315,937
    
    
    
    18,503,742
    
    
    
    15,378,304Investment expenses
    
    
    (1,747,753
    )
    
    
    (1,499,070
    )
    
    
    (1,056,029
    )Net investment income
    
    $
    23,568,184
    
    
    
    17,004,672
    
    
    
    14,322,275
  Year ended December 31,2005
    
    
    2004
    
    
    2003Proceeds
    
    $
    108,314,217
    
    
    
    132,438,693
    
    
    
    162,273,703Gross realized gains
    
    $
    324,257
    
    
    
    1,714,888
    
    
    
    1,543,954Gross realized (losses)
    
    $
    (121,377
    )
    
    
    (1,350,862
    )
    
    
    (311,801
    )
  Year ended December 31,2005
    
    
    2004
    
    
    2003Proceeds
    
    $
    615,945
    
    
    
    62,500
    
    
    
    838,416Gross realized gains
    
    $
    321,693
    
    
    
    
    
    
    
    18,344Gross realized (losses)
    
    $
    (3
    )
    
    
    (98
    )
    
    
    (676
    )
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2005, 2004 and 2003
  Year ended December 31,2005
    
    
    2004
    
    
    2003Realized gains (losses):Fixed maturities & held to maturity
    
    $
    202,880
    
    
    
    364,026
    
    
    
    1,232,153Equity securities
    
    
    321,690
    
    
    
    (98
    )
    
    
    17,668Loss from early extinguishment of a
liability
    
    
    
    
    
    
    
    
    
    
    563,055Gain from the sale of property,
plant
and equipment
    
    
    505,329
    
    
    
    45,064
    
    
    
    70,229Loss on other invested assets
    
    
    (610,626
    )
    
    
    (19,964
    )
    
    
    Net realized gains
    
    $
    419,273
    
    
    
    389,028
    
    
    
    1,883,105
  (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 31,2005
    
    
    2004
    
    
    2003Balance at beginning of period
    
    $
    44,904,581
    
    
    
    16,884,456
    
    
    
    14,191,172Increase (decrease) related to:Acquisitions
    
    
    
    
    
    
    33,942,464
    
    
    
    8,835,099Amortization (1)
    
    
    (5,645,305
    )
    
    
    (5,922,339
    )
    
    
    (6,141,815
    )Balance at end of period
    
    $
    39,259,276
    
    
    
    44,904,581
    
    
    
    16,884,456
 
 (1)
    
    See note 5 below regarding the coinsurance agreements entered into effective
January 1, 2004.  Year
    
    Amount2006
    
    $
    5,007,6702007
    
    
    4,756,3302008
    
    
    4,504,9902009
    
    
    4,253,6512010
    
    
    4,148,654Thereafter
    
    
    16,587,981
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2005, 2004 and 2003
  Year ended December 31,AccumulatedGross
    
    
    amortization
    
    
    NetBalance 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 and 2005
    
    $
    17,470,289
    
    
    
    (5,068,299
    )
    
    
    12,401,990
 (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, 2005, 2004 and 2003.
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2005, 2004 and 2003
 2005
    
    
    2004
    
    
    2003Policies and contract claims payable at
January 1
    
    $
    8,282,508
    
    
    
    5,648,288
    
    
    
    4,794,096Less: reinsurance recoverable
    
    
    2,713,719
    
    
    
    1,143,562
    
    
    
    266,841Net balance at January 1
    
    
    5,568,789
    
    
    
    4,504,726
    
    
    
    4,527,255Acquisitions of First Alliance, Mid-American
and Security Plan
    
    
    
    
    
    
    3,714,520
    
    
    
    21,339Less: reinsurance recoverable
    
    
    
    
    
    
    
    
    
    
    Net acquired balance
    
    
    
    
    
    
    3,714,520
    
    
    
    21,339Add: claims incurred, related to:Current year
    
    
    27,927,866
    
    
    
    12,744,274
    
    
    
    16,305,954Prior years
    
    
    (1,212,110
    )
    
    
    (1,832,821
    )
    
    
    (489,130
    )26,715,756
    
    
    
    10,911,453
    
    
    
    15,816,824Deduct: claims paid, related to:Current year
    
    
    21,037,205
    
    
    
    11,513,517
    
    
    
    12,599,343Prior years
    
    
    4,356,679
    
    
    
    2,048,393
    
    
    
    3,261,34925,393,884
    
    
    
    13,561,910
    
    
    
    15,860,692Net balance December 31
    
    
    6,890,661
    
    
    
    5,568,789
    
    
    
    4,504,726Plus: reinsurance recoverable
    
    
    4,336,246
    
    
    
    2,713,719
    
    
    
    1,143,562Policy and contracts payable, December 31
    
    $
    11,226,907
    
    
    
    8,282,508
    
    
    
    5,648,288
  (5)
    
    ReinsuranceIn the normal course of business, the Company reinsures portions of certain policies that it
underwrites to limit disproportionate risks. During 2005 and 2004, 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.
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2005, 2004 and 2003
  2005
    
    
    2004Aggregate assumed life insurance in
force
    
    $
    592,636,000
    
    
    
    488,312,000Aggregate ceded life insurance in force
    
    $
    (221,793,000
    )
    
    
    (265,001,000
    )Net life insurance in force
    
    $
    4,058,072,000
    
    
    
