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

CITIZENS, INC.

Colorado		84-0755371
(State of incorporation)		(I.R.S. Employer Identification No.)
400 East Anderson Lane, Austin, Texas		78752
(Address of principal executive offices)		(Zip Code)

(512) 837-7100
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class		Name of Each Exchange on Which Registered
Class A Common Stock		New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. o Yes þ No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. o Yes þ No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days. þ Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o Yes o No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. (Check one):

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). o Yes þ No

As of June 30, 2009, the aggregate market value of the Class A voting stock held by non-affiliates of the registrant was approximately $255,000,000.

Number of shares of common stock outstanding as of March 1, 2010:

Class A: 48,686,759
Class B: 1,001,714

DOCUMENTS INCORPORATED BY REFERENCE

Part III of this Report incorporates certain portions of the definitive proxy materials of the registrant in respect to its 2010 Annual Meeting of Shareholders.

 

 

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TABLE OF CONTENTS

		Page
PART I
Item 1. Business			3
Item 1A. Risk Factors			9
Item 1B. Unresolved Staff Comments			19
Item 2. Properties			19
Item 3. Legal Proceedings			19
Item 4. (Reserved)			20
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchase of Equity Securities			20
Item 6. Selected Financial Data			21
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations			22
Item 7A. Quantitative and Qualitative Disclosures about Market Risk			38
Item 8. Financial Statements and Supplementary Data			39
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			39
Item 9A. Controls and Procedures			39
Item 9B. Other Information			41
PART III
Item 10. Directors, Executive Officers and Corporate Governance			41
Item 11. Executive Compensation			41
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			41
Item 13. Certain Relationships and Related Transactions, and Director Independence			41
Item 14. Principal Accounting Fees and Services			41
PART IV
Item 15. Exhibits, Financial Statement Schedules			41
Signatures			48
Exhibit 21
Exhibit 23
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

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, statements specifically identified as forward-looking statements within this document. Many of these statements contain risk factors as well. In addition, certain statements in future filings by the Company with the Securities and Exchange Commission, in press releases, and in oral and written statements made by us or with the approval of the Company, which are not statements of historical fact constitute forward-looking statements within the meaning of the Act. Examples of forward-looking statements, include, but are not limited to: (i) projections of revenues, income or loss, earnings or loss per share, the payment or non-payment of dividends, capital structure, and other financial items, (ii) statements of our plans and objectives by our management or Board of Directors including those relating to products or services, (iii) statements of future economic performance and (iv) statements of assumptions underlying such statements. Words such as “believes,” “anticipates,” “assumes,” “estimates,” “plans,” “projects,” “could,” “expects,” “intends,” “targeted,” “may,” “will” and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.

Forward-looking statements are subject to known and unknown risks, uncertainties and other factors that may cause actual results to differ materially from those contemplated by the forward-looking statements. Factors that could cause the Company’s future results to differ materially from expected results include, but are not limited to:

•

Changes in foreign and U.S. general economic, market, and political conditions, including the performance of financial markets and interest rates, particularly in light of the severe economic conditions and the severe stress experienced by the global financial markets that began in the second half of 2008 and continued into 2009;

•

Changes in consumer behavior, which may affect the Company’s ability to sell its products and retain business;

•

The timely development of and acceptance of new products of the Company and perceived overall value of these products and services by existing potential customers;

•

Fluctuations in experience regarding current mortality, morbidity, persistency and interest rates relative to expected amounts used in pricing the Company’s products;

•

Results of litigation we may be involved in;

•

Changes in assumptions related to deferred acquisition costs and the value of any businesses we may acquire;

•

Regulatory, accounting or tax changes that may affect the cost of, or the demand for, the Company’s products or services;

•

Our concentration of business from persons residing in Latin America and the Pacific Rim;

•

Our success at managing risks involved in the foregoing;

•

Changes in tax laws;

•

Effects of acquisitions and restructuring, including possible difficulties in integrating and realizing the projected results of acquisitions;

•

Changes in statutory or U.S. GAAP accounting principles, policies or practices; and

•

The “risk factors” disclosed herein, as well as other risk factors disclosed previously and from time to time in our filings with the Securities and Exchange Commission.

Such forward-looking statements speak only as of the date on which such statements are made, and the Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made to reflect the occurrence of unanticipated events.

We make available, free of charge, through our Internet website (http://www.citizensinc.com), our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Section 16 reports filed by officers and directors, news releases, and, if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable after we electronically file such reports with, or furnish such reports to, the Securities and Exchange Commission. We are not including any of the information contained on our website as part of, or incorporating it by reference into, this Annual Report on Form 10-K.

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

PART I

ITEM 1. BUSINESS

Overview

Citizens, Inc. is an insurance holding company with approximately $927 million of assets under management at December 31, 2009 and serving the life insurance needs of individuals in the United States and in over 30 countries around the world. Through our subsidiaries, we pursue a strategy of offering ordinary whole life insurance with a focus on cash accumulation and final expense insurance products in niche markets where we believe we are able to achieve competitive advantages. Our core operations include issuing and servicing:

•

U.S. Dollar-denominated ordinary whole life insurance and endowment policies predominantly to high net worth, high income foreign residents, principally in Latin America and the Pacific Rim, through independent marketing consultants;

•

ordinary whole life insurance policies to middle income households in the midwest and the southern United States through independent marketing consultants; and

•

final expense and limited liability property policies to middle and lower income households in Louisiana, Mississippi and Arkansas through employee and independent agents in our home service distribution channel.

We have provided our insurance products internationally since 1975 and domestically since 1969. We believe we are one of the leading writers of U.S. Dollar-denominated ordinary whole life insurance outside of the United States. We also operate a Home Service distribution channel in Louisiana and Arkansas providing final expense ordinary whole life insurance and limited liability property insurance.

We believe the foreign markets we target have a relatively limited number of competitors and that the domestic markets we target are underserved by the life insurance industry, and these markets therefore offer attractive opportunities for expansion. We capitalize on the experience of our management team in marketing operations and achieve economies of scale in administrative operations. We seek to generate above-average returns using knowledge of our niche markets and our well-established distribution channels. We believe our underwriting processes, policy terms, pricing practices and proprietary administrative systems enable us to generate meaningful gross profit margins.

We were formed in 1969 by our Chairman, Harold E. Riley. Prior to our formation, Mr. Riley had many years of experience in the international and domestic life insurance business. Our business has grown significantly, both internationally and domestically, in recent years. Revenues rose from $139.0 million in 2005 to $189.0 million in 2009. During the five years ended December 31, 2009, our assets grew from $661.9 million to $927.3 million. Total stockholders’ equity increased from $137.0 million at December 31, 2005 to $216.1 million at December 31, 2009. See Item 6. “Selected Financial Data” in this Report.

Our Operating Segments

Our business is comprised of three primary operating business segments:

•

Life Insurance;

•

Home Service Insurance; and

•

Other Non-insurance Enterprises.

See Note 9 of the “Notes to Consolidated Financial Statements” for operating results of our segments for each of the years ended December 31, 2009, 2008 and 2007.

Life Insurance

Our Life Insurance segment consists of issuing ordinary whole life insurance domestically and in U.S. Dollar-denominated amounts to foreign residents. These contracts are designed to provide a fixed amount of insurance coverage over the life of the insured. Endowment contracts are also issued by the Company, which are principally saving contracts that incorporate an element of life insurance protection. For the majority of our business, we retain only the first $100,000 of risk on any one life. We operate this segment through our subsidiaries: CICA Life Insurance Company of America (“CICA”), Citizens National Life Insurance Company, (“CNLIC”) and Integrity Capital Insurance Company (“ICIC”).

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

International

We focus our sales of U.S. Dollar-denominated ordinary whole life insurance and endowment policies to high net worth, high income residents in Latin America and the Pacific Rim. We have successfully participated in the foreign marketplace since 1975, and we continue to seek opportunities for expansion of our foreign operations. We believe positive attributes of our international insurance business include:

•

larger face amount policies typically issued when compared to our U.S. operations, which results in lower underwriting and administrative costs per policy;

•

premiums are typically paid annually rather than monthly or quarterly, which saves us administrative expenses, accelerates cash flow and results in lower policy lapse rates than premiums with more frequently scheduled payments;

•

higher persistency than our U.S. policies;

•

good or better mortality rates than those in the United States, because our foreign insureds are high net worth individuals in the top income brackets in their respective countries.

We have implemented several policies and procedures to reduce the risks of asset and premium loss relating to our international business. Approvals for policy issuance are made in our Austin office and policies are issued and delivered to our independent consultants, who deliver the policies to the insureds. We have no offices, employees or assets outside of the United States. Insurance policy applications and premium payments are submitted by the independent consultants to us and we review the applications in our home offices in Austin, Texas. Premiums are paid in U.S. Dollars through a U.S. financial institution by check, wire or credit card. The policies we issue contain limitations on benefits for certain causes of death, such as homicide and careless driving. We have also developed disciplined underwriting criteria, which include medical reviews of applicants and background and reference checks. We have a claims policy that requires investigation of substantially all death claims. Additionally, we perform background reviews and reference checks of prospective marketing firms and consultants.

We accept applications for international insurance policies submitted by independent marketing firms and consultants. These persons specialize in marketing life insurance products and generally have several years of insurance marketing experience. We maintain standard contracts with the independent marketing firms pursuant to which they provide recruitment, training and supervision of their managers and associates in the service and placement of our products; however, all associates of these firms also contract directly with us as independent contractors and receive their compensation directly from us. Accordingly, should an arrangement between any independent marketing firm and us be terminated for any reason, we believe we would continue with the existing marketing arrangements with the associates of these firms without a material loss of sales. Our standard agreement with independent marketing firms and consultants provides they are independent contractors responsible for their own operation, expenses and that they are the representative of the prospective insured. In addition, the marketing firms also guarantee any debts of their associates to us. The marketing firms receive commissions on all new and renewal policies serviced or placed by them or their associates. All of these contracts provide that the independent marketing firms and consultants are aware of and responsible for compliance with local laws.

The following table sets forth, by territory, our total percentages of direct collected premiums from our international life insurance business for the periods indicated. The information is presented in accordance with statutory accounting practices prescribed by the state of Colorado, the state of domicile of our subsidiary that writes all of our international business, CICA.

		Year ended December 31,
Country		2009								2008								2007
		(In thousands)
Colombia		$	23,755				23.8	%		$	19,473				20.6	%		$	24,352				26.2	%
Taiwan			14,316				14.4				13,793				14.6				12,567				13.5
Venezuela			14,209				14.2				12,594				13.4				11,631				12.5
Ecuador			10,922				11.0				10,889				11.5				9,641				10.4
Argentina			8,669				8.7				9,580				10.2				9,099				9.8
Other Non-U.S.			27,843				27.9				27,988				29.7				25,525				27.6
Total		$	99,714				100.0	%		$	94,317				100.0	%		$	92,815				100.0	%

The ordinary whole life policies issued to residents of foreign countries during 2009 had an average face amount of approximately $73,000.

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

International Products

We offer several ordinary whole life insurance and endowment products designed to meet the needs of our non-U.S. policy owners. These policies have been structured to provide:

•

U.S. Dollar-denominated cash values that accumulate, beginning in the first policy year, to a policyholder during his or her lifetime;

•

premium rates that are competitive with or better than most foreign local companies;

•

a hedge against local currency inflation;

•

protection against devaluation of foreign currency;

•

capital investment in a more secure economic environment (i.e., the United States); and

•

lifetime income guarantees for an insured or for surviving beneficiaries.

Our international products have living benefit features. Every policy contains guaranteed cash values and is participating (i.e., provides an annual cash dividend). The major portion of each premium payment is used to provide insurance protection and build guaranteed cash values, while a lesser portion is used for retirement benefit accumulation. Once a policy owner pays the annual premium and the policy is issued, we immediately pay a cash dividend to the owner. The policy owner has several options with regard to the dividend, including the right to assign dividends to our stock investment plan, registered under the Securities Act of 1933 (the “Securities Act”), and administered in the United States by our unaffiliated transfer agent.

International Competition

The life insurance business is highly competitive. We compete with a large number of stock and mutual life companies internationally and domestically, as well as with financial institutions that offer insurance products. There are more than 1,000 life insurance companies in the United States, some of which also provide insurance to foreign residents.

Given the variety of foreign markets in which we provide ordinary whole life insurance, it is not possible to ascertain our competitive position. We face competition primarily from companies formed and operated in the country in which the insureds reside, from companies that operate in the same manner as we do and from companies that are foreign to the countries in which policies are sold, but issue insurance policies denominated in the local currency of those countries. A substantial number of companies may be deemed to have a competitive advantage over us due to their significantly greater financial resources, histories of successful operations and larger marketing forces. We believe that our experience, combined with the special features of our policies, allow us to compete effectively in pursuing new business.

Because premiums on our international policies are paid in U.S. Dollars drawn on U.S. financial institutions, and we pay claims in U.S. Dollars, we provide a product that is different from the products provided by foreign-domiciled companies. Our international policies are usually acquired by significant net worth persons in the top income brackets of their respective countries. The policies sold by our local competitors are generally offered broadly and are priced using the mortality of the entire population of the geographic region. Our mortality charges are therefore typically lower, which provides a competitive advantage. Additionally, the assets backing the reserves for our local competitors’ policies must be substantially invested in their respective countries and, therefore, are exposed to the inflationary risks and social or economic crises that tend to impact many foreign countries.

Due to the global economic downturn and turbulent financial markets, CICA has experienced an increase in surrenders from international policyholders, as well as a reduction in new policy sales. These negative events are believed to be related to adverse economic factors facing policyholders, and we anticipate these items will improve as the overall economic conditions improve.

Domestic

In the midwest and the southern United States, we seek to serve middle income households through the sale of cash accumulation ordinary whole life insurance products. The majority of our inforce business results from blocks of business of insurance companies we have acquired over the past 15 years.

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Our distribution strategy is geared towards attracting marketing consultants, comprised primarily of part-time, second-career sales associates (such as teachers, coaches, community leaders and others) in rural and urban areas, although we have seen an increased interest for our products from career distribution networks. In the United States, our domestic sales and marketing is conducted predominantly through independent marketing consultants. Over the past three years, new product sales have trended downward as we have tightened underwriting on business that did not meet our profitability objectives. Our product strategy focuses on the introduction of our cash accumulation ordinary whole life products to independent marketing consultants associated with companies we have acquired, while continuing to service the needs of acquired policyholders.

The following table sets forth our direct collected premiums by state for the periods indicated, in accordance with statutory accounting practices prescribed by the states of domicile of our insurance company subsidiaries.