    3,736,355,000
  2005
    
    
    2004
    
    
    2003Premiums assumed
    
    $
    571,007
    
    
    
    636,361
    
    
    
    463,629Premiums ceded
    
    $
    (13,867,350
    )
    
    
    (15,388,824
    )
    
    
    (1,793,912
    )Claims and surrenders assumed
    
    $
    561,177
    
    
    
    626,592
    
    
    
    457,899Claims and surrenders ceded
    
    $
    (20,432,902
    )
    
    
    (12,217,456
    )
    
    
    (1,809,188
    )
   111




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2005, 2004 and 2003
 nd st
 (6)
    
    Stockholders Equity and RestrictionsThe 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. Total insurance surplus at December 31, 2005 was $100,737,573.
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 December 31, 2005 approximately
$12,614,934 of dividends could be paid to the Company without prior regulatory approval in
2006.CICA, CUSA, CNLIC, 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, SAIC and SPLIC as of December 31, 2005 exceeded levels requiring company or
regulatory action.
 (7)
    
    Revolving Line of Credit and Term LoanOn March 22, 2004, the Company entered into a revolving loan agreement with Regions Bank
establishing a commitment for a line of credit of $30,000,000 that matured on March 22, 2005.
It was extended at maturity until September 21, 2005.
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2005, 2004 and 2003
 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 Security Plan. Under the term loan, the Company was required to repay
the principal portion of the loan in ten semi-annual installments of $3,000,000 beginning on
May 1, 2005. In April 2005, the term loan was paid off.Documents to renew the line of credit through October 2006, and to increase the borrowing
capacity to $75 million were executed in November 2005. The line of credit provides for a
maximum of $5,000,000 for general corporate purposes not related to acquisition of insurance
companies. Although the line of credit was increased, additional borrowing above the $30
million amount will require the prior written approval of the holders of the Companys
preferred stock. No amount was outstanding on this line at December 31, 2005.(8) Convertible Preferred StockOn July 12, 2004, the Company completed a private placement of $12.5 million of Series A-1
Convertible Preferred Stock (Series A-1 Preferred) to four unaffiliated institutional
investors. The Company used the net proceeds from the sale of the Series A-1 Preferred as
part of the purchase price for the acquisition of SPLIC discussed above. Along with the
Series A-1 Preferred, the Company also issued warrants to purchase 543,790 shares of Class A
common stock, at an exercise price of $6.95 per share, and unit warrants to purchase Series
A-2 Convertible Preferred Stock (Series A-2 Preferred).The conversion, exercise and redemption prices set forth in this Note 8, along with the
numbers of shares and warrants (except for the 25,000 Series A-1 Preferred shares referenced
above), have been adjusted for the respective stock dividends paid December 31, 2004 and
December 30, 2005.The Company may, at its option, subject to certain conditions, increase the issue by $12.5
million to $25 million by requiring the investors to make additional payments for their
shares of Series A-1 Preferred. To the extent the Company increases the issue from $12.5
million, the number of Class A common shares that may be purchased pursuant to the seven-year
warrants would increase proportionately.The 25,000 shares of Series A-1 Preferred carry a 4% per annum dividend, payable in cash or,
if certain conditions are met, shares of the Companys Class A common stock.The Series A-1 Preferred is convertible at the option of the investors at any time into
shares of Class A common stock at a conversion price of $6.33 per share and are mandatorily
redeemable five years after their issuance if not converted prior to the redemption date.
The Series A-1 Preferred can be converted into an aggregate of
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2005, 2004 and 2003
 1,974,723 Class A common shares. In addition, the Company may, if certain conditions have
been met, redeem the Series A-1 Preferred by issuing shares of its Class A common stock to
the Series A-1 Preferred holders at a minimum price of $6.11 per common share. This
redemption would result in the issuance of 2,045,826 Class A common shares.The Company could be required to redeem the Series A-1 Preferred 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 $3.50 per
common share, the redemption must be in cash. Redemption rights terminate if the price per
share of Class A common stock exceeds 130% ($8.23) of the conversion price of the Series A-1
Preferred for any 25 consecutive trading days.The unit warrants, which were also issued on July 12, 2004, entitled the investors to
purchase from the Company up to $5 million of Series A-2 Preferred. Three of the four
investors exercised their unit warrants, for an exercise price of approximately $3.75
million, before the unit warrants expired in October 2005. The three issuances of Series A-2
Preferred are convertible into Class A common stock at conversion prices equal to 110% of the
average market closing prices of the Class A common stock for the 30 trading days before the
respective dates of issuance of the Series A-2 Preferred to the three investors. The
redemption period for the Series A-2 Preferred expires on July 12, 2009.On July 7, 2005, the first of the three investors to do so exercised its unit warrant and
purchased 1,338 shares of Series A-2 Preferred for $1,250,468, convertible into Class A
common stock at $6.11 per common share, and seven year warrants to purchase 56,219 shares of
Class A common stock at an exercise price of $6.72 per share.On September 30, 2005, the second investor exercised its unit warrant, purchasing 1,338
shares of Series A-2 Preferred for $1,250,468, convertible into Class A common stock at $7.26
per common share, and seven year warrants to purchase 47,351 shares of Class A common stock
at an exercise price of $7.99 per share.In early October 2005, the third investor exercised its unit warrant, purchasing 1,338 shares
of Series A-2 Preferred for $1,250,468, convertible into Class A common stock at $7.20 per
common share, and seven year warrants to purchase 47,779 shares of Class A common stock at an
exercise price of $7.92 per share.In connection with the issuance of Series A-1 Preferred and associated warrants in July 2004,
the finders with respect to these transactions received, as part of the finders
compensation, warrants to purchase 98,835 shares of Series A common stock at an exercise
price of $6.95 per share. In connection with the issuances of Series A-2 Preferred and
associated warrants in 2005, the finders received, as part of the finders
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2005, 2004 and 2003
 compensation, warrants to purchase 27,525 shares of Class A common stock at exercise prices
ranging from $6.72 to $7.99. In October 2005, the remaining series A-2 Preferred Stock and
associated warrants expired without the fourth investor exercising their option.At July 12, 2004, the Company initially recognized deferred issuance costs of $1,485,846, a
discount on the beneficial conversion feature of $3,073,204 and discounts on fair values of
options and warrants of $2,718,959, respectively, as offsets against the $12.5 million
issuance of the Series A-1 Preferred. The beneficial conversion feature represents the
difference at July 12, 2004 between the $6.33 redemption price per share of the Series A-1
Preferred 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 Preferred 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
Preferred 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 method. On July 7, 2005, September 30, 2005 and October 6, 2005, three of the four
unaffiliated investors exercised their right to purchase the Series A-2 Convertible Preferred
Stock. The Company recognized deferred issuance costs of $247,301 and a premium of $720,630
related to the liability for the option recorded at the date of the respective exercises. At
December 31, 2005 and 2004, there was $1,026,067 and $1,097,660 in unaccreted deferred
issuance costs and $3,679,794 and $5,501,689 in unaccreted net discount costs, respectively.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 $2,944,150 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.On September 30, 2004, the Company declared its initial 4% dividend to the Series A-1
Preferred 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. On March 31, 2005, the Company paid the third quarterly dividend, consisting of
23,536 shares of its Class A common stock valued at $130,860. On June 30, 2005, the Company
paid the fourth quarterly dividend, consisting of 21,712 shares of its Class A common stock
valued at $132,443. On September 30, 2005, the Company paid the fifth quarterly dividend,
consisting of 20,328 shares of its Class A common stock valued at $130,506. Of this, 1,740
shares of Class A common stock valued at $11,280 were paid because of the unit warrant
exercise and issuance of Series A-2 Preferred on July 7, 2005. On
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2005, 2004 and 2003
 December 31, 2005, the Company paid the sixth quarterly dividend resulting in the issuance of
30,170 shares of its Class A common stock valued at $164,427. Of this, 6,866 shares of Class
A common stock valued at $37,420 were paid to holders of the Series A-2 Preferred.(9)
    