		Year Ended December 31,
State		2009								2008								2007
		(In thousands)
Texas		$	6,501				37.3	%		$	7,306				41.6	%		$	7,481				39.6	%
Indiana			2,125				12.1				99				0.6				100				0.5
Missouri			1,877				10.7				2,073				11.8				2,309				12.2
Kentucky			1,525				8.7				1,838				10.5				2,224				11.8
Oklahoma			1,475				8.4				1,920				10.9				2,136				11.3
Other States			3,992				22.8				4,316				24.6				4,535				24.6
Total		$	17,495				100.0	%		$	17,552				100.0	%		$	18,785				100.0	%

The current year increase in Indiana resulted from the acquisition of Integrity Capital Insurance Company, which is domiciled in Indiana. This company was acquired in February of 2009, and we reported year-to-date premiums totaling approximately $1.6 million in 2009.

A number of domestic life insurance companies we have acquired also had issued blocks of accident and health insurance policies, which we did not consider to be a core part of our business. We ceded virtually all of such business under a coinsurance agreement with an unaffiliated insurance company under which it assumes substantially all of our accident and health policies. The premium amounts ceded under the coinsurance agreement in the years ended December 31, 2009, 2008, and 2007 were $6.3 million, $7.5 million and $8.2 million, respectively.

Domestic Products

The life insurance products we sell domestically focus primarily on living needs and provide benefits focused toward accumulating money for the insured. The features of our domestic life insurance products include:

•

cash accumulation/living benefits;

•

tax-deferred interest earnings;

•

guaranteed lifetime income options;

•

monthly income for surviving family members;

•

accidental death benefit coverage options; and

•

an option to waive premium payments in the event of disability.

Our life insurance products are principally designed to address the insured’s concern about outliving his or her monthly income, while at the same time providing death benefits. The primary purpose of our product portfolio is to help the insured create capital for needs such as retirement income, children’s higher education funds, business opportunities, emergencies and health care needs.

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Domestic Competition

The U.S. life insurance industry is a mature industry that, in recent years, has experienced little to no growth. Competition is intense because the life insurance industry is consolidating, with larger, more efficient and more effective organizations emerging from consolidation. Additionally, legislation became effective in the United States in the year 2000 that permits commercial banks, insurance companies and investment banks to combine. These factors have increased competitive pressures in general.

Many domestic life insurance companies have significantly greater financial, marketing forces and other resources, longer business histories and more diversified lines of insurance products than we do. We also face competition from companies marketing in person as well as with direct mail and Internet sales campaigns. Although we may be at a competitive disadvantage to these entities, we believe that our premium rates and policy features are generally competitive with those of other life insurance companies selling similar types of ordinary whole life insurance.

Home Service Insurance

We operate in the Home Service market through our subsidiaries: Security Plan Life Insurance Company (“SPLIC”) and Security Plan Fire Insurance Company (“SPFIC”). We focus on the life insurance needs of the middle and lower income market in Louisiana, Mississippi and Arkansas. Our policies are sold and serviced through a home service marketing distribution system of approximately 330 employee-agents who work full time on a route system and through funeral homes to sell policies, collect premiums and service policyholders.

Home Service Products

Our home service insurance products consist primarily of small face amount ordinary whole life and pre-need policies, which are designed to fund final expenses for the insured, primarily consisting of funeral and burial costs. The average life insurance policy face amount was approximately $7,300 in 2009; therefore, the underwriting performed on these applications is limited. To a much lesser extent, our Home Service Insurance segment sells limited-liability, named peril property policies covering dwellings and contents. We provide $30,000 maximum coverage on any one dwelling and contents, while content only coverage and dwelling only coverage is limited to $20,000. We intend to continue emphasis upon growth within this segment via direct sales and acquisitions.

Home Service Competition

In the Home Service segment, we face competition in Louisiana, Mississippi and Arkansas from other companies that specialize in home service distribution of insurance. We seek to compete based upon our emphasis on personal service to our customers.

Other Non-Insurance Enterprises

Other Non-insurance Enterprises includes Computing Technology, Inc., which provides data processing services to the Company, Insurance Investors, Inc., which provides aviation transportation to the Company, and Funeral Homes of America. This segment also includes the results of Citizens, Inc., the parent Company.

Revenues derived from any single customer did not exceed 10% of consolidated revenues in any of the last three years.

Operations and Technology

Our administrative operations are conducted primarily at our executive offices in Austin, Texas through approximately 105 administrative, operating and underwriting personnel. Our Home Service operations are conducted to a large degree from our district offices and support center in Donaldsonville, Louisiana through approximately 50 operations personnel, and Little Rock, Arkansas. At our executive offices, we perform policy design, marketing oversight, underwriting, accounting and reporting, customer service, administration and investing activities.

Our senior management has significant experience in insurance company application system design and implementation. Since the mid-1960’s, our senior management has been leading development of evolving insurance applications. We have a single integrated system for our entire Company, which is a centrally-controlled, mainframe-based administrative system. Functions of our administrative system include policy set up, administration, billing and collections, commission calculation, valuation, automated internal audit functions, storage backup and other related functions. Each company we acquire is converted onto our administrative system. This system has been in place for many years, and we believe it is a significant asset to us. We update our administrative system on an ongoing basis. This system is also capable of significant expansion without substantial capital outlay or increase in staff. Therefore, we believe we can achieve additional growth without costly administrative system expenditures, delays, failures or the addition of substantial staffing.

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Regulation

Our U.S. insurance operations are subject to a wide variety of laws and regulations. State insurance laws establish supervisory agencies with broad regulatory authority to regulate most aspects of our U.S. insurance businesses, and our insurance subsidiaries are regulated by the insurance departments of each state in which they are licensed. In addition, U.S. laws, such as the U.S.A. Patriot Act of 2001, the Gramm-Leach-Bliley Act of 1999, the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001, and the Sarbanes-Oxley Act of 2002, are examples of U.S. regulation that affect our business. We are subject to comprehensive regulations under the U.S. Patriot Act with respect to money laundering, as well as federal regulations regarding privacy and confidentiality. In addition, other federal laws and regulations apply to us in areas such as pension regulations, privacy, tort reform and taxation. Also, various forms of direct federal regulation of insurance have been proposed from time to time. Our insurance products and thus our businesses also are affected by U.S. federal, state and local tax laws.

The purpose of the laws and regulations that affect our insurance business is primarily to protect our insureds and not our stockholders. Many of the laws and regulations to which we are subject are regularly re-examined, and existing or future laws and regulations may become more restrictive or otherwise adversely affect our operations. In addition, insurance regulatory authorities (including state law enforcement agencies and attorneys general) periodically make inquiries and regularly conduct examinations regarding compliance by us and our subsidiaries with insurance, and other laws and regulations regarding the conduct of our insurance businesses. We cooperate with such inquiries and examinations and take corrective action when warranted.

Our insurance subsidiaries are collectively licensed to transact business in 33 states. We have insurance subsidiaries domiciled in the states of Colorado, Louisiana, Indiana and Texas. Our U.S. insurance subsidiaries are licensed and regulated in all U.S. jurisdictions in which they conduct insurance business. The extent of this regulation varies, but most jurisdictions have laws and regulations governing the financial condition of insurers, including standards of solvency, types and concentration of investments, establishment and maintenance of reserves, credit for reinsurance and requirements of capital adequacy, and the business conduct of insurers, including marketing and sales practices and claims handling. In addition, statutes and regulations usually require the licensing of insurers and their agents, the approval of policy forms and related materials and the approval of rates for certain types of insurance products.

All U.S. jurisdictions in which our U.S. insurance subsidiaries conduct insurance business have enacted legislation that requires each U.S. insurance company in a holding company system, except captive insurance companies, to register with the insurance regulatory authority of its jurisdiction of domicile and to furnish that regulatory authority financial and other information concerning the operations of, and the interrelationships and transactions among, companies within its holding company system that may materially affect the operations, management or financial condition of the insurers within the system. These laws and regulations also regulate transactions between insurance companies and their parents and affiliates. Generally, these laws and regulations require that all transactions within a holding company system between an insurer and its affiliates be fair and reasonable and that the insurer’s statutory capital and surplus following any transaction with an affiliate be both reasonable in relation to its outstanding liabilities and adequate to its financial needs. Statutory surplus is the excess of admitted assets over the sum of statutory liabilities and capital. For certain types of agreements and transactions between an insurer and its affiliates, these laws and regulations require prior notification to, and non-disapproval or approval by, the insurance regulatory authority of the insurer’s jurisdiction of domicile.

The payment of dividends or other distributions to us by our insurance subsidiaries is regulated by the insurance laws and regulations of their respective states of domicile. The laws and regulations of some of these jurisdictions also prohibit an insurer from declaring or paying a dividend except out of its earned surplus or require the insurer to obtain regulatory approval before it may do so. In addition, insurance regulators may prohibit the payment of ordinary dividends or other payments by our insurance subsidiaries to us (such as a payment under a tax sharing agreement or for employee or other services) if they determine that such payment could be adverse to our policyholders or contract holders of the subsidiary.

The laws and regulations of the jurisdictions in which our U.S. insurance subsidiaries are domiciled require that a controlling party obtain the approval of the insurance commissioner of the insurance company’s jurisdiction of domicile prior to acquiring control of the insurer and may delay, deter or prevent a transaction that our shareholders might consider desirable.

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Risk-based capital (“RBC”) requirements are imposed on life and property and casualty insurance companies. The risk-based capital ratio is determined by dividing an insurance company’s total adjusted capital, as defined, by its authorized control level risk-based capital. Companies that do not meet certain minimum standards require specified corrective action. The risk-based capital ratios for all our insurance subsidiaries exceeded such minimum ratios as of December 31, 2009. At December 31, 2008, Security Plan Fire Insurance Company (“SPFIC”) and Ozark National Life Insurance Company (“ONLIC”) had total adjusted capital below minimum standards. The Company was able to remediate these issues during 2009, which resulted in capital contributions being made to these entities by their parent, and the merger of ONLIC into Security Plan Life Insurance Company (“SPLIC”). The capital contributions had no effect on consolidated operations of the Company.

Effective with the annual reporting period ending December 31, 2010, the National Association of Insurance Commissioners, or the NAIC, adopted revisions to the Annual Financial Reporting Model Regulation, or the Model Audit Rule, related to auditor independence, corporate governance and internal control over financial reporting. The adopted revisions require that we file reports with state insurance departments regarding our assessment of internal control over financial reporting.

In late 2009, the NAIC issued Statement of Statutory Accounting Principles (“SSAP”) 10R (“SSAP 10R”). SSAP 10R increased the amount of deferred tax assets that may be admitted on a statutory basis. The admission criteria for realizing the value of deferred tax assets was increased from a one year to a three year period. Further, the aggregate cap on deferred tax assets that may be admitted was increased from 10% to 15% of surplus. These changes increased the capital and surplus of our insurance subsidiaries, thereby positively impacting RBC at December 31, 2009. To temper this positive RBC impact, and as a temporary measure at December 31, 2009 only, a 5% pre-tax RBC charge must be applied to the additional admitted deferred tax assets generated by SSAP 10R.

Potential Changes in Regulation

Government actions in response to the recent financial crisis and market volatility could significantly impact our current regulations. As part of a comprehensive reform of financial services regulation known as H.R. 3173, Congress is considering the creation of an office within the federal government to collect information about the insurance industry, recommend standards, and represent the United States in dealing with foreign insurance regulators.

Item 1A. RISK FACTORS

Investing in our Company involves certain risks. Set forth below are certain risks with respect to our Company. Readers should carefully review these risks, together with the other information contained in this report. The risks and uncertainties we have described in this report are not the only ones we face. Additional risks and uncertainties not presently known to us, or that we currently deem not material, may also adversely affect our business. Any of the risks discussed in this report or that are presently unknown or not material, if they were to actually occur, could result in a significant adverse impact on our business, operating results, prospects or financial condition. References in the risk factors below to “we,” “us,” “our,” “Citizens” and like terms relate to Citizens, Inc. and its subsidiaries on a U.S. GAAP consolidated financials basis, unless specifically identified otherwise. We operate our subsidiaries as separate and distinct entities with respect to corporate formalities.

Risks Relating to Our Business

A substantial amount of our revenue comes from foreign residents and is subject to risks associated with the possible application of foreign insurance and securities laws and regulations to our business, as well as risks from political and economic instability and currency or asset transfer restrictions.

A substantial part of our insurance policy sales are from foreign countries, primarily those in Latin America and the Pacific Rim. There is a risk that we may lose a significant portion of these sales should adverse events occur in these countries.

We do not accept insurance applications outside of the United States. All of our assets are in the United States and all policy premiums must be paid to us in U.S. Dollars drawn on U.S. financial institutions. As a result, we have never qualified to do business in any foreign country and have never submitted our insurance policies issued to foreign residents for review by any insurance regulatory agency. We sell our policies to foreign residents using foreign independent marketing firms and independent consultants, and we rely on those persons to comply with applicable laws in selling our insurance products.

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

The government of a foreign country could determine that its residents may not buy life insurance from us unless we became qualified to do business in that country or unless our policies purchased by its residents receive prior approval from its insurance regulators. If this were to occur, our policy sales to that country’s residents would cease before any such approvals could be obtained. Also, there is no assurance that we would be able to qualify to do business in any foreign country or that its insurance regulatory authorities would approve our policies. We could also face sanctions, including fines and penalties, if a country’s authorities determined any failure to qualify or otherwise comply with its laws was willful or ongoing. Any of the foregoing could reduce our revenues and materially adversely affect our results of operations and financial condition. Additionally, we do not determine whether our independent consultants are required to be licensed to sell insurance in the countries in which they make insurance sales. If our independent consultants were not in compliance with applicable laws, including licensing laws, they could be required to cease operations, which would reduce our revenues. We have not obtained any advice of counsel in any foreign jurisdictions with respect to these matters. We are unable to quantify the effect of foreign regulation on our 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 or avoid a market if foreign regulation were imposed.

The offer and sale of our Class A common stock through our Stock Investment Plan (the “Plan”) is registered under the Securities Act of 1933. Most all of our foreign policyholders choose to invest certain cash dividends they receive with respect to their life insurance policies in our Class A common stock through the Plan, which is not registered under the securities laws of any foreign jurisdiction. We have not obtained any advice of counsel in any foreign jurisdiction as to whether such participation by foreign residents in the Plan is subject to foreign securities laws or regulations or whether our independent consultants in these jurisdictions are subject to licensing requirements in connection with foreign policyholder participation in the Plan. If a securities regulatory authority were to determine the offer and sale of our Class A common stock through the Plan were contrary to applicable laws and regulations, we could be faced with cease and desist orders, fines and penalties, or reduced participation in the Plan by our foreign policyholders. This could materially reduce the amount of our Class A common stock purchased in the open market under the Plan, as historically a significant volume of shares have been purchased under the Plan through insurance policy cash dividends assigned to the Plan. We could also be faced with private disputes relating to the Plan, including the possibility of securities law claims within the United States. In the absence of countervailing considerations, we would expect to defend any such claims and we could incur significant defense costs, including not only attorneys’ fees and other direct litigation costs, but also the expenditure of substantial amounts of management time that otherwise would be devoted to our business. This could materially, adversely affect our results of operations and financial condition.

Additionally, if economic or political crises were to occur in any of the countries where our foreign policyowners reside, our revenues could be adversely affected. Also, currency control laws, regulations and decrees in foreign countries, if implemented, could materially adversely affect our revenues by imposing restrictions on asset transfers outside of a country where our insureds reside.

While our management has more than 40 years of experience in writing life insurance policies for foreign residents without any significant regulatory action or any lengthy currency controls relating to our foreign resident insureds, there can be no assurance that such situations will not occur and that our revenues, results of operations and financial condition will not be materially, adversely affected if they do occur.

The United States and global financial markets experienced extreme volatility and disruption in 2008 and 2009. We continue to be exposed to significant financial and capital markets risk, including changes in equity prices, which may have a material adverse effect on our results of operations, financial condition and liquidity.

Markets in the United States and elsewhere experienced extreme volatility and disruption during 2008 and 2009, due largely to the stresses affecting the global banking system The global economy is in the midst of a severe recession, the effects of which are likely to persist beyond 2009, despite significant past and expected future governmental intervention in the world’s major economies. These circumstances exerted significant downward pressure on prices in the fourth quarter of 2008 and during 2009 on debt and equity securities and virtually all other asset classes and resulted in substantial increased market volatility, severely constrained credit and capital markets, particularly for financial institutions, and an overall loss of investor confidence.

As an insurance holding company with significant investment exposure, we face material financial and capital markets risk in our operations. Due to the low interest rate environment in 2009, the Company experienced significant call activity on our fixed income portfolio. We recorded other-than-temporary impairments (“OTTI”) in 2008 and 2009 due to market and credit decline. In addition, the current severe recession and the significant increase in the unemployment rate could result in decreased persistency of our insurance policies in force, as well as reduced new insurance policy sales, which may materially, adversely affect our results of operations and financial condition.

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Changes in market interest rates may significantly affect our profitability.

Some of our products, principally traditional whole life insurance and guaranteed interest contracts, expose us to the risk that changes in interest rates will reduce our “spread,” or the difference between the amounts that we are required to pay under our contracts to policyholders and the rate of return we are able to earn on our investments intended to support obligations under the contracts. Our spread is a key component of our net income.

As interest rates decrease or remain at low levels, we may be forced to reinvest proceeds from investments that have matured, prepaid, been sold, or called at lower yields, reducing our investment margin. Our fixed income bond portfolio is exposed to interest rate risk as a significant portion of the portfolio is callable. Lowering interest crediting rates can help offset decreases in investment margins on some products. However, our ability to lower these rates could be limited by competition or contractually guaranteed minimum rates, and may not match the timing or magnitude of changes in asset yields. Our expectation of future spreads is an important component in amortization of deferred acquisition costs and significantly lower spreads may result in increasing amortization, thereby reducing net income for the period. See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” — Consolidated Results of Operations — Realized Gains (Losses) on Investments.

Gross unrealized losses on fixed maturity and equity securities may be realized or result in future impairments, resulting in a reduction in our net income.

Fixed maturity and equity securities classified as available-for-sale are reported at fair value. Unrealized gains and losses on available-for-sale securities are recognized as a component of other comprehensive income (loss) and are, therefore, excluded from net income. Our total gross unrealized losses on our available-for-sale securities portfolio at December 31, 2009 were $9.7 million. The accumulated change in estimated fair value of these securities is recognized in net income when the gain or loss is realized upon sale of the security or in the event that the decline in estimated fair value is determined to be other-than-temporary and an impairment charge to earnings is taken. Realized losses or impairments may have a material adverse effect on our net income in a particular quarterly or annual period.

Our actual claims losses may exceed our reserves for claims and we may be required to establish additional reserves, which in turn may adversely impact our results of operations and financial condition.

We maintain reserves to cover our estimated exposure for claims relating to our issued insurance policies. Reserves, whether calculated under U.S. generally accepted accounting principles (“U.S. GAAP”) or statutory accounting practices prescribed by various state insurance regulators, do not represent an exact calculation of exposure, but instead represent our best estimates, generally involving actuarial projections, of what we expect claims will be based on mortality assumptions that are determined by various regulatory authorities. Many reserve assumptions are not directly quantifiable, particularly on a prospective basis. In addition, when we acquire other domestic life insurance companies, our assessment of the adequacy of acquired policy liabilities is subject to our estimates and assumptions. Reserve estimates are refined as experience develops, and adjustments to reserves are reflected in our statements of operations for the period in which such estimates are updated. Because establishing reserves is an inherently uncertain process involving estimates of future losses, future developments may require us to increase claims reserves, which may have a material adverse effect on our results of operations and financial condition in the periods in which such increases occur.

See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” — Critical Accounting Estimates — Policy Liabilities.

Unexpected losses in future reporting periods may require us to adjust the valuation allowance against our deferred tax assets.

The Company’s valuation allowance relative to our deferred tax asset (“DTA”) was $2.5 million at December 31, 2009. The valuation allowance was established based on facts, circumstances and information available at the reporting date, which indicated it was more likely than not that some or all of the DTA would not be realized.

Currently, we evaluate our DTA quarterly for recoverability based on available evidence. This process involves management’s judgment about assumptions, which are subject to change from period to period due to tax rate changes or variances between our projected operating performance and our actual results. Ultimately, future adjustments to the DTA valuation allowance, if any, will be determined based upon changes in the expected realization of the net deferred tax assets. The realization of the deferred tax assets depends on the existence of sufficient taxable income in either the carry back or carry forward periods under applicable tax law. Due to significant estimates utilized in establishing the valuation allowance and the potential for changes in facts and circumstances, it is reasonably possible that we will be required to record adjustments to the valuation allowance in future reporting periods. Such an adjustment could have a material adverse effect on our results of operation, financial condition and capital position.

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” — Critical Accounting Estimates — Tax Accounting.

We may be required to accelerate the amortization of deferred acquisition costs and the costs of customer relationships acquired, which would increase our expenses and adversely affect our results of operations and financial condition.

At December 31, 2009, we had $115.6 million of deferred policy acquisition costs, or DAC. DAC represents costs that vary with and are primarily related to the sale and issuance of our insurance policies and are deferred and amortized over the estimated life of the related insurance policies. These costs include commissions in excess of ultimate renewal commissions, solicitation and printing costs, sales material costs and some support costs, such as underwriting and contract and policy issuance expenses. Under U.S. GAAP, DAC is amortized to income over the lives of the underlying policies, in relation to the anticipated recognition of premiums.

In addition, when we acquire a block of insurance policies, we assign a portion of the purchase price to the right to receive future net cash flows from existing insurance and investment contracts and policies. This intangible asset, called the cost of customer relationships acquired, or CCRA, represents the actuarially estimated present value of future cash flows from the acquired policies. At December 31, 2009, we had $34.7 million of CCRA. We amortize the value of this intangible asset in a manner similar to the amortization of DAC.

Our amortization of DAC and CCRA generally depends upon anticipated profits from investments, surrender and other policy charges, mortality, morbidity, persistency and maintenance expense margins. For example, if our insurance policy lapse and surrender rates were to exceed the assumptions upon which we priced our insurance policies, or if actual persistency proves to be less than our persistency assumptions, especially in the early years of a policy, we would be required to accelerate the amortization of expenses we deferred in connection with the acquisition of the policy. We regularly review the quality of our DAC and CCRA to determine if they are recoverable from future income. If these costs are not recoverable, they are charged to expenses in the financial period in which we make this determination.

Unfavorable experience with regard to expected expenses, investment returns, surrender and other policy changes, mortality, morbidity, lapses or persistency may cause us to increase the amortization of DAC or CCRA, or both, or to record a current period expense to increase benefit reserves, any of which could have a material adverse effect on our results of operations and financial condition.

See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” — Critical Accounting Estimates — Deferred policy acquisition cost and cost of customer relationships acquired.

We may be required to recognize an impairment on the value of our goodwill, which would increase our expenses and materially adversely affect our results of operations and financial condition.

Goodwill represents the excess of the amount paid by us to acquire various life insurance companies over the fair value of their net assets at the date of the acquisition. Under U.S. GAAP, we test the carrying value of goodwill for impairment at least annually at the “reporting unit” level, which is either an operating segment or a business that is one level below the operating segment. Goodwill is impaired if its carrying value exceeds its implied fair value. This may occur for various reasons, including changes in actual or expected earnings or cash flows of a reporting unit, generation of earnings by a reporting unit at a lower rate than similar businesses or declines in market prices for publicly traded businesses similar to our reporting units. If any portion of our goodwill becomes impaired, we would be required to recognize the amount of the impairment as a current-period expense, which could have a material adverse effect on our results of operations and financial condition.

See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” — Critical Accounting Estimates — Goodwill.

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

We are a defendant in lawsuits, which may adversely affect our financial condition and detract from the time our management is able to devote to our business, and we are subject to risks related to litigation and regulatory matters.

We are a defendant in a lawsuit originally filed on August 6, 1999 in the Texas District Court, Austin, Texas, now styled Citizens Insurance Company of America, Citizens, Inc., and Harold E. Riley v. Fernando Hakim Daccach, in which a class was originally certified by the trial court and affirmed by the Court of Appeals for the Third District of Texas. We appealed the grant of class status to the Texas Supreme Court, which on March 2, 2007, reversed the Court of Appeal’s affirmation of the trial court’s class certification order, decertified the class and remanded the case to the trial court for further proceedings consistent with the Texas Supreme Court’s opinion. The underlying lawsuit alleged that certain life insurance policies we made available to non-U.S. residents, when combined with a policy feature that allowed certain cash benefits to be assigned to two non-U.S. trusts for the purpose of accumulating ownership of our Class A common stock, along with allowing the policyholders to make additional contributions to the trusts, were actually offers and sales of securities that occurred in Texas by unregistered dealers in violation of the Texas securities laws. The remedy sought was rescission and return of the insurance premium payments. On November 16, 2009, the trial court conducted further proceedings on the case, in order to determine whether the class should be recertified. On December 9, 2009, the trial court denied the recertification of the class. The remaining plaintiffs must now proceed individually, and not as a class, if they intend to pursue their cases against Citizens. Citizens intends to maintain a vigorous defense in any remaining proceedings.

Security Plan Fire Insurance Company (“SPFIC”) is a defendant in a suit styled The State of Louisiana v. AAA Insurance, or Road Home Litigation, which was filed in the Civil District Court for the Parish of Orleans on August 23, 2007 by the state of Louisiana as subrogee/assignee of the insureds of more than 200 different insurance companies. The suit was filed to recover money that the state of Louisiana paid to certain insureds under the Louisiana Road Home Program for damages resulting from Hurricanes Katrina and Rita. The suit was removed to the United States District Court for the Eastern District of Louisiana on September 11, 2007. In March 2009, the trial court judge dismissed all bad faith claims asserted against the defendants, including SPFIC. The judge also dismissed all claims for flood damage and all claims asserted under Louisiana’s Valued Policy Law. Due to the District Court’s recent rulings noted above, we no longer believe an adverse ruling in the Road Home Litigation would have a material impact on our financial statements.

In addition to these lawsuits, we may from time to time be subject to a variety of legal and regulatory actions relating to our current and past business operations, including, but not limited to, other possible disputes relating to the non-U.S. trusts or the Plan referred to above and the investment by many of our foreign policyholders in our Class A common stock of certain cash dividends they receive from their insurance policies. If allegations similar to those made in certain of these lawsuits regarding the application of Texas or other securities laws to the assignment of policy dividends were determined to be valid, we could face the possibility of other securities law claims within the United States. Also, we could be faced with contingent liabilities with respect to possible claims for violations of securities laws, the extent of which would be difficult to determine. In the absence of countervailing considerations, we would expect to defend any such claims, and we could incur significant defense costs, including not only attorneys’ fees and other direct litigation costs, but also the expenditure of substantial amounts of management time that otherwise would be devoted to our business. This could materially adversely affect our results of operations and financial condition.

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

We reinsure certain risks underwritten by our various insurance subsidiaries. Market conditions beyond our control determine the availability and cost of the reinsurance protection we purchase. The high cost of reinsurance or lack of affordable coverage could adversely affect our results of operations and financial condition.

Our reinsurance facilities are generally subject to annual renewal. We may not be able to maintain our current reinsurance facilities and, even if highly desirable or necessary, we may not be able to obtain replacement reinsurance facilities in adequate amounts or at rates economic to us. If we are unable to renew our expiring facilities or to obtain new reinsurance facilities, either our net exposures would increase or, if we are unwilling or unable to bear an increase in net exposures, we may have to reduce the level of our underwriting commitments. In addition, our reinsurance facilities may be cancelled, pursuant to their terms, upon the occurrence of certain specified events, including a change of control of our Company (generally defined as the acquisition of 10% or more of our voting equity securities) or the failure of our insurance company subsidiaries to maintain the minimum required levels of statutory surplus. Any of these potential developments could materially adversely affect our revenues, results of operations and financial condition.

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

In 2009, we reinsured $363 million of face amount of our life insurance policies. Amounts reinsured in 2009 represented 8.2% of the face amount of direct life insurance in force in that year. Although the cost of reinsurance is, in some cases, reflected in premium rates, under certain reinsurance agreements, the reinsurer may increase the rate it charges us for reinsurance. If our cost of reinsurance were to increase, we might not be able to recover these increased costs, and our results of operations and financial condition could be materially adversely affected. See Note 5 to the Company’s Consolidated Financial Statements.

We may not be able to continue our past strategy of acquiring other U.S. life insurance companies, and we may not realize improvements to our financial results as a result of our past or any future acquisitions.

We have acquired 16 U.S. life insurance companies since 1987. Our objective in this strategy has been to increase our assets, revenues and capital, improve our competitive position and increase our earnings, in part by realizing certain operating efficiencies associated with economies of scale.

We evaluate possible acquisitions of other insurance companies on an ongoing basis. While our business model is not dependent primarily upon acquisitions, the time frame for achieving or further improving our market positions can be shortened through acquisitions. There can be no assurance that suitable acquisitions presenting opportunities for continued growth and operating efficiencies will be available to us, or that we will realize the anticipated financial results from completed acquisitions.

Even if we identify and complete insurance company acquisitions, we may be unable to integrate them on an economically favorable basis. Implementation of an acquisition strategy entails a number of risks, including, among others, inaccurate assessment of assets, liabilities or contingent liabilities and the failure to achieve anticipated revenues, earnings or cash flow. The occurrence of any of these events could have a material adverse effect on our results of operations and financial condition.

Our international and domestic operations face significant competition.