    Mergers and AcquisitionsOn 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.
 At October 31, 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
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2005, 2004 and 2003
 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 and
2003, 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
    
    
    0.17
    
    
    
    0.28
 Year Ended December 31, 2003As Reported
    
    Pro FormaRevenue
    
    $
    95,102,763
    
    
    
    149,692,761Net Income
    
    
    3,126,265
    
    
    
    9,023,982Net Income Per Share
    
    
    0.08
    
    
    
    0.23
 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 2005, 2004 and
2003.(10)
    
    Contingencies
 Cause Number 03-0505; Citizens Insurance Company of America, Citizens, Inc., Harold E. Riley and Mark A. Oliver, Petitioners v. Fernando Hakim Daccach, Respondent, in the Supreme Court of Texas.
   117




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##### Table of Contents



(11)
    
    Segment InformationHistorically, the Company has had three reportable segments: International Life Business,
Domestic Health Business and Domestic Life Business. During 2004, following the acquisition
of Security Plan, a new segment, Home Service Business, was established.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.
dollars paid in the U.S. The Companys Domestic Health Business, consisting of accident and
health, specified disease, hospital indemnity and accidental death policies, is sold
throughout the southern U.S. The Company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.
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2005, 2004 and 2003
  Geographic Areas
 2005
    
    
    2004
    
    
    2003RevenuesU.S.
    
    $
    64,640,672
    
    
    
    29,939,769
    
    
    
    31,756,796Non-U.S.
    
    
    79,674,651
    
    
    
    72,885,909
    
    
    
    63,345,967Total Revenues
    
    $
    144,315,323
    
    
    
    102,825,678
    
    
    
    95,102,763
  Year Ended December 31
    
    2005
    
    
    2004
    
    
    2003RevenueInternational Life
    
    $
    79,674,651
    
    
    
    72,885,909
    
    
    
    63,345,967Home Service Business
    
    
    49,692,366
    
    
    
    12,345,741
    
    
    
    Domestic Life
    
    
    14,048,666
    
    
    
    16,806,481
    
    
    
    18,020,466Domestic Health
    
    
    899,640
    
    
    
    787,547
    
    
    
    13,736,330Total consolidated revenue
    
    $
    144,315,323
    
    
    
    102,825,678
    
    
    
    95,102,763Premiums and Annuity and
Universal Life ConsiderationInternational Life
    
    $
    68,444,072
    
    
    
    59,213,856
    
    
    
    51,972,432Home Service Business
    
    
    37,719,751
    
    
    
    9,587,052
    
    
    
    Domestic Life
    
    
    11,603,183
    
    
    
    13,579,045
    
    
    