Our international marketing plan focuses on making available U.S. Dollar-denominated life insurance products to high net worth, high income individuals residing in more than 30 countries. New competition could cause the supply of insurance to change, which could affect our ability to price our products at attractive profitable rates to us, thereby adversely affecting our revenues, results of operations and financial condition. Although there are some impediments facing potential competitors that wish to enter the foreign markets we serve, the entry of new competitors into these markets may occur, affording our customers reason to change to other insurance providers. In connection with our business with foreign nationals, we experience competition primarily from the following sources, many of which have substantially greater financial, marketing and other resources than we have:

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Foreign operated companies with U.S. Dollar policies. We face direct competition from companies that operate in the same manner as we operate in our international markets.

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Companies foreign to the countries in which their policies are sold but that issue local currency policies. Another group of our competitors in the international marketplace consists of companies that are foreign to the countries in which their policies are sold but issue life insurance policies denominated in the local currencies of those countries. Local currency policies provide the benefit of assets located in the country of foreign residents, but entail risks of uncertainty due to local currency fluctuations, as well as the perceived instability and weakness of local currencies.

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Locally operated companies with local currency policies. We compete with companies formed and operated in the country in which our foreign insureds reside. Generally, these companies are subject to risks of currency fluctuations, and they primarily use mortality tables based on experience of the local population as a whole. These mortality tables are typically based on significantly shorter life spans than those we use. As a result, the cost of insurance from these companies tends to be higher than ours. Although these companies typically market their policies to a broader section of the population than do our independent marketing firms and independent consultants, there can be no assurance that these companies will not endeavor to place a greater emphasis on our target market and compete more directly with us.

In the United States, we compete with more than 1,000 other life insurance companies of various sizes. The life insurance business in the United States is highly competitive, in part because it is a mature industry that, in recent years, has experienced little to no growth in life insurance sales. Many domestic life insurance companies have substantially greater financial resources, longer business histories and more diversified lines of insurance coverage than we do. These companies also have larger sales forces than we have. Competition in the United States has also increased recently because the life insurance industry is consolidating, with larger, more efficient organizations emerging from the consolidation. In addition, legislation became effective in 2000 that permits commercial banks, insurance companies and investment banks to combine. This legislation permits, for instance, a commercial bank to acquire or form an insurance company. We believe these factors have increased competitive pressures in the life insurance market in general.

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

In addition, from time to time, companies enter and exit the markets in which we operate, thereby increasing competition at times when there are new entrants. We may lose business to competitors offering competitive products at lower prices, or for other reasons.

There can be no assurance that we will be able to compete effectively in any of our markets. If we do not, our business, results of operations and financial condition will be materially adversely affected.

Sales of our products may be reduced if we are unable to (i) establish and maintain commercial relationships with independent marketing firms and independent consultants (ii) attract and retain employee agents or (iii) develop and maintain our distribution sources.

We distribute our insurance products through several distribution channels, including independent marketing firms and independent consultants and our employee agents. These relationships are significant for both our revenues and our profits. In our life insurance segment, we depend almost exclusively on the services of independent marketing firms and independent consultants. In our home service insurance segment, we depend on employee agents whose role in our distribution process is integral to developing and maintaining relationships with policyholders. Significant competition exists among insurers to form relationships with marketers of demonstrated ability. Some of our competitors may offer better compensation packages for marketing firms, independent consultants and agents and broader arrays of products and have a greater diversity of distribution resources, better brand recognition, more competitive pricing, lower cost structures and greater financial strength or claims paying ratings than we do. We compete with other insurers for marketing firms, independent consultants and employee agents primarily on the basis of our compensation and support services. Any reduction in our ability to attract and retain effective sales representatives could materially adversely affect our revenues, results of operations and financial condition.

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 rely on the active participation of our Chairman of the Board and Chief Executive Officer, Harold E. Riley (age 81), and our Vice Chairman of the Board and President, Rick D. Riley (age 56), in connection with the development and execution of our operating and marketing plans and strategy for expanding our business. We anticipate that their expertise will continue to be of substantial value in connection with our operations. The loss of the services of either of these individuals could have a significant adverse effect on our business and prospects. We do not have an employment agreement with either of these persons nor do we carry a key-man insurance policy on either of their lives.

We are subject to extensive governmental regulation in the United States, which increases our costs of doing business and could restrict the conduct of our business.

We are subject to extensive regulation and supervision in U.S. jurisdictions wherein we do business, as well as anti-money laundering regulations adopted under the U.S. Patriot Act. Insurance company regulation is generally designed to protect the interests of policyholders, with substantially lesser protections to shareholders of the regulated insurance companies. To that end, all the states in which we do business have insurance regulatory agencies with broad powers under law with respect to such things as: licensing companies to transact business; mandating capital and surplus requirements; regulating trade and claims practices; approving policy forms; and restricting companies’ ability to enter and exit markets.

The capacity for an insurance company’s growth in premiums is partially a function of its required statutory surplus. Maintaining appropriate levels of statutory surplus, as measured by statutory accounting practices prescribed or permitted by a company’s state of domicile, is considered important by all state insurance regulatory authorities. Failure to maintain required levels of statutory surplus could result in increased regulatory scrutiny and enforcement action by regulatory authorities.

See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” — Liquidity and Capital Resources for further discussion on statutory capital requirements.

Most insurance regulatory authorities have broad discretion to grant, renew, suspend and revoke licenses and approvals, and could preclude or temporarily suspend us from carrying on some or all of our activities, including acquisitions of other insurance companies, require us to add capital to our insurance company subsidiaries, or fine us. If we are unable to maintain all required licenses and approvals, or if our insurance business is determined not to comply fully with the wide variety of applicable laws and regulations and their interpretations, including the U.S. Patriot Act, our revenues, results of operations and financial condition could be materially adversely affected.

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Changes in U.S. regulation may adversely affect our results of operations and financial condition and limit our prospective growth.

Currently, the U.S. Federal Government does not directly regulate the insurance business, although initiatives for Federal regulation of insurance are proposed by members of the U.S. Congress from time to time. However, Federal legislation and administrative policies in several other areas can materially and adversely affect insurance companies, including our business. These areas include the U.S. Patriot Act, financial services regulation, securities regulation, including the Sarbanes-Oxley Act of 2002, pension regulation, privacy, tort reform legislation and taxation. In addition, various forms of direct federal regulation of insurance have been proposed from time to time.

Our failure to maintain effective information systems could adversely affect our business.

We must maintain and enhance our existing information systems and develop new information systems in order to keep pace with continuing changes in information processing technology, evolving industry and regulatory standards and changing customer preferences. If we do not maintain adequate systems, we could experience adverse consequences, including inadequate information on which to base pricing, underwriting and reserve decisions, regulatory problems, failure to meet prompt payment obligations, increases in administrative expenses and loss of customers.

Some of our information technology systems and software are mainframe-based, legacy-type systems that require an ongoing commitment of resources to maintain current standards. We continuously enhance and update our systems to keep pace with changes in our products and business models, information processing technology, evolving industry and regulatory standards and policyholder needs. Our success is in large part dependent on maintaining and enhancing the effectiveness of existing systems, as well as continuing to integrate, develop and enhance our information systems to support business processes in a cost-effective manner.

Our failure to maintain effective and efficient information systems, or our failure to efficiently and effectively consolidate our information systems to eliminate redundant or obsolete applications, could have a material adverse effect on our results of operations and financial condition.

Our failure to protect confidential information and privacy could result in the loss of customers, subject us to fines and penalties and adversely affect our results of operations and financial condition.

Our insurance subsidiaries are subject to privacy regulations and to confidentiality obligations. We also have legal obligations to protect certain confidential information we obtain from our existing vendors. These obligations generally include protecting confidential information in the same manner and to the same extent as we protect our own confidential information. The actions we take to protect confidential information include among other things: monitoring our record retention plans and policies and any changes in state or federal privacy and compliance requirements; maintaining secure storage facilities for tangible records; and limiting access to electronic information in order to safeguard certain information.

In addition, the Gramm-Leach-Bliley Act requires that we deliver a notice regarding our privacy policy both at the delivery of an insurance policy and annually thereafter. Certain exceptions are allowed for sharing of information under joint marketing agreements. However, certain state laws may require us to obtain a policyholder’s consent before we share information.

We have a written information security program with appropriate administrative, technical and physical safeguards to protect such confidential information. If we do not comply with privacy regulations and protect confidential information, we could experience adverse consequences, including regulatory sanctions, loss of reputation and litigation, any of which could have a material adverse effect on our business, results of operations and financial condition.

The insurance industry in which we operate may be subject to periodic negative publicity, which may negatively impact our financial results.

We interface with and distribute our products to individual consumers. There may be a perception that these purchasers may be unsophisticated and in need of consumer protection. Accordingly, from time to time, consumer advocate groups or the media may focus attention on our products, thereby subjecting us to periodic negative publicity. We may also be negatively impacted if other insurance companies engage in practices resulting in increased public attention to our businesses. Negative publicity may result in lower sales of insurance, lower persistency of our insurance products, increased regulation and legislative scrutiny of industry practices as well as increased litigation, which may further increase our costs of doing business and impede our ability to market our products. As a result, our business, results of operations and financial condition could be materially, adversely affected.

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

General economic, financial market and political conditions may materially, adversely affect our results of operations and financial condition.

Our results of operations and financial condition may be materially, adversely affected from time to time by general economic, financial market and political conditions, both in the United States and in the foreign countries where our policy owners reside. These conditions include economic cycles such as: levels of consumer spending; levels of inflation; movements of the financial markets; availability of credit; fluctuations in interest rates, monetary policy or demographics; and legislative and competitive changes.

During periods of economic downturn, such as the one occurring in 2008 and 2009, our insureds may choose not to purchase our insurance products, may terminate existing policies, permit policies to lapse or may choose to reduce the amount of coverage purchased, any of which could have a material adverse effect on our results of operations and financial condition. Also, our sales of new insurance policies might decrease.

Our insurance subsidiaries are restricted by applicable laws and regulations in the amounts of fees, dividends and other distributions they may make to us. The inability of our subsidiaries to make payments to us in sufficient amounts for us to conduct our operations could adversely affect our ability to meet our obligations or expand our business.

As a holding company, our principal asset is the stock of our subsidiaries. We rely primarily on statutorily permissible payments from our insurance company subsidiaries, principally through service agreements we have with our subsidiaries, to meet our working capital and other corporate expenses. The ability of our insurance company subsidiaries to make payments to us is subject to regulation by the states in which they are domiciled, and these payments depend primarily on approved service agreements between us and these subsidiaries and, to a lesser extent, the statutory surplus (which is the excess of assets over liabilities as determined under statutory accounting practices prescribed by an insurance company’s state of domicile), future statutory earnings (which are earnings as determined in accordance with statutory accounting practices) and regulatory restrictions.

Generally, the net assets of our insurance company subsidiaries available for dividends are limited to either the lesser or greater (depending on the state of domicile) of the subsidiary’s net gain from operations during the preceding year and 10% of the subsidiary’s net statutory surplus as of the end of the preceding year as determined in accordance with accounting practices prescribed by insurance regulatory authorities.

Except to the extent that we are a creditor with recognized claims against our subsidiaries, claims of our subsidiaries’ creditors, including policyholders, have priority with respect to the assets and earnings of the subsidiaries over the claims of our creditors and shareholders. If any of our subsidiaries becomes insolvent, liquidates or otherwise reorganizes, our creditors and shareholders will have no right to proceed in their own right against the assets of that subsidiary or to cause the liquidation, bankruptcy or winding-up of the subsidiary under applicable liquidation, bankruptcy or winding-up laws.

Adverse capital and credit market conditions may significantly affect our access to debt and equity capital and our cost of capital in seeking to expand our business.

The capital and credit markets experienced extreme volatility in 2008 continuing into 2009. In some cases, the markets exerted significant downward pressure on availability of debt and equity capital for certain issuers (including short term liquidity and credit capacity). We believe the availability of debt and equity capital has decreased significantly compared to prior years.

The availability of equity and debt financing to us will depend on a variety of factors such as market conditions, the general availability of credit, the overall availability of credit to the financial services industry, our credit capacity, as well as the possibility that investors or lenders could develop a negative perception of our long- or short-term financial prospects. Disruptions, uncertainty or volatility in the capital markets may also limit our access to equity capital for us to seek to expand our business. As such, we may be forced to delay raising debt or equity capital, or bear an unattractive cost of capital, which could adversely affect our ability to complete any acquisitions and negatively impact profitability of an acquisition.

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

There can be no assurance that actions of the U.S. Government, the Federal Reserve and other governmental and regulatory bodies for the purpose of stabilizing the financial markets will achieve the intended effect.

In response to the financial crises affecting the U.S. banking system and financial markets and going concern threats to investment banks and other financial institutions, on October 3, 2008, President Bush signed the Emergency Economic Stabilization Act of 2008 (the “EESA”) into law. Pursuant to the EESA, the U.S. Treasury has the authority to, among other things, purchase up to $700 billion of mortgage-backed and other securities from financial institutions for the purpose of stabilizing the financial markets and invest in financial services companies. The Federal Government, the Federal Reserve and other governmental and regulatory bodies have taken or are considering taking other actions to address the current financial crisis, including purchases of commercial paper. On February 17, 2009, President Obama signed the American Recovery and Reinvestment Act of 2009, which provided for Federal spending and tax cuts, estimated in the aggregate to be approximately $789 billion, for the purpose of job preservation and creation, infrastructure investment, energy efficiency and science, unemployment assistance, state and local government fiscal stabilization and other associated purposes. There can be no assurance as to what impact such actions will have on the financial markets, including the high levels of volatility currently being experienced. Such continued volatility could materially and adversely affect our business, financial condition and results of operations, or the trading price of our Class A common stock.

Risks Relating to Our Class A Common Stock

The price of our Class A common stock may be volatile and may be affected by market conditions beyond our control.

Our Class A common stock price has historically fluctuated and is likely to fluctuate in the future and could decline materially because of the volatility of the stock market in general, decreased participation in the Plan referred to above or a variety of other factors, many of which are beyond our control, including: quarterly or annual variations in actual or anticipated results of our operations; interest rate fluctuations; changes in financial estimates by securities analysts; competition and other factors affecting the life insurance business generally; and conditions in the U.S. and world economies.

Our Class A common shareholders will not control us for the foreseeable future, will have a limited ability to influence our business policies and corporate actions and will not by themselves be able to elect any directors.

It is difficult for minority shareholders to elect any of our directors or otherwise exert influence over our business. Holders of our outstanding Class B common stock are entitled to elect a simple majority of our board of directors and are therefore deemed our ultimate controlling party. All of our Class B common stock is currently owned indirectly by the Harold E. Riley Trust of which Harold E. Riley, our Chairman of the Board and Chief Executive Officer, is the sole trustee. Additionally, Harold E. Riley beneficially owns approximately 7% of the issued shares of our Class A common stock.

Our articles of incorporation and bylaws, as well as applicable state insurance laws, may discourage takeovers and business combinations that our shareholders might consider to be in their best interests.