    11,270,023Domestic Health
    
    
    899,640
    
    
    
    787,547
    
    
    
    14,784,958Total consolidated premium income
    
    $
    118,666,646
    
    
    
    83,167,500
    
    
    
    78,027,413Net Investment IncomeInternational Life
    
    $
    10,142,576
    
    
    
    11,414,138
    
    
    
    9,539,769Home Service Business
    
    
    11,572,842
    
    
    
    2,875,368
    
    
    
    Domestic Life
    
    
    1,852,766
    
    
    
    2,715,166
    
    
    
    4,594,403Domestic Health
    
    
    
    
    
    

    
    
    
    
    188,103Total consolidated net investment
income
    
    $
    23,568,184
    
    
    
    17,004,672
    
    
    
    14,322,275
 119




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2005, 2004 and 2003
 Amortization expense:International Life
    
    $
    8,272,807
    
    
    
    7,473,167
    
    
    
    9,035,478Home Service Business
    
    
    4,770,155
    
    
    
    848,572
    
    
    
    Domestic Life
    
    
    3,151,317
    
    
    
    4,253,083
    
    
    
    4,216,119Domestic Health
    
    
    
    
    
    
    
    
    
    
    5,665,479Total consolidated amortization
expense
    
    $
    16,194,279
    
    
    
    12,574,822
    
    
    
    18,917,076Realized gains (losses)International Life
    
    $
    96,750
    
    
    
    635,492
    
    
    
    1,254,297Home Service Business
    
    
    304,849
    
    
    
    (397,633
    )
    
    
    Domestic Life
    
    
    17,674
    
    
    
    151,169
    
    
    
    628,808Domestic Health
    
    
    
    
    
    
    
    
    
    
    Total consolidated realized
gains (losses)
    
    $
    419,273
    
    
    
    389,028
    
    
    
    1,883,105Income (loss) before federal
income tax:International Life
    
    $
    5,761,991
    
    
    
    8,840,612
    
    
    
    4,959,621Home Service Business
    
    
    5,902,227
    
    
    
    2,510,941
    
    
    
    Domestic Life
    
    
    33,820
    
    
    
    (2,946,087
    )
    
    
    (302,259
    )Domestic Health
    
    
    97,883
    
    
    
    (317,706
    )
    
    
    (1,369,040
    )Total consolidated income
before Federal income taxes
    
    $
    11,795,921
    
    
    
    8,087,760
    
    
    
    3,288,322
 2005
    
    
    2004Assets as of December 31:International Life
    
    $
    233,529,849
    
    
    
    225,359,680Home Service Business
    
    
    300,946,232
    
    
    
    298,396,206Domestic Life
    
    
    115,320,962
    
    
    
    123,160,286Domestic Health
    
    
    12,091,768
    
    
    
    14,295,390Total
    
    $
    661,888,811
    
    
    
    661,211,562
 Major categories of premiums are summarized as follows:
 Year ended December 31,2005
    
    
    2004
    
    
    2003Premiums and annuity and
universal life considerations:Ordinary life
    
    $
    109,890,939
    
    
    
    77,110,880
    
    
    
    60,395,058Annuity and universal life
    
    
    3,021,299
    
    
    
    3,519,523
    
    
    
    2,383,768Group life
    
    
    567,463
    
    
    
    636,361
    
    
    
    463,629Accident and health
    
    
    1,560,136
    
    
    
    787,547
    
    
    
    14,784,958Casualty
    
    
    3,626,809
    
    
    
    1,113,189
    
    
    
    Total premiums and annuity and
universal life
considerations
    
    $
    118,666,646
    
    
    
    83,167,500
    
    
    
    78,027,413
 120




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2005, 2004 and 2003
  Area
    
    2005
    
    2004
    
    2003Colombia
    
    
    15.6
    %
    
    
    14.4
    
    
    
    19.6Argentina
    
    
    6.4
    
    
    
    6.7
    
    
    
    11.4Venezuela
    
    
    5.4
    
    
    
    5.1
    
    
    
    6.7Taiwan
    
    
    5.3
    
    
    
    2.9
    
    
    
    2.5Uruguay
    
    
    2.4
    
    
    
    2.6
    
    
    
    5.0Other Foreign
    
    
    17.4
    
    
    
    14.8
    
    
    
    18.9Louisiana
    
    
    30.4
    
    
    
    15.4
    
    
    
    1.7Texas
    
    
    6.9
    
    
    
    8.0
    
    
    
    12.8Kentucky
    
    
    2.2
    
    
    
    3.4
    
    
    
    6.8Oklahoma
    
    
    2.6
    
    
    
    3.3
    
    
    
    5.7Other States
    
    
    5.4
    
    
    
    23.4
    
    
    
    8.9Total
    
    
    100.0
    %
    
    
    100.0
    
    
    
    100.0
 (12)
    
    Income TaxesA 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:
 2005
    
    
    2004
    
    
    2003Expected tax expense
    
    $
    4,010,613
    
    
    
    2,749,838
    
    
    
    1,118,029Change in valuation
allowance
    
    
    1,102,538
    
    
    
    (1,318,931
    )
    
    
    Tax-exempt interest
    
    
    (229,606
    )
    
    
    (9,680
    )
    
    
    (49,130
    )Small life insurance company
deduction
    
    
    
    
    
    
    (103,167
    )
    