Our articles of incorporation and bylaws, as well as various state insurance laws, may delay, deter, render more difficult or prevent a takeover attempt our shareholders might consider in their best interests. As a result, our shareholders will be prevented from receiving the benefit from any premium to the market price of our Class A common stock that may be offered by a bidder in a takeover context. Even in the absence of a takeover attempt, the existence of these provisions may adversely affect the prevailing market price of our Class A common stock if they are viewed as discouraging takeover attempts in the future.

The following provisions in our articles of incorporation and bylaws make it difficult for our Class A shareholders to replace or remove our directors and have other anti-takeover effects that may delay, deter or prevent a takeover attempt:

•

holders of shares of our Class B common stock elect a simple majority of our board of directors, and all of these shares are owned by the Harold E. Riley Trust; and

•

our board of directors may issue one or more series of preferred stock without the approval of our shareholders.

State insurance laws generally require prior approval of a change in control of an insurance company. Generally, such laws provide that control over an insurer is presumed to exist if any person, directly or indirectly, owns, controls, holds with the power to vote, or holds proxies representing 10% or more of the voting securities of the insurer. In considering an application to acquire control of an insurer, an insurance commissioner generally will consider such factors as the experience, competence and financial strength of the applicant, the integrity of the applicant’s board of directors and executive officers, the acquirer’s plans for the management and operation of the insurer, and any anti-competitive results that may arise from the acquisition. In addition, a person seeking to acquire control of an insurance company is required in some states to make filings prior to completing an acquisition if the acquirer and the target insurance company and their affiliates have sufficiently large market shares in particular lines of insurance in those states. These state insurance requirements may delay, deter or prevent our ability to complete an acquisition.

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

We have never paid any cash dividends on our Class A common stock and do not anticipate doing so in the foreseeable future.

We have never paid cash dividends on our Class A common stock, as it is our policy to retain earnings for use in the operation and expansion of our business.

There are a substantial number of shares of our Class A common stock eligible for future sale in the public market. The sale of these shares could cause the market price of our Class A common stock to fall.

There were 48,686,759 shares of our Class A common stock issued as of December 31, 2009. Our executive officers, directors and management owned approximately 4,268,000 shares of our Class A common stock as of this date, representing approximately 10% of our then outstanding Class A common stock. Almost all of these shares have been registered for public resale and generally may be sold freely. In the event of a sale of some or all of these shares or the perceived sale of these shares, the market price of our Class A common stock could fall substantially.

Item 1B. UNRESOLVED STAFF COMMENTS

None.

Item 2. PROPERTIES

We own our principal office in Austin, Texas, consisting of an 80,000 square foot office building in addition to approximately one acre of land nearby that houses storage facilities. Approximately 50,000 square feet is occupied or reserved for our operations. We also own a training facility at Lake Buchanan, Texas. In addition, we own other properties in Texas, Arkansas and Louisiana that are incidental to our operations.

Item 3. LEGAL PROCEEDINGS

We are a defendant in a lawsuit originally filed on August 6, 1999 in the Texas District Court, Austin, Texas, now styled Citizens Insurance Company of America, Citizens, Inc., Harold E. Riley and Mark A. Oliver, Petitioners v. Fernando Hakim Daccach, Respondent, in which a class was originally certified by the trial court and affirmed by the Court of Appeals for the Third District of Texas. We appealed the grant of class status to the Texas Supreme Court, which on March 2, 2007, reversed the Court of Appeal’s affirmation of the trial court’s class certification order, decertified the class and remanded the case to the trial court for further proceedings consistent with the Texas Supreme Court’s opinion. The underlying lawsuit alleged that certain life insurance policies that we made available to non-U.S. residents, when combined with a policy feature that allowed certain cash benefits to be assigned to two non-U.S. trusts for the purpose of accumulating ownership of our Class A common stock, along with allowing the policyholders to make additional contributions to the trusts, were actually offers and sales of securities that occurred in Texas by unregistered dealers in violation of the Texas securities laws. The remedy sought was rescission and return of the insurance premium payments. On November 16, 2009, the trial court conducted further proceedings on the case, in order to determine whether the class should be recertified. On December 9, 2009, the trial court denied the recertification of the class. The remaining plaintiffs must now proceed individually, and not as a class, if they intend to pursue their cases against Citizens. Citizens intends to maintain a vigorous defense in any remaining proceedings.

Security Plan Fire Insurance Company (“SPFIC”) is a defendant in a suit styled The State of Louisiana v. AAA Insurance, or Road Home Litigation, which was filed in the Civil District Court for the Parish of Orleans on August 23, 2007 by the state of Louisiana as subrogee/assignee of the insureds of more than 200 different insurance companies. The suit was filed to recover money that the state of Louisiana paid to certain insureds under the Louisiana Road Home Program for damages resulting from Hurricanes Katrina and Rita. The suit was removed to the United States District Court for the Eastern District of Louisiana on September 11, 2007. In March 2009, the trial court judge dismissed all bad faith claims asserted against the defendants, including SPFIC. The judge also dismissed all claims for flood damage and all claims asserted under Louisiana’s Valued Policy Law. Due to the District Court’s recent rulings noted above, we no longer believe an adverse ruling in the Road Home Litigation would have a material impact on our financial statements.

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

In addition to the legal proceedings described above, we may from time to time be subject to a variety of legal and regulatory actions relating to our future, current and past business operations, including, but not limited to:

•

disputes over insurance coverage or claims adjudication;

•

regulatory compliance with insurance and securities laws in the United States and in foreign countries;

•

disputes with our marketing firms, consultants and employee agents over compensation and termination of contracts and related claims;

•

disputes regarding our tax liabilities;

•

disputes relative to reinsurance and coinsurance agreements; and

•

disputes relating to businesses acquired and operated by us.

In the absence of countervailing considerations, we would expect to defend any such claims vigorously. However, in doing so, we could incur significant defense costs, including not only attorneys’ fees and other direct litigation costs, but also the expenditure of substantial amounts of management time that otherwise would be devoted to our business. If we suffer an adverse judgment as a result of any claim, it could have a material adverse effect on our business, results of operations and financial condition.

Item 4. (Reserved)

PART II

Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASE OF EQUITY SECURITIES

Our Class A common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol CIA. As of December 31, 2009, the approximate number of record owners of our Class A common stock was 86,000. Management estimates the number of beneficial owners to be approximately 125,000.

Quarterly high and low closing prices per share of our Class A common stock as reported by the NYSE are shown below.

		2009								2008
Quarter Ended		High				Low				High				Low
March 31		$	9.65				6.32			$	6.95				5.14
June 30			7.98				6.08				7.96				6.02
September 30			7.20				5.59				9.15				5.79
December 31			6.83				5.80				9.70				6.99

We have not paid cash dividends in any of the past five years and do not expect to pay cash dividends in the foreseeable future. For restrictions on our present and future ability to pay dividends, see Note 6 of the “Notes to Consolidated Financial Statements.”

We did not purchase any of our equity securities during any quarter in 2007, 2008 or 2009.

Securities Authorized for Issuance Under Equity Compensation Plans

We do not maintain any equity compensation plans or arrangements. Thus, we do not have any securities authorized for issuance under these types of plans, nor have we issued any options, warrants or similar instruments to purchase any of our equity securities, except for warrants issued in conjunction with the convertible preferred stock issued in 2004 and 2005. See Note 7 of the “Notes to Consolidated Financial Statements.”

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Item 6. SELECTED FINANCIAL DATA

The table below sets forth, in summary form, selected financial data of the Company. This data, which is not covered in the reports of our independent registered public accounting firms, should be read in conjunction with our consolidated financial statements and notes, which are included elsewhere herein.

		Year ended December 31,
		2009				2008				2007				2006				2005
		(In thousands, except per share data)
Total Revenues		$	188,980				146,673				169,637				154,189				139,024
Net Income (Loss)			17,340				(15,707	)			16,557				8,677				7,302
Basic and Diluted Earnings (Loss) Per Class A Share			0.31				(0.42	)			0.35				0.16				0.13
Total Assets			927,326				832,276				787,909				711,184				661,889
Total Liabilities			711,251				653,022				597,532				558,690				513,380
Total Stockholders’ Equity			216,075				171,541				176,157				139,611				136,963
Book Value Per Share			4.35				3.68				4.00				3.38				3.33

See Item 1. “Business” and Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” for information that may affect the comparability of the financial data contained in the above table.

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

We conduct operations as an insurance holding company emphasizing ordinary life insurance products in niche markets where we believe we can achieve competitive advantages. As an insurance provider, we collect premiums in the current period to pay future benefits to our policy and contract holders. Our core operations include issuing:

•

U.S. Dollar-denominated ordinary whole life insurance and endowment policies predominantly to high net worth, high income foreign residents, located principally in Latin America and the Pacific Rim, through approximately 2,100 independent marketing consultants;

•

ordinary whole life insurance policies to middle income households in the midwest and the southern United States through approximately 340 independent marketing consultants; and

•

final expense and limited liability property policies to middle and lower income households in Louisiana, Mississippi and Arkansas through approximately 625 employee and independent agents in our home service distribution segment.

Life Insurance. Over the past 30 years, CICA and its predecessors have accepted policy applications from foreign nationals for U.S. Dollar-denominated ordinary whole life insurance and endowment policies. Traditionally, this market has been concentrated in the top 3-5% of the population of a country in terms of income and net worth. In recent years, however, there has been a shift to encompass a broader spectrum of the population, as upper middle classes develop in Latin America and the Pacific Rim. We make our insurance products available using third-party marketing organizations and independent marketing consultants. The number of our producing independent consultants has expanded over the years in this segment to approximately 2,100, and we received applications from residents of more than 30 countries outside of the U.S. in 2009. Historically, the majority of our international business has come from Latin America; however, the Pacific Rim has represented a meaningful source of new business for several years.

Through the domestic market of our Life Insurance segment, we provide ordinary whole life, credit life insurance, and final expense policies to middle income families and individuals in certain markets in the midwest and southern U.S. The majority of our revenues are the result of acquisitions of domestic life insurance company acquisitions since 1987.

Home Service Insurance. We provide final expense ordinary life insurance to middle and lower income individuals in Louisiana, Mississippi and Arkansas. Our policies in this segment are sold and serviced through a home service marketing distribution system utilizing employee-agents who work on a route system to collect premiums and service policyholders and through networks of funeral homes who collect premium and provide personal policyholder service.

We also realize revenues from our investment portfolio, which is a key component of our operations. The revenues we collect as premiums from policyholders are invested to ensure future benefit payments under the policy contracts. Life insurance companies earn profits on the investment spread, which reflects the investment income earned on the premiums paid to the insurer between the time of receipt and the time benefits are paid out under policies. Changes in interest rates, changes in economic conditions and volatility in the capital markets can all impact the amount of earnings that we realize from our investment portfolio.

Marketplace Conditions and Trends

Described below are some of the significant trends affecting the life insurance industry and the possible effects they may have on our future operations.

•

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 to accumulate cash values to provide for living expenses in a policy owner’s later years, while continuously providing a death benefit.

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

•

The current worldwide recession and contraction of credit availability has resulted in adverse effects for the life insurance industry, including increased surrender of life insurance policies in force, decreased new life insurance policy sales and increased competition for new life insurance policy sales. Our operations in 2009 reflected these adverse developments, and are discusssed further below.

•

We believe there is a trend toward consolidation of domestic life insurance companies, due to significant losses incurred by the life insurance industry as a result of the credit crisis and recession of 2008-2009, as well as increasing costs of regulatory compliance for domestic life insurance companies. We believe this trend should be a benefit to our acquisition strategy as more complementary acquisition candidates may become available for us to consider.

•

Many of the events and trends affecting the life insurance industry have had an impact on the life reinsurance industry. These events have 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 will have to reduce our underwriting commitments.

Recent Acquisitions

In the fourth quarter of 2008, the Company completed its acquisition of ONLIC, included in the Home Service segment, for $8.0 million and had additional acquisition related expenses of $900,000. In the first quarter of 2009, the Company completed its acquisition of Integrity Capital Corporation (“ICC”) in exchange for 1,292,000 shares of Citizens, Inc. Class A common stock. ICC is the parent of Integrity Capital Insurance Company (“ICIC”), an Indiana life insurance company that is included in the Life Insurance segment. The transaction was valued at $8.4 million when the transaction closed on February 27, 2009.

Consolidated Results of Operations

Insurance revenues are primarily generated from premium revenues and investment income. In addition, realized gains and losses on investment holdings can significantly impact revenues from year to year.

		Year Ended December 31,
		2009				2008				2007
		(In thousands)
Revenues:
Premiums:
Life insurance		$	141,001				134,953				130,265
Accident and health insurance			1,531				1,580				1,558
Property insurance			4,748				4,764				4,925
Net investment income			29,602				30,478				30,743
Realized gains (losses), net			8,040				(23,812	)			(94	)
Decrease (increase) in fair value of warrants			3,154				(2,662	)			828
Other income			904				1,372				1,412
Total revenues			188,980				146,673				169,637
Exclude increase (decrease) in fair value of warrants			(3,154	)			2,662				828
Total revenues excluding fair value adjustments of warrants outstanding		$	185,826				149,335				170,465

Premium Income. Premium income during 2009 increased 4.2% to $147.3 million from $141.3 million in 2008. The increase resulted primarily from renewal premiums, which totaled $123.2 million, $116.6 million and $111.2 million in 2009, 2008 and 2007, respectively. The Company believes that new business sales were negatively impacted due to the global recession and policyholder concerns. Endowment sales represented an increased portion of new business sales internationally, as these products have gained in popularity over the past several years. In addition, most of our life insurance policies contain a policy loan provision, which allows the policyholder to use cash value of a policy to pay premiums. The Company believes this feature is routinely used by policyholders to keep a policy active, as evidenced by the increase in the policy loan asset balance year over year.

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Net Investment Income. Net investment income decreased during 2009 to $29.6 million, compared to $30.5 million during 2008 and $30.7 million in 2007. The decrease resulted from lower investment rates available in 2009 on new money investments compared to the prior two years, as well as the significant call activity the Company experienced on its overall investment portfolio in the current year, resulting in lower rates on reinvested funds. We continue to invest in bonds of U.S. Government-sponsored enterprises, such as Federal National Mortgage Association (“FNMA”) and Federal Home Loan Mortgage Association (“FHLMC”), due to our conservative investment strategy of investing in high quality issuers. Over 85% of total investment income is attributable to the Company holdings of fixed maturity securities. Policy loan income increased in the current year due to the growth in the asset balance, as policyholders utilized the policy loan feature to pay premiums and keep policies in force.

		Year Ended December 31,
		2009				2008				2007
		(In thousands)
Gross investment income:
Fixed maturity securities		$	25,921				27,536				26,925
Equity securities			1,056				1,027				2,171
Mortgage loans			50				28				33
Policy loans			2,444				2,105				1,919
Long-term investments			465				39				(47	)
Other			507				357				191
Total investment income			30,443				31,092				31,192
Less investment expenses			(841	)			(614	)			(449	)
Net investment income		$	29,602				30,478				30,743

Realized Gains (Losses) on Investments. The investment markets were very volatile at the end of 2008 and throughout 2009 due to the credit crisis and economic downturn. In 2009, the Company sold equity mutual funds, which were previously impaired, for a realized gain of $4.9 million. The Company also sold a number of fixed maturity investments in 2009, resulting in a total gain of $8.0 million. The Company recorded $0.3 million in realized losses during 2009 related to other-than-temporary impairments due to market declines and issuer credit deterioration, which are netted against the gains recorded. In 2008, the Company recognized other-than-temporary impairment write-downs of $23.5 million on its holdings of equity mutual funds. In addition, we also impaired two bonds due to credit quality, recognizing a realized loss of $0.3 million.

Decrease (Increase) in Fair Value of Warrants. Because the market value of our Class A common stock decreased during 2009, we recognized a gain on the decrease in fair value of warrants of $3.2 million in 2009, compared to a loss of $2.7 million in 2008 and a gain of $0.8 million in 2007. The gain in 2009 was directly related to the decrease in the price of our Class A common stock. The warrant liability is calculated using the Black-Scholes option pricing model, which projects the future value of the warrants when they expire in July 2011 and 2012. Current accounting standards require the change in the value of the warrant liability be recorded as a component of revenues. When the liability increases we incur a loss, and when the liability decreases we recognized income. The warrant liability is not anticipated to have an effect on the Company’s cash flows, as the Company expects the warrants will either be converted into our Class A common stock in July 2012, or sooner, at the election of the warrant holders, or expire.

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

		Year Ended December 31,
		2009				2008				2007
		(In thousands)
Benefits and expenses:
Insurance benefits paid or provided:
Claims and surrenders		$	59,988				56,253				50,571
Increase in future policy benefit reserves			40,790				37,117				36,420
Policyholders’ dividends			6,680				6,865				6,401
Total insurance benefits paid or provided			107,458				100,235				93,392
Commissions			35,536				35,984				35,641
Other underwriting, acquisition and insurance expense			28,340				28,611				27,583
Capitalization of deferred policy acquisition costs			(23,656	)			(24,109	)			(26,210	)
Amortization of deferred policy acquisition costs			17,202				15,650				12,530
Amortization of cost of customer relationships acquired and other intangibles			3,494				2,897				3,203
Total benefits and expenses		$	168,374				159,268				146,139

Claims and Surrenders. As noted in the table below, claims and surrenders increased 6.6% from $56.3 million in 2008 to $60.0 million in 2009. The 2009 increase primarily related to an increase in surrender expense, as well as an increase in endowments.

		Years ended December 31,
		2009				2008				2007
		(In thousands)
Death claims		$	22,494				22,529				20,720
Surrender expenses			19,666				15,222				13,832
Endowment benefits			14,079				13,814				12,835
Property claims			1,590				2,657				1,090
Accident and health benefits			437				427				311
Other policy benefits			1,722				1,604				1,783
Total claims and surrenders		$	59,988				56,253				50,571

The Company monitors death claims to determine if they are within levels meeting expectations. The claim experience in 2009 improved relative to 2008. In addition in 2008, there was a $650,000 decrease in 2007 to correct an overstatement of the prior year’s claim liability.

Policy surrenders increased 29.2% in 2009 to $19.7 million from $15.2 million in 2008, up from $13.8 million in 2007. The increase in surrender expense is primarily related to our international business and is expected to increase over time due to the maturity of this block of business. A significant portion of surrenders relates to policies that have been in force over fifteen years and no longer have a surrender charge associated with them. In addition, the Company believes a significant portion of the increase resulted from the global recession and policyholder uncertainty about the economy. Total direct insurance inforce reported in 2009 was $4.4 billion compared to $4.3 billion in 2008 and $4.2 billion in 2007.

Endowment benefits increased 1.9% from $13.8 million in 2008 to $14.1 million in 2009. Endowments totaled $12.8 million in 2007. We have a series of international policies that carry an immediate endowment benefit of an amount elected by the policy owner. These benefits have been popular in the Pacific Rim and Latin America, where the Company has experienced increased interest in our guaranteed products in recent years. Like policy dividends, endowments are factored into the premium and, as such, the increase has no impact on profitability. The Company expects these benefits to continue to increase as this block of business increases.

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Property claims decreased 40.2% in 2009, from $2.7 million in 2008 to $1.6 million in 2009, and were $1.1 million in 2007. In 2008, Hurricanes Gustav and Ike swept through Louisiana resulting in an increase in property claims of $1.6 million over 2007. In 2007, the Company released claim liabilities of $711,000 that were no longer required due to the expiration of the statute of limitations, which had been related to Hurricane Katrina in 2005 and impacted several years thereafter.

Reserves. The change in future policy benefit reserves increased from $37.1 million in 2008 to $40.8 million in 2009. Sales of certain endowment products have gained popularity is our international markets, which build reserves at a much higher rate, and have contributed to the increasing reserves over the past several years. Endowment sales totaled approximately $8.5 million, $7.4 million and $6.6 million in 2009, 2008 and 2007, respectively.

Policyholder Dividends. Policyholder dividends decreased 2.7% during 2009 to $6.7 million from $6.9 million in 2008 and $6.4 million in 2007, due to the decline in inforce of our ordinary whole life products. All of our international policies are participating. Policyholder dividends are factored into the premiums and have no impact on profitability.

Commissions. Commissions decreased slightly during 2009 to $35.5 million from $36.0 million in 2008 and $35.6 million in 2007. Commissions were essentially flat all three years, even though premium income was up due to the increase of renewal premiums, which pay a lower commission rate than the rate paid on first year business.

Underwriting, Acquisition and Insurance Expense. Underwriting, acquisition and insurance expenses decreased to $28.3 million in 2009 from $28.6 million in 2008 and $27.6 million in 2007. The 2009 decrease compared to 2008 primarily related to lower audit and consulting fees. The 2008 increase was due largely to an increase in employee compensation and increased fees for international shipping.

Deferred Policy Acquisition Costs. Capitalized deferred policy acquisition costs (“DAC”) decreased 1.9% from $24.1 million in 2008 to $23.7 million in 2009. These costs were $26.2 million in 2007. The decrease resulted from the decline in new business and, therefore, the decline in the associated new business costs that were capitalized. Significantly lower amounts are capitalized related to renewal business. Amortization amounts increased in 2009 to $17.2 million compared to $15.6 million in 2008 and $12.5 million in 2007. The increase in 2009 and 2008 was significantly impacted by the amount of policy surrenders that the Company experienced in the latter part of 2008 and throughout 2009. We believe this trend is driven primarily by the negative economy and resulting policyholder uncertainty.

Cost of Customer Relationships Acquired and Other Intangibles. Amortization of cost of customer relationships acquired and other intangibles increased from $2.9 million in 2008, to $3.5 million in 2009, and was $3.2 million in 2007. The 2009 increase related to the ICC acquisition and faster amortization due to the increase in lapses on this new business block, in addition to a full year of amortization related to ONLIC in the current year compared to two months in 2008.

Federal Income Tax. The Federal income tax expense was $3.3 million, $3.1 million and $6.9 million in 2009, 2008 and 2007, respectively, resulting in effective tax rates of 15.8%, 24.7% and 29.5%, respectively. The Company established a tax valuation allowance related to OTTI losses on its mutual funds of $6.9 million in 2008. The establishment of the valuation allowance had the effect of increasing tax expense. In 2009, $2.8 million of this allowance was released as a reduction of tax expense primarily due to the sale of approximately 42% of the mutual fund portfolio in 2009. In addition, the fair market value change related to outstanding warrants of $3.2 million reported as an increase in revenues in 2009 compared to a decrease in income of $2.7 million and increase of $0.8 million in 2008 and 2007, respectively, which was not taxable and also impacted the corporate tax rate.

Segment Operations

The Company has three reportable segments: Life Insurance, Home Service Insurance and Other Non-Insurance Enterprises. These segments are reported in accordance with U.S. GAAP. The Company evaluates profit and loss performance based on net income before Federal income taxes.

						Home				Other
		Life				Service				Non-Insurance
		Insurance				Insurance				Enterprises				Total
		(In thousands)
Income (loss) before Federal income tax:
For the year ended December 31:
2009		$	10,472				9,245				889				20,606
2008			712				(8,955	)			(4,352	)			(12,595	)
2007			13,145				12,729				(2,376	)			23,498

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Life Insurance

Our Life Insurance segment consists of issuing primarily ordinary whole life insurance in U.S. Dollar-denominated amounts to foreign residents in 30 countries, and domestically through independent marketing firms and consultants throughout the United States.

		For the Year Ended December 31,
		2009				2008				2007
		(In thousands)
Revenue:
Premiums		$	105,997				102,030				97,292
Net investment income			16,667				17,015				16,891
Realized gains (losses), net			1,100				(13,882	)			3
Other income			340				330				660
Total revenue			124,104				105,493				114,846
Benefits and expenses:
Insurance benefits paid or provided:
Claims and surrenders			41,277				36,241				34,305
Increase in future policy benefit reserves			36,043				34,246				34,160
Policyholders’ dividends			6,594				6,714				6,401
Total insurance benefits paid or provided			83,914				77,201				74,866
Commissions			21,146				21,589				22,144
Other underwriting, acquisition and insurance expenses			10,167				10,866				13,294
Capitalization of deferred policy acquisition costs			(17,871	)			(19,177	)			(20,653	)
Amortization of deferred policy acquisition costs			14,757				13,331				10,874
Amortization of cost of customer relationships acquired and other intangibles			1,519				971				1,176
Total benefits and expenses			113,632				104,781				101,701
Income before Federal income tax		$	10,472				712				13,145

Premiums. Premium revenues increased 3.9% to $106.0 million for 2009 compared to $102.0 million for 2008. First year premiums have declined in this segment due primarily to lower international new sales. However, total segment premiums reflect an increase due to higher renewal premiums, which have been trending higher as this block of insurance matures.

Life Insurance premium breakout is detailed below.

		For the Year Ended December 31,
		2009				2008				2007
		(In thousands)
Premiums:
First year		$	16,294				18,020				20,104
Renewal			89,703				84,010				77,188
Total premium		$	105,997				102,030				97,292

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Net Investment Income. Net investment income decreased to $16.7 million in 2009 compared to $17.0 million and $16.9 million in 2008 and 2007. The decrease related to lower investment rates available in 2009, as well as the significant call activity the Company experienced in the current year. Approximately $215.0 million in bonds was called by the U.S. Government and Government agencies in 2009 on a total life segment portfolio of $289.6 million. This money was reinvested in lower yielding securities.

Realized Gains (Losses), Net. Realized gains totaled $1.1 million in 2009 resulting from sales of available-for-sale fixed income securities, compared to realized losses of $13.9 million in 2008, primarily resulting from other-than-temporary impairments on equity mutual fund holdings in 2008.

		For the Year Ended December 31,
		2009				2008				2007
		(In thousands)
Death claims		$	7,986				7,147				7,254
Surrender expenses			17,672				13,770				12,250
Endowment benefits			14,051				13,877				12,813
Accident and health benefits			288				290				193
Other policy benefits			1,280				1,157				1,795
Total claims and surrenders		$	41,277			$	36,241			$	34,305

Claims and Surrenders. Claims and surrenders increased to $41.3 million in 2009 compared to $36.2 million and $34.3 million in 2008 and 2007.

Death claim amounts fluctuate from period to period, and are monitored by the Company. The amounts are within anticipated ranges based upon management’s expectations.

Surrender benefits increased 28.3% to $17.7 million in 2009 compared to $13.8 million and $12.3 million in 2008 and 2007. The majority of this increase in policy surrenders was attributable to our international business and related to policies that have been in force over fifteen years, and no longer have a surrender charge. The Company believes a significant portion of the increase was a result of the global recession and policyholder uncertainty. In addition, the Company recorded surrenders resulting from poor persistency related to one Brazilian agent. The Company has canceled the contract with this agent.

Commissions. Commissions are a principal operating expense that is paid in relation to sales production. The decline in commission expense in 2009 is a reflection of the decrease in first year business, which pays a higher commission rate than the renewal business that is the source of a significant portion of current year premium revenues. Renewal premiums represented 85% of total premium revenue in 2009 compared to 82% in 2008.

Other Underwriting, Acquisition and Insurance Expenses. The operating expenses have declined over the past several years due to lower expenses related to staffing reductions, accountants and other consultants. In addition, an expense allocation adjustment was made in 2008 to more realistically weight the Home Service segment overhead due to its higher administrative overhead than our other operations. The Company monitors all operating expenses and continues to seek efficiencies in our operations.

Deferred Policy Acquisition Costs (“DAC”). Capitalized DAC was lower in 2009, with $17.9 million compared to $19.2 million and $20.7 million in 2008 and 2007, respectively, due to decreased sales of new products. The Company believes a significant portion of this decrease resulted from the global recession and policyholder uncertainty. Amortization of DAC increased to $14.8 million compared to lower levels in 2008 and 2007, primarily due to an increase in lapses on this segment of business as previously noted.

Amortization of Cost of Customer Relationships Acquired (“COIA”). Amortization expense increased to $1.5 million in 2009 compared to $1.0 million and $1.2 million in 2008 and 2007, due to increased lapses relating to the purchased blocks. The Company generally reports higher amortization in the first year of an acquisition because lapses are typically higher, and then a leveling off and more consistent amortization in the following years. Amortization related to ICIC acquired business in early 2009 totaled $0.6 million at year end 2009.

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Home Service Insurance

Our Home Service Insurance segment provides preneed and final expense ordinary life insurance and annuities to middle and lower income individuals primarily in Louisiana, Mississippi and Arkansas. Our policies in this segment are sold and serviced through funeral homes and a home service marketing distribution system utilizing employee and independent agents. Ozark National Life Insurance Company (“ONLIC”) was acquired in late 2008.

		For the Years Ended December 31,
		2009				2008				2007
		(In thousands)
Revenue:
Premiums		$	41,283				39,267				39,456
Net investment income			12,680				12,654				13,502
Realized gains (losses), net			6,562				(9,948	)			(85	)
Other income			101				273				6
Total revenue			60,626				42,246				52,879
Benefits and expenses:
Insurance benefits paid or provided:
Claims and surrenders			18,711				20,012				16,266
Increase in future policy benefit reserves			4,747				2,871				2,260
Policyholders’ dividends			86				151				—
Total insurance benefits paid or provided			23,544				23,034				18,526
Commissions			14,390				14,395				13,497
Other underwriting, acquisition and insurance expenses			14,812				14,459				10,001
Capitalization of deferred policy acquisition costs			(5,785	)			(4,932	)			(5,557	)
Amortization of deferred policy acquisition costs			2,445				2,319				1,656
Amortization of cost of customer relationships acquired and other intangibles			1,975				1,926				2,027
Total benefits and expenses			51,381				51,201				40,150
Income (loss) before Federal income tax		$	9,245				(8,955	)			12,729

Premiums. The increase in 2009 was due to a full year of ONLIC premiums, which were reflected in 2009 for this segment compared to only one quarter of premium in 2008. In addition, in 2009 there was an increase in premiums related to SPFIC fire business sales and a premium rate increase for SPFIC that was effective in the last quarter of 2009.