    
    (320,324
    )Adjustment of prior year
taxes
    
    
    (143,945
    )
    
    
    (590,489
    )
    
    
    (658,980
    )Basis difference in investments
    
    
    
    
    
    
    (314,234
    )
    
    
    Other
    
    
    (246,171
    )
    
    
    (57,316
    )
    
    
    72,462Federal income
tax expense
    
    $
    4,493,429
    
    
    
    356,021
    
    
    
    162,057
  2005
    
    
    2004
    
    
    2003Current
    
    $
    1,590,567
    
    
    
    1,473,469
    
    
    
    249,869Deferred
    
    
    2,902,862
    
    
    
    (1,117,448
    )
    
    
    (87,812
    )$
    4,493,429
    
    
    
    356,021
    
    
    
    162,057
 121




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2005, 2004 and 2003
  2005
    
    
    2004Deferred tax assets:Future policy benefit reserves
    
    $
    21,126,115
    
    
    
    20,309,812Net operating loss carryforwards
    
    
    5,022,328
    
    
    
    4,162,646Due and accrued dividends and expenses
    
    
    561,852
    
    
    
    1,356,726Investments available-for-sale
    
    
    2,473,361
    
    
    
    385,951Other
    
    
    1,208,794
    
    
    
    449,528Total gross deferred tax assets
    
    
    30,392,450
    
    
    
    26,664,663Valuation allowance
    
    
    (1,102,538
    )
    
    
    Total gross deferred tax assets net of
valuation allowance
    
    
    29,289,912
    
    
    
    26,664,663Deferred tax liabilities:Deferred policy acquisition costs, cost of
customer relationships acquired and intangible
assets
    
    
    (28,127,247
    )
    
    
    (24,506,530
    )Investments amortization
    
    
    (2,769,760
    )
    
    
    (2,860,059
    )Other
    
    
    (13,744
    )
    
    
    (103,461
    )Total gross deferred tax liabilities
    
    
    (30,910,751
    )
    
    
    (27,470,050
    )Net deferred tax (liability) asset
    
    $
    (1,620,839
    )
    
    
    (805,387
    )
  2005
    
    
    2004Deferred tax assets (liabilities):Balance January 1
    
    $
    (805,387
    )
    
    
    1,887,048Deferred tax benefit (expense)
    
    
    (2,902,862
    )
    
    
    1,117,448Acquisition of Security Plan
    
    
    
    
    
    
    (4,851,162
    )Investments available-for-sale
    
    
    2,087,410
    
    
    
    1,041,279Balance December 31
    
    $
    (1,620,839
    )
    
    
    (805,387
    )
 122




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2005, 2004 and 2003
 The Company and its subsidiaries had net operating losses at December 31, 2005 available to
offset future taxable income of approximately $14,908,000 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. At
December 31, 2005, the Company determined that 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, it is more likely than not that its deferred tax assets, net of the
established valuation allowance, would be realized. The Company established a valuation
allowance for the net deferred tax asset, in the amount of $1,102,538, related to CNLIC as a
result of the proposed sale of that company. At December 31, 2004, the Company, based on its
estimates of projected future income, determined that no valuation allowance was appropriate
and released the allowance previously established in the amount of $1,318,931.At December 31, 2005, 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, 2005 become taxable, the tax computed at present rates would be
approximately $1,119,000.(13)
    
    Fair Value of Financial InstrumentsEstimates 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:
 123




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2005, 2004 and 2003
 2005
    
    2004Carrying
    
    Fair
    
    Carrying
    
    Fairamount
    
    value
    
    amount
    
    valueFinancial assets:Fixed maturities
    
    $
    457,570,672
    
    
    
    459,074,379
    
    
    
    447,566,922
    
    
    
    448,879,648Equity securities
    
    
    609,760
    
    
    
    609,760
    
    
    
    1,063,917
    
    
    
    1,063,917Cash and cash
equivalents
    
    
    18,311,105
    
    
    
    18,311,105
    
    
    
    31,720,787
    
    
    
    31,720,787Mortgage Loans
    
    
    833,464
    
    
    
    929,453
    
    
    
    349,611
    
    
    
    471,091Financial liabilities:Annuities
    
    
    19,440,486
    
    
    
    19,440,486
    
    
    
    16,913,432
    
    
    
    16,913,432
      124




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2005, 2004 and 2003
 the carrying amounts approximate fair value because of the short maturity of such financial
instruments.(14)
    
    Other Comprehensive LossThe changes in the components of other comprehensive loss are reported net of income taxes of
34% for the periods indicated as follows:
 Year ended December 31, 2005Pre-tax
    
    
    Tax
    
    
    NetAmount
    
    
    Effect
    
    
    AmountUnrealized loss on securities:Unrealized holding loss
arising during the period
    
    $
    (5,614,872
    )
    
    
    1,909,056
    
    
    
    (3,705,816
    )Add: reclassification
adjustment for gains included
in net income
    
    
    (524,570
    )
    
    
    178,354
    
    
    
    (346,216
    )Other comprehensive loss
    
    $
    (6,139,442
    )
    
    
    2,087,410
    
    
    
    (4,052,032
    )
 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 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 loss
    
    $
    (3,499,880
    )
    
    
    1,189,962
    
    
    
    (2,309,918
    )
 125




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2005, 2004 and 2003
 (15) Quarterly Financial Information (Unaudited)
  2005Fourth
    
    
    Third
    
    
    Second
    
    
    FirstQuarter
    
    
    Quarter
    
    
    Quarter
    
    
    QuarterRevenues
    
    $
    38,535,621
    
    
    
    36,188,161
    
    
    
    34,194,864
    
    
    
    35,396,677Expenses
    
    
    33,062,386
    
    
    
    33,942,286
    
    
    
    33,470,275
    
    
    
    32,044,455Federal income tax
expense
    
    
    2,379,429
    
    
    
    759,000
    
    
    
    362,264
    
    
    
    992,736Net income
    
    
    3,093,806
    
    
    
    1,486,875
    
    
    
    362,325
    
    
    
    2,359,486Basic and diluted
earnings per share
    
    
    .06
    
    
    
    .02
    
    
    
    .00
    
    
    
    .05
 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
    
    
    (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
    
    
    .11
    
    
    
    .03
    
    
    
    .02
    
    
    
    .01
 (16) Subsequent Events
  126




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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, 2005 and 2004
 2005
    
    
    2004AssetsInvestment in subsidiaries (1)
    
    $
    140,164,717
    
    
    
    138,199,548Fixed maturities available-for-sale, at fair value
    
    
    7,337,400
    
    
    
    2,888,260Mortgage loans
    
    
    304,762
    
    
    
    27,305Accrued investment income
    
    
    106,436
    
    
    
    51,975Real estate
    
    
    748,268
    
    
    
    910,107Cash
    
    
    1,227,266
    
    
    
    402,070Other assets
    
    
    1,984,804
    
    
    
    2,740,125Note Receivable (1)
    
    
    
    
    
    
    30,000,000Total assets
    
    $
    151,873,653
    
    
    
    175,219,390Liabilities and Stockholders EquityLiabilities -Accrued expense and other
    
    $
    1,777,869
    
    
    
    1,448,978Note payable
    
    
    
    
    
    
    30,000,000Liabilities for options and warrants
    
    
    1,587,151
    
    
    
    2,738,062Total Liabilities
    
    
    3,365,020
    
    
    
    34,187,040Cumulative convertible preferred stock
    
    
    11,545,543
    
    
    
    5,901,271Stockholders equity:Common stock:Class A
    
    
    214,307,665
    
    
    
    198,266,955Class B
    
    
    3,184,350
    
    
    
    2,827,191Retained deficit
    
    
    (64,717,088
    )
    
    
    (55,321,287
    )Accumulated other comprehensive loss:Unrealized investment losses on securities
held by parent and subsidiaries, net of tax
    
    
    (4,801,231
    )
    
    
    (749,199
    )Treasury stock
    
    
    (11,010,606
    )
    
    
    (9,892,581
    )Total stockholders equity
    
    $
    136,963,090
    
    
    
    135,131,079Total liabilities and stockholders equity
    
    $
    151,873,653
    
    
    
    175,219,390
 
 (1)
    
    Eliminates in consolidation.  127




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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, 2005 and 2004 and 2003
 2005
    
    
    2004
    
    
    2003Revenues:Management service fees (1)
    
    $
    27,371,938
    
    
    
    17,931,352
    
    
    
    19,570,459Investment income
    
    
    186,810
    
    
    
    167,996
    
    
    
    134,546Other
    
    
    7,424
    
    
    
    2,355
    
    
    
    12,472Realized gains (losses)
    
    
    58,701
    
    
    
    (793
    )
    
    
    4,450Total revenues
    
    
    27,624,873
    
    
    
    18,100,910
    
    
    
    19,721,927Expenses:General
    
    
    25,323,042
    
    
    
    17,326,989
    
    
    
    19,080,752Taxes
    
    
    1,471,574
    
    
    
    888,943
    
    
    
    580,490Total expenses
    
    
    26,794,616
    
    
    
    18,215,932
    
    
    
    19,661,242Income (loss) before equity in
income of unconsolidated
subsidiaries
    
    
    830,257
    
    
    
    (115,022
    )
    
    
    60,685Equity in income of
unconsolidated subsidiaries
(1)
    
    
    6,472,235
    
    
    
    7,846,761
    
    
    
    3,065,580Net income
    
    $
    7,302,492
    
    
    
    7,731,739
    
    
    
    3,126,265
 
 (1)
    
    Eliminates in consolidation.  128




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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, 2005, 2004 and 2003
 2005
    
    
    2004
    
    
    2003Cash flows provided by (used in) operating
activities:Net income
    
    $
    7,302,492
    
    
    
    7,731,739
    
    
    
    3,126,265Adjustments to reconcile net income to net cash
provided by (used in) operating activities:Realized losses (gains)
    
    
    (58,701
    )
    
    
    793
    
    
    
    (4,450
    )Equity in net income of
unconsolidated subsidiaries
    
    
    (6,472,235
    )
    
    
    (7,846,761
    )
    
    
    (3,065,580
    )Accrued expenses and other liabilities
    
    
    328,891
    
    
    
    488,555
    
    
    
    13,973Depreciation
    
    
    78,889
    
    
    
    72,658
    
    
    
    62,895Change in accrued investment income
    
    
    (54,461
    )
    
    
    7,895
    
    
    
    (35,952
    )Other
    
    
    395,545
    
    
    
    (599,256
    )
    