Net Investment Income. The increase in 2009 was due to the overall increase in the investment portfolio holdings with the addition of ONLIC. In addition, SPLIC received $240,000 from a lawsuit settlement related to a bond in default. The overall investment yield on investment securities resulted in lower investment income in 2009 due to significant call activity that resulted in approximately 21% of the bond portfolio being reinvested into lower yielding securities.

Realized Gains (Losses), Net. Gains reported in 2009 totaled $6.6 million compared to losses of $9.9 million in 2008. The net gains in 2009 related primarily to sales of equity mutual funds previously impaired in 2008 under other-than-temporary impairment guidance. The impairments in 2008 totaled $9.9 million relative to the Home Service segment. Additional impairments of $0.3 million were recorded in 2009 due to further declines in market values relating to credit issues and are reducing the net gains as reported.

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Claims and Surrenders. Claims and surrenders decreased with $18.7 million incurred in 2009 compared to $20.0 million and $16.3 million in 2008 and 2007. The decrease from 2008 to 2009 was due primarily to a decrease in death benefits for SPLIC and a decrease in casualty claims for SPFIC in 2009 compared to the same period in 2008. The results in 2008 included incurred claims from Hurricanes Ike and Gustav totaling $0.8 million.

		For the Year Ended December 31,
		2009				2008				2007
		(In thousands)
Death claims		$	14,508				15,382				13,466
Surrender expenses			1,994				1,452				1,582
Endowment benefits			28				(63	)			22
Property claims			1,590				2,657				1,090
Accident and health benefits			149				137				118
Other policy benefits			442				447				(12	)
Total claims and surrenders		$	18,711			$	20,012			$	16,266

Increase in Future Policy Benefit Reserves. The increase in 2009 included $0.4 million resulting from a correction related to ONLIC reserves caused by data issues discovered in the current year.

Commissions. Commission expense in 2009 included a full year of ONLIC commissions that were not completely included in the prior year, due to the acquisition date of October 2008. Higher commissions were recorded in 2008 for Security Plan due to the use of a manual computation, which resulted in a higher commission expense. This process was partially automated in 2009 and is resulting in a more refined computation in the current year.

Other Underwriting, Acquisition and Insurance Expenses. Expenses increased to $14.8 million in 2009 compared to $14.5 million and $10.0 million in 2008 and 2007. The current year increase was due primarily to the additional allocation of expenses in this segment due to the labor intensive nature of the high volume and lower face amount products.

Deferred Policy Acquisition Costs (“DAC”). Capitalized expenses increased to $5.8 million in 2009 compared to $4.9 million and $5.6 million in 2008 and 2007. This increase was directly related to the increase in premiums collected and agent production. Amortization totaled $2.4 million, $2.3 million and $1.7 million in 2009, 2008 and 2007, respectively. Amortization was impacted by lapse rates relative to the block of business. Higher lapse rates resulted in higher DAC amortization.

Other Non-Insurance Enterprises

Overall, other non-insurance operations are relatively immaterial to the consolidated results, except for the fair value adjustment related to the Company’s warrants to purchase Class A common stock. The fair value adjustment as of December 31, 2009 was $3.2 million, which was recorded as revenue, compared to a loss of $2.7 million recorded for the same period in 2008. These amounts fluctuate due to the movement in our Class A common stock price and fair value calculation using the Black-Scholes valuation model.

Investments

The administration of our investment portfolios is handled by our management, pursuant to board-approved investment guidelines, with all trading activity approved by a committee of the respective boards of directors of our insurance company subsidiaries. The guidelines used require that bonds, both government and corporate, are of high quality and comprise a majority of the investment portfolio. State insurance statutes prescribe the quality and percentage of the various types of investments that may be made by insurance companies and generally permit investment in qualified state, municipal, federal and foreign government obligations, high quality corporate bonds, preferred and common stock, real estate, mortgage loans and real estate within certain specified percentages. The assets selected are intended to mature in accordance with the average maturity of the insurance products and to provide the cash flow for our insurance company subsidiaries to meet their respective policyholder obligations.

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

The following table shows the carrying value of our investments by investment category and cash and cash equivalents, and the percentage of each to total invested assets.

		December 31, 2009								December 31, 2008
						Percent of Total								Percent of Total
		Carrying Value				Carrying Value				Carrying Value				Carrying Value
		(In thousands)								(In thousands)
Fixed maturity securities:
U.S. Government-sponsored corporations and U.S. Government agencies		$	399,626				55.6	%		$	295,481				46.6	%
Mortgage-backed (1)			19,452				2.7				51,907				8.2
Corporate			116,098				16.1				79,528				12.5
Municipal bonds			57,192				7.9				58,105				9.2
Foreign governments			120				—				134				—
Total fixed maturity securities			592,488				82.3				485,155				76.5
Cash and cash equivalents			48,625				6.8				63,792				10.1
Short-term investments			2,510				0.3				2,250				0.4
Other investments:
Policy loans			32,096				4.5				28,955				4.6
Equity securities			33,477				4.6				43,000				6.8
Mortgage loans			1,533				0.2				339				0.1
Real estate and other long-term investments			9,216				1.3				9,553				1.5
Total cash, cash equivalents and investments		$	719,945				100.0	%		$	633,044				100.0	%

At December 31, 2009, investments in fixed maturity and equity securities were 86.9% of our total investments. All of our fixed maturities were classified as either available-for-sale or held-to-maturity securities at December 31, 2009. We had no fixed maturity or equity securities that were classified as trading securities at December 31, 2009 or 2008.

The following table shows the distribution of the credit ratings of our portfolio of fixed maturity securities by carrying value as of December 31, 2009.

		December 31, 2009								December 31, 2008
		Carrying Value				%				Carrying Value				%
		(In thousands)								(In thousands)
AAA and U.S. Government		$	442,160				74.6	%		$	379,547				78.2	%
AA			26,613				4.5				37,263				7.7
A			69,934				11.8				56,043				11.6
BBB			48,311				8.2				7,217				1.5
BB and other			5,470				0.9				5,085				1.0
Totals		$	592,488				100.0	%		$	485,155				100.0	%

The Company experienced a significant amount of maturities and call activity relative to the fixed income portfolio, with $292.7 million reported in 2009 compared to $162.3 million and $75.9 million in 2008 and 2007. As interest rates declined over the past two years, issuers called those holdings and the Company reinvested into lower yielding securities. The gross investment yield on the fixed maturity securities portfolio dropped approximately 50 basis points from year end 2008 compared to the same period in 2009.

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Valuation of Investments in Fixed Maturity and Equity Securities

We evaluate the carrying value of our fixed maturity and equity securities at least quarterly. The Company monitors all debt and equity securities on an on-going basis relative to changes in credit ratings, market prices, earnings trends and financial performance, in addition to specific region or industry reviews. The assessment of whether impairments have occurred is based on a case-by-case evaluation of underlying reasons for the decline in fair value. The Company determines other-than-temporary impairment by reviewing all relevant evidence related to the specific security issuer as well as the Company’s intent to sell the security, or if it is more likely than not that the Company would be required to sell a security before recovery of its amortized cost.

When an other-than-temporary impairment has occurred, the amount of the other-than-temporary impairment recognized in earnings depends on whether the Company intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis. If the Company intends to sell the security or more like than not will be required to sell the security before recovery of its amortized cost basis, the other-than-temporary impairment shall be recognized in earnings equal to the entire difference between the investment’s cost and its fair value at the balance sheet date. If the Company does not intend to sell the security and it is not more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis, the other-than-temporary impairment shall be separated into the following: a) the amount representing the credit loss; and b) the amount related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss shall be recognized in earnings. The amount of the total other-than-temporary impairment related to other factors shall be recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the other-than-temporary impairment recognized in earnings shall become the new amortized cost basis of the investment. That new amortized cost basis shall not be adjusted for subsequent recoveries in fair value.

With the exception of Security Plan, virtually all of our subsidiaries fixed maturity investments are in U.S. Government or U.S. Government-sponsored enterprises or U.S. Government instruments. Security Plan has significant investments in corporate and municipal bonds. In 2009, the Company impaired three bonds for $0.1 million and a number of common stocks totaling $0.2 million. These 2009 impairments resulted from declines due to credit quality of the issuers and have been reflected as a realized loss in the accompanying income statement. The Company impaired two bonds totaling $0.3 million during 2008, because the Company did not expect these securities to recover in value in the near term. The Company’s equity securities consist of mutual funds acquired in 2007 and 2008. The Company recorded an other-than-temporary impairment charges on its equity securities in 2008 in the amount of $23.5 million. Based upon our emphasis on investing in fixed maturity securities primarily composed of obligations of U.S. Government-sponsored corporations and our analysis of whether declines in fair value below cost are temporary or other-than-temporary, management believes that our investments in fixed maturity investments at December 31, 2009 were not impaired, and no additional other-than-temporary losses need to be recorded.

Gross unrealized losses on fixed maturities available-for-sale amounted to $9.7 million as of December 31, 2009 and $16.0 million as of December 31, 2008. This increase was primarily due to a lower interest rate environment, which put downward pricing pressure on the fair values of our U.S. Government and agency bonds. There were no gross unrealized losses on equity securities as of December 31, 2009, as all of these securities were deemed impaired in 2008 and were written down to their fair value as of December 31, 2008. In 2009, the Company sold the equity mutual fund holdings from the Home Service segment and recorded realized gains of $4.9 million due to market recovery since impairment at December 31, 2008. Information on unrealized gains and losses by category is set forth in our consolidated financial statements, Note 2 — Investments, in the “Notes to the Consolidated Financial Statements.”

Reinsurance

As is customary among insurance companies, our insurance company subsidiaries reinsure with other companies portions of the life insurance risks they underwrite. A primary purpose of reinsurance agreements is to enable an insurance company to reduce the amount of risk on any particular life and, by reinsuring the amount exceeding the maximum amount the insurance company is willing to retain, to insure individuals in amounts larger than it could without such agreements. Even though a portion of the risk may be reinsured, our insurance company subsidiaries remain liable to perform all the obligations imposed by the policies issued by them and could be liable if their reinsurers were unable to meet their obligations under the reinsurance agreements.

We believe we have established appropriate reinsurance coverage based upon our net retained insured liabilities compared to our surplus.

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

The effect of reinsurance on premiums is as follows:

		Year ended December 31,
		2009				2008				2007
		(In thousands)
Direct premiums		$	155,727				151,077				146,409
Reinsurance assumed			1,416				1,459				1,462
Reinsurance ceded			(9,863	)			(11,239	)			(11,123	)
Net premiums		$	147,280				141,297				136,748

CICA monitors the solvency of its reinsurers in seeking to minimize the risk of loss in the event of default by a reinsurer. The primary reinsurers of CICA are large, well capitalized entities.

The effect of reinsurance on life insurance in force is as follows:

		Year ended December 31,
		2009				2008				2007
		(In millions)
Direct written life insurance inforce		$	4,432				4,322				4,168
Reinsurance assumed			928				647				644
Reinsurance ceded			(363	)			(302	)			(274	)
Net life insurance inforce		$	4,997				4,667				4,538

Virtually all of the Company’s non-credit accident and health insurance has been assigned and is administered by Texas International Life Insurance Company (“TILIC”), an unaffiliated party. The reinsurance recoverables under this agreement are collateralized by assets held in a trust for the benefit of the reinsured policies.

The Company monitors the credit ratings of our life and property reinsurers. The ratings by A.M. Best Company range from B+ (Good) to A+ (Superior).

SPFIC elected to increase the amount of first and second event catastrophe reinsurance to $10.0 million per event from $7.1 million and raise the retention level to $500,000 per event from $250,000, after the negative effects from Hurricane Katrina in 2005. Thus, the first $500,000 of incurred claims and any claims in excess of $10.0 million were SPLIC’s responsibility. The same reinsurance levels were in place for 2007 and 2008. The reinsurance premium for first event catastrophe reinsurance was $750,000 in 2008, and $840,000 in 2007. In 2008, SPFIC also paid reinsurance premiums in the amount of $478,000 for second and third event coverage due to Hurricanes Gustav and Ike.

Liquidity and Capital Resources

Liquidity refers to a company’s ability to generate sufficient cash flows to meet the needs of its operations. Liquidity is managed on insurance operations to ensure stable and reliable sources of cash flows to meet obligations and is provided by a variety of sources.

The liquidity requirements of our Company are met primarily by funds provided from operations. Premium deposits and revenues, investment income and investment maturities are the primary sources of funds, while investment purchases, policy benefits, and operating expenses are the primary uses of funds. We historically have not had to liquidate investments to provide cash flow, but in 2008 SPFIC sold $237,000 of bonds because of liquidity needs as a result of Hurricanes Gustav and Ike. There were no liquidity issues in 2009. Our investments consist primarily of marketable debt securities that could be readily converted to cash for liquidity needs. See Note 8 of the “Notes to Consolidated Financial Statements” for a table disclosing our contractual obligations.

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

A primary liquidity concern is the risk of an extraordinary level of early policyholder withdrawals. We include provisions within our insurance policies, such as surrender charges, that help limit and discourage early withdrawals. Since these contractual withdrawals, as well as the level of surrenders experienced, have been largely consistent with our assumptions in asset liability management, our associated cash outflows have, historically, not had an adverse impact on our overall liquidity. Individual life insurance policies are less susceptible to withdrawal than annuity reserves and deposit liabilities because policyholders may incur surrender charges and undergo a new underwriting process in order to obtain a new insurance policy. Cash flow projections and cash flow tests under various market interest rate scenarios are also performed annually to assist in evaluating liquidity needs and adequacy. We currently anticipate that available liquidity sources and future cash flows will be adequate to meet our needs for funds.

Cash flows from our insurance operations historically have been sufficient to meet current needs. Cash flows from operating activities were $52.1 million, $46.4 million and $37.9 million for the years ended December 31, 2009, 2008 and 2007, respectively. We have traditionally also had significant cash flows from both scheduled and unscheduled investment security maturities, redemptions, and prepayments, which totaled $292.7 million, $162.3 million and $75.9 million in 2009, 2008 and 2007. These cash flows, for the most part, are reinvested in fixed income securities. Net cash outflows from investment activity totaled $68.8 million, $14.3 million and $58.8 million for the years ended December 31, 2009, 2008 and 2007, respectively. The outflows from investing activities for the year ended December 31, 2009, primarily related to the investment of excess cash and cash equivalents generated from operations during 2009. The Company’s cash flows from financing activities were $1.5 million in 2009, $10.6 million in 2008 and $17.5 million in 2007. In 2008, the Company received $9.4 million from capital contributions relating to our Series A-1 preferred stock. In 2007, the Company sold approximately 2.7 million shares of Class A common stock in a registered direct public offering. The sale resulted in gross proceeds of $18.8 million and net proceeds of $17.1 million after broker commissions and offering related expenses.