    
    (487,920
    )Net cash provided by (used in)
operating activities
    
    
    1,520,420
    
    
    
    (144,377
    )
    
    
    (390,769
    )Cash flows from investing activities:Purchase of fixed maturities, available-for-sale
    
    
    (5,500,000
    )
    
    
    (450,000
    )
    
    
    (3,750,000
    )Maturities of fixed maturities,
available-for-sale
    
    
    950,000
    
    
    
    700,000
    
    
    
    3,110,000Payoff of note receivable
    
    
    30,000,000
    
    
    
    
    
    
    
    Capital contribution to subsidiaries
    
    
    
    
    
    
    (11,000,000
    )
    
    
    Sale of real estate
    
    
    212,710
    
    
    
    3,027
    
    
    
    Issuance of note receivable
    
    
    
    
    
    
    (30,000,000
    )
    
    
    Payoff of collateral loan
    
    
    100,000
    
    
    
    
    
    
    
    Purchase of real estate
    
    
    (21,739
    )
    
    
    (113,572
    )
    
    
    (143,918
    )Net cash provided by (used in)
investing activities
    
    
    25,740,971
    
    
    
    (40,860,545
    )
    
    
    (783,918
    )Cash flows from financing activities:Payoff of note payable
    
    
    (30,000,000
    )
    
    
    
    
    
    
    Proceeds from note payable
    
    
    
    
    
    
    30,000,000
    
    
    
    Proceeds from issuance of convertible preferred
stock
    
    
    3,751,404
    
    
    
    12,500,000
    
    
    
    Payment of convertible preferred stock issuance
costs
    
    
    (187,599
    )
    
    
    (1,210,655
    )
    
    
    Net cash provided by (used in)
financing activities
    
    
    (26,436,195
    )
    
    
    41,289,345
    
    
    
    Net increase (decrease) in cash
    
    
    825,196
    
    
    
    284,423
    
    
    
    (1,174,687
    )Cash at beginning of year
    
    
    402,070
    
    
    
    117,647
    
    
    
    1,292,334Cash at end of year
    
    $
    1,227,266
    
    
    
    402,070
    
    
    
    117,647
  129




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##### Table of Contents



Schedule III
 CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Supplementary Insurance Information
As of December 31, 2005 and 2004
 2005
    
    
    2004Deferred policy acquisition cost:International Life
    
    $
    65,784,008
    
    
    
    54,035,273Home Service Business
    
    
    2,396,030
    
    
    
    279,077Domestic Life
    
    
    2,230,296
    
    
    
    2,021,011Domestic Health
    
    
    
    
    
    
    Total consolidated deferred policy
acquisition costs:
    
    $
    70,410,334
    
    
    
    56,335,361Future policy benefits, losses, claims
and loss expenses:International Life
    
    $
    179,453,086
    
    
    
    149,966,063Home Service Business
    
    
    201,602,373
    
    
    
    196,422,122Domestic Life
    
    
    84,522,465
    
    
    
    91,914,683Domestic Health
    
    
    13,386,251
    
    
    
    13,604,150Total consolidated future policy
benefits, losses, claims and loss
expenses
    
    $
    478,964,175
    
    
    
    451,907,018Unearned premiums:International Life
    
    $
    377,008
    
    
    
    390,242Home Service Business
    
    
    1,101,589
    
    
    
    1,029,575Domestic Life
    
    
    205,694
    
    
    
    239,181Domestic Health
    
    
    
    
    
    
    Total consolidated unearned premiums
    
    $
    1,684,291
    
    
    
    1,658,998Other policy claims and benefits payable:International Life
    
    $
    11,954,166
    
    
    
    10,238,304Home Service Business
    
    
    321,691
    
    
    
    387,639Domestic Life
    
    
    6,522,134
    
    
    
    6,275,090Domestic Health
    
    
    
    
    
    
    Total consolidated other policy claims
and benefits payable
    
    $
    18,797,991
    
    
    
    16,901,033
  130




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##### Table of Contents



Schedule III, continued
 CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Supplementary Insurance Information, continued
Years Ended December 31, 2005, 2004 and 2003
 2005
    
    
    2004
    
    
    2003Premium revenue and annuity and universal
life considerationsInternational Life
    
    $
    68,444,072
    
    
    
    59,213,856
    
    
    
    51,972,432Home Service Business
    
    
    37,719,751
    
    
    
    9,587,052
    
    
    
    Domestic Life
    
    
    11,603,183
    
    
    
    13,579,045
    
    
    
    11,270,023Domestic Health
    
    
    899,640
    
    
    
    787,547
    
    
    
    14,784,958Total consolidated premium revenue
    
    $
    118,666,646
    
    
    
    83,167,500
    
    
    
    78,027,413Net investment income:International Life
    
    $
    10,142,576
    
    
    
    11,414,138
    
    
    
    9,539,769Home Service Business
    
    
    11,572,842
    
    
    
    2,875,368
    
    
    
    Domestic Life
    
    
    1,852,766
    
    
    
    2,715,166
    
    
    
    4,594,403Domestic Health
    
    
    
    
    
    
    
    
    
    
    188,103Total consolidated net investment income
    
    $
    23,568,184
    
    
    
    17,004,672
    
    
    
    14,322,275Benefits, claims, losses and settlement
expenses:International Life
    
    $
    51,244,536
    
    
    
    45,380,518
    
    
    
    34,907,134Home Service Business
    
    
    20,763,171
    
    
    
    5,105,472
    
    
    
    Domestic Life
    
    
    9,954,863
    
    
    
    9,755,732
    
    
    
    8,245,538Domestic Health
    
    
    336,386
    
    
    
    (65,976
    )
    
    
    9,108,577Total
consolidated benefits, claims, losses and settlement expenses
    
    $
    82,298,956
    
    
    
    60,175,746
    
    
    
    52,261,249Amortization of deferred policy
acquisition costs:International Life
    
    $
    7,350,418
    
    
    
    7,136,397
    
    
    
    8,611,495Home Service Business
    
    
    959,132
    
    
    
    
    
    
    
    Domestic Life
    
    
    2,003,480
    
    
    
    1,302,050
    
    
    
    1,433,829Domestic Health
    
    
    
    
    
    
    
    
    
    
    1,761,316Total consolidated amortization of
deferred policy acquisition costs
    
    $
    10,313,030
    
    
    
    8,438,447
    
    
    
    11,806,640Other operating expenses:International Life
    
    $
    13,205,916
    
    
    
    9,713,799
    
    
    
    10,829,339Home Service Business
    
    
    9,570,775
    
    
    
    1,948,977
    
    
    
    Domestic Life
    
    
    2,478,135
    
    
    
    5,342,037
    
    
    
    4,063,820Domestic Health
    
    
    173,960
    
    
    
    386,630
    
    
    
    4,072,961Total consolidated other operating expenses
    
    $
    25,428,786
    
    
    
    17,391,443
    
    
    
    18,966,120
  131




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##### Table of Contents



Schedule IV
 CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Reinsurance
Years Ended December 31, 2005, 2004 and 2003
 PercentageCeded
    
    
    Assumed
    
    
    
    
    
    
    of amountGross
    
    
    to other
    
    
    from other
    
    
    Net
    
    
    assumed toamount
    
    
    companies
    
    
    companies
    
    
    amount
    
    
    netYear ended December 31, 2005Life insurance in force
    
    $
    3,687,229,000
    
    
    
    221,793,000
    
    
    
    592,636,000
    
    
    
    4,058,072,000
    
    
    
    14.6
    %Premiums:Life insurance
    
    
    111,794,398
    
    
    
    1,907,003
    
    
    
    571,007
    
    
    
    110,458,402
    
    
    
    .5Accident and
health insurance
    
    
    12,389,786
    
    
    
    10,829,650
    
    
    
    
    
    
    
    1,560,136
    
    
    
    Casualty
    
    
    4,757,506
    
    
    
    1,130,697
    
    
    
    
    
    
    
    3,626,809
    
    
    
    Total premiums
    
    $
    128,941,690
    
    
    $
    13,867,350
    
    
    $
    571,007
    
    
    $
    115,645,347
    
    
    
    .5Year ended December 31, 2004Life insurance in force
    
    $
    3,513,044,000
    
    
    
    265,001,000
    
    
    
    488,312,000
    
    
    
    3,736,355,000
    
    
    
    13.1Premiums:Life insurance
    
    
    78,111,801
    
    
    
    1,000,921
    
    
    
    636,361
    
    
    
    77,747,241
    
    
    
    .8Accident and
health insurance
    
    
    15,085,957
    
    
    
    14,298,410
    
    
    
    
    
    
    
    787,547
    
    
    
    Total premiums
    
    
    1,202,682
    
    
    
    89,493
    
    
    
    
    
    
    
    1,113,189$
    94,400,440
    
    
    
    15,388,824
    
    
    
    636,361
    
    
    
    79,647,977
    
    
    
    .8Year ended December 31, 2003Life insurance in force
    
    $
    2,435,495,000
    
    
    
    301,366,000
    
    
    
    485,038,000
    
    
    
    2,619,167,000
    
    
    
    18.5Premiums:Life insurance
    
    
    61,777,374
    
    
    
    1,382,316
    
    
    
    463,629
    
    
    
    60,858,687
    
    
    
    .8Accident 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
  132




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##### Table of Contents



Signatures
  CITIZENS, INC.Date: March 16, 2006
    
    By:
    
    /s/ Mark A. OliverMark A. OliverChief Executive Officer and PresidentBy:
    
    /s/ Larry E. CarsonLarry E. CarsonVice President, Chief Financial Officerand Treasurer
    /s/ Mark A. Oliver
    
    /s/ Harold E. RileyMark A. Oliver, Director
    
    Harold E. Riley, Chairman of theBoard and Director/s/ Richard C. Scott
    
    /s/ Timothy T. TimmermanDr. Richard C. Scott, Director
    
    Timothy T. Timmerman, Director/s/ Rick D. Riley
    
    /s/ Steven F. SheltonRick D. Riley, Director
    
    Steven F. Shelton, Director/s/ E. Dean Gage
    
    /s/ Grant G. TeaffDr. E. Dean Gage, Director
    
    Grant G. Teaff, Director
 133




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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 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)10.10(o)
    
    First Amended and Restated Loan Agreement  Regions Bank, dated December 5, 2005*11
    
    Statement re: Computation of per share earnings (see financial statements)21
    
    Subsidiaries of Registrant*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.(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.




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##### Table of Contents



(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.(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 March 31,
2005, as Exhibit 10.10(m) with the Registrants Annual Report onForm
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.