Stockholders’ equity at December 31, 2009 was $216.1 million compared to $171.5 million at December 31, 2008. The 2009 increase was largely due to income earned during the period and conversion of the Company’s preferred stock to Class A common stock.

Investments increased to $671.3 million at December 31, 2009 from $569.3 million at December 31, 2008. Invested assets increased 17.9% during 2009, due to the increase in fixed income holdings in the Company’s portfolio resulting from new premium and cash amounts being invested, as cash balances decreased by $15.2 million from 2008 to 2009, and the inclusion of ICC. Fixed maturities are categorized as fixed maturities available-for-sale, which are carried in our consolidated financial statements at fair value and held-to-maturity, which are carried at amortized cost. Fixed maturities available-for-sale were 57.4% of investments at December 31, 2009, and fixed maturities held-to-maturity were 30.8% of investments at December 31, 2009.

Policy loans comprised 4.8% of invested assets at December 31, 2009 compared to 5.1% at December 31, 2008. These loans, which are secured by the underlying policy values, have yields ranging from 5% to 12% and maturities that are related to the maturity or termination of the applicable policies. Management believes we maintain adequate liquidity despite the uncertain maturities of these loans.

Our cash balances at our primary depositories were significantly in excess of Federal Deposit Insurance Corporation coverage at December 31, 2009 and December 31, 2008. Management monitors the solvency of all financial institutions in which we have funds to minimize the exposure for loss. Management does not believe we are at significant risk for such a loss. During 2010, we intend to continue to utilize short term agencies and U.S. Treasuries as a cash management tool to minimize excess cash balances.

In the wake of bankruptcy filings by large corporations several years ago, concern was raised regarding the use of certain off-balance sheet special purpose entities such as partnerships to hedge or conceal losses related to investment activity. We do not utilize special purpose entities as investment vehicles, nor are there any such entities in which we have an investment that engage in speculative activities of any nature, and we do not use such investments to hedge our investment positions. The Company has no subprime or collateralized debt obligations.

The NAIC has established minimum capital requirements in the form of Risk-Based Capital (“RBC”). Risk-based capital factors the type of business written by an insurance company, the quality of its assets, and various other aspects of an insurance company’s business to develop a minimum level of capital called “Authorized Control Level Risk-based Capital” and compares this level to an adjusted statutory capital that includes capital and surplus as reported under statutory accounting principles, plus certain investment reserves. Should the ratio of adjusted statutory capital to control level risk-based capital fall below 200%, a series of actions by the affected company would begin. At December 31, 2009, all of our insurance subsidiaries were above the required minimum levels.

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Two of our subsidiaries were below the minimum threshold at December 31, 2008. A capital contribution of $1.0 million was made to SPFIC by its parent SPLIC during the first quarter of 2009 because the ratio fell below 200%. An additional $1.0 million contribution was made to SPFIC by its parent SPLIC in the third quarter of 2009. Adjustments have been made relative to SPFIC product profitability, which had a positive impact on operations through the remainder of 2009 and are expected to benefit future years. A capital contribution of $1.0 million was also made to ONLIC by its parent CICA during the first quarter of 2009 when its ratio fell below 200%. The decline in SPFIC’s capital balance mainly resulted from hurricane losses in 2008 and an increase in operating expenses. The reduction in ONLIC’s capital balance resulted from declines in asset values of preferred and common stock holdings. The capital contributions made in 2009 increased the ratios as anticipated in action plans submitted to the appropriate state insurance departments. The Company received approval from the respective state insurance departments to merge ONLIC into SPLIC as of October 1, 2009. The capital contributions did not impact the overall consolidated financial position or results of operations of the Company.

Parent Company Liquidity and Capital Resources

We are a holding company and have had minimal operations of our own. Our assets primarily consist of the capital stock of our subsidiaries. Accordingly, our cash flows depend upon the availability of statutorily permissible payments, primarily payments under management agreements from our two primary life insurance subsidiaries, CICA and SPLIC. The ability to make payments is limited by applicable laws and regulations of Colorado, CICA’s state of domicile, and Louisiana, Security Plan’s state of domicile, which subject insurance operations to significant regulatory restrictions. These laws and regulations require, among other things, that these insurance subsidiaries maintain minimum solvency requirements and limit the amount of dividends these subsidiaries can pay to the holding company. We historically have not relied upon dividends from subsidiaries for our cash flow needs and we do not intend to do so in the future.

Critical Accounting Estimates

Our critical accounting policies are as follows:

Policy Liabilities

Future policy benefit reserves have been computed by the net level premium method with assumptions as to investment yields, dividends on participating business, mortality and withdrawals based upon our experience. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amount of policy liabilities and the increase in future policy benefit reserves. Management’s judgments and estimates for future policy benefit reserves provide for possible unfavorable deviation.

We continue to use the original assumptions (including a provision for the risk of adverse deviation) in subsequent periods to determine the changes in the liability for future policy benefits (the “lock-in concept”) unless a premium deficiency exists. Management monitors these assumptions and has determined that a premium deficiency did not exist as of December 31, 2009. Management believes that our policy liabilities and increase in future policy benefit reserves as of the years ended December 31, 2009, 2008 and 2007 are based upon assumptions, including a provision for the risk of adverse deviation, that do not warrant revision. The relative stability of these assumptions and management’s analysis is discussed below.

Deferred Policy Acquisition Costs

Acquisition costs, consisting of commissions and policy issuance, underwriting and agency expenses that relate to and vary with the production of new business, are deferred. These deferred policy acquisition costs are amortized primarily over the estimated premium paying period of the related policies in proportion to the ratio of the annual premium recognized to the total premium revenue anticipated, using the same assumptions as were used in computing liabilities for future policy benefits.

We utilize the factor method to determine the amount of costs to be capitalized and the ending asset balance. The factor method is based on the ratio of premium revenue recognized for the policies in force at the end of each reporting period compared to the premium revenue recognized for policies in force at the beginning of the reporting period. The factor method ensures that policies that lapsed or surrendered during the reporting period are no longer included in the deferred policy acquisition costs calculation. The factor method limits the amount of deferred costs to its estimated realizable value, provided actual experience is comparable to that contemplated in the factors.

Inherent in the capitalization and amortization of deferred policy acquisition costs are certain management judgments about what acquisition costs are deferred, the ending asset balance and the annual amortization. Approximately 80% of our capitalized deferred acquisition costs are attributed to first year excess commissions. The remaining 20% are attributed to costs that vary with and are directly related to the acquisition of new insurance business. Those costs generally include costs related to the production, underwriting and issuance of new business.

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

A recoverability test that considers, among other things, actual experience and projected future experience is performed at least annually. These annual recoverability tests initially calculate the available premium (gross premium less benefit and expense portion of premium) for the next 30 years. The available premium per policy and the deferred policy acquisition costs per policy are then calculated. The deferred policy acquisition costs are then evaluated over two methods utilizing reasonable assumptions and two other methods using pessimistic assumptions. The two methods using reasonable assumptions illustrate an early-deferred policy acquisition recoverability period. The two methods utilizing pessimistic assumptions still support early recoverability of our aggregate deferred policy acquisition costs. Management believes that our deferred policy acquisition costs and related amortization for the years ended December 31, 2009, 2008 and 2007 limits the amount of deferred costs to its estimated realizable value. This belief is based upon the analysis performed on capitalized expenses that vary with and are primarily related to the acquisition of new and renewal insurance business, utilization of the factor method and annual recoverability testing.

Cost of Customer Relationships Acquired

Cost of Customer Relationships Acquired (“CCRA”) is established when we purchase a block of insurance. CCRA is amortized primarily over the emerging profit of the related policies using the same assumptions as were used in computing liabilities for future policy benefits. We utilize various methods to determine the amount of the ending asset balance, including a static model and a dynamic model. Inherent in the amortization of CCRA are certain management judgments about the ending asset balance and the annual amortization. The assumptions used are based upon interest, mortality and lapses at the time of purchase.

A recoverability test that considers, among other things, actual experience and projected future experience is performed at least annually. These annual recoverability tests initially calculate the available premium (gross premium less benefit and expense portion of premium) for the next thirty years. The CCRA is then evaluated utilizing reasonable assumptions. Management believes that our CCRA and related amortization is recoverable for the years ended December 31, 2009, 2008 and 2007. This belief is based upon the analysis performed on estimated future results of the block and our annual recoverability testing.

Goodwill

Current accounting guidance requires that goodwill balances be review for impairment at least annually or more frequently if events occur or circumstances change that would indicate that a triggering event has occurred. A reporting unit is defined as an operating segment on one level below an operating segment. Most of the Company’s reporting units, for which goodwill has been allocated, are equivalent to the Company’s operating segment, as there is no discrete financial information available for the separate components of the segment or all of the components of the segment have similar economic characteristics.

The goodwill impairment test follows a two step process as defined under current accounting guidance. In the first step, the fair value of a reporting unit is compared to its carrying value. If the carrying value of a reporting unit exceeds its fair value, the second step of the impairment test is performed for purposes of measuring the impairment. In the second step, the fair value of the reporting unit is allocated to all of the assets and liabilities of the reporting unit to determine an implied goodwill value. If the carrying amount of the reporting unit goodwill exceeds the implied goodwill value, an impairment loss is recognized in an amount equal to that excess.

Management’s determination of the fair value of each reporting unit incorporates multiple inputs including discounted cash flow calculations, peer company price to earnings multiples, the level of the Company’s Class A common stock price and assumptions that market participants would make in valuing the reporting unit. Other assumptions can include levels of economic capital, future business growth, and earnings projections.

Valuation of Investments in Fixed Maturity and Equity Securities

The evaluation of securities for impairments is a quantitative and qualitative process, which is subject to risks and uncertainties and is intended to determine whether declines in the fair value of investments should be recognized in current period earnings. The risks and uncertainties include changes in general economic conditions, the issuer’s financial condition or future prospects, the effects of changes in interest rates or credit spreads and the expected recovery period.

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Based upon current accounting guidance, investment securities must be classified as held-to-maturity, available-for-sale or trading. Management determines the appropriate classification at the time of purchase. The classification of securities is significant since it directly impacts the accounting for unrealized gains and losses on securities. Fixed maturity securities are classified as held-to-maturity and carried at amortized cost when management has the positive intent and the Company has the ability to hold the securities to maturity. Securities not classified as held-to-maturity are classified as available-for-sale and are carried at fair value, with the unrealized holding gains and losses, net of tax, reported in other comprehensive income and do not affect earnings until realized.

The Company evaluates all securities on a quarterly basis, and more frequently when economic conditions warrant additional evaluations, for determining if an OTTI exists pursuant to the accounting guidelines. In evaluating the possible impairment of securities, consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial conditions and near-term prospects of the issuer, and the ability and intent of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. In analyzing an issuer’s financial condition, the Company may consider whether the securities are issued by the Federal government or its agencies, by government-sponsored agencies, or whether downgrades by bond rating agencies have occurred, and reviews of the issuer’s financial condition.

If management determines that an investment experienced an OTTI, management must then determine the amount of OTTI to be recognized in earnings. If management does not intend to sell the security and it is more likely than not that the Company will not be required to sell the security before recovery of its amortized cost basis less any current period loss, the OTTI will be separated into the amount representing the credit loss and the amount related to all other factors. The amount of OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of OTTI related to other factors will be recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings will become the new amortized cost basis of the investment. If management intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current period credit loss, the OTTI will be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. Any recoveries related to the value of these securities are recorded as an unrealized gain (as other comprehensive income (loss) in shareholders’ equity) and not recognized in income until the security is ultimately sold.

The Company from time to time may dispose of an impaired security in response to asset/liability management decisions, future market movements, business plan changes, or if the net proceeds can be reinvested at a rate of return that is expected to recover the loss within a reasonable period of time.

Premium Revenue and Related Expenses

Premiums on life and accident and health policies are reported as earned when due or, for short duration contracts, over the contract period on a pro rata basis. Benefits and expenses are associated with earned premiums so as to result in recognition of profits over the estimated life of the contracts. This matching is accomplished by means of provisions for future benefits and the capitalization and amortization of deferred policy acquisition costs.

Annuities are accounted for in a manner consistent with accounting for interest bearing financial instruments. Our primary annuity products do not include fees or other such charges.

Tax Accounting

A deferred tax asset or deferred tax liability is recorded only if a determination is made that is more-likely-than-not that the tax treatment on which the deferred tax item depends will be sustained in the event of an audit. These determinations inherently involves management’s judgment. In addition, the Company must record a tax valuation allowance with respect to deferred tax assets if it is more-likely-than-not that the tax benefit will not be realized. This valuation allowance is in essence a contra account to the deferred tax asset. Management must determine the portion of the deferred tax asset and resulting tax benefit that may not be realized based upon judgment of expected outcomes. Due to significant estimates utilized in establishing the valuation allowance and the potential for changes in facts and circumstances, it is reasonably possible that we will be required to record adjustments to the valuation allowance in future reporting periods. Such a charge could have a material adverse effect on our results of operations, financial condition and capital position.

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Recent Accounting Pronouncements

See “Item 8. Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements, Note 1. Accounting Pronouncements.”

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

General

The nature of our business exposes us to investment market risk. Market risk is the risk of loss that may occur when changes in interest rates and public equity prices adversely affect the value of our invested assets. Interest rate risk is our primary market risk exposure. Substantial and sustained increases and decreases in market interest rates can affect the fair value of our investments. The fair value of our fixed maturity portfolio generally increases when interest rates decrease and decreases when interest rates increase.

Market Risk Related to Interest Rates

Our exposure to interest rate changes results from our significant holdings of fixed maturity investments, policy loans and mortgage loans on real estate, all of which comprised over 87.0% of our cash and investment portfolio as of December 31, 2009. These investments are mainly exposed to changes in U.S. Treasury rates. Our fixed maturities investments include U.S. Government-sponsored corporations, U.S. Government bonds, securities issued by government agencies, and corporate bonds. Approximately 70.2% of the fixed maturities we owned at December 31, 2009 are instruments of U.S. Government-sponsored enterprises, or are backed by U.S. Government agencies.

		December 31, 2009												December 31, 2008
										Net												Net
										Unrealized												Unrealized
		Amortized				Fair				Gains				Amortized				Fair				Gains
		Cost				Value				(Losses)				Cost				Value				(Losses)
		(In thousands)
Fixed maturities, available-for-sale		$	389,195				385,579				(3,616	)			494,034				485,155				(8,879	)
Fixed maturities, held-to-maturity			206,909				199,676				(7,233	)			—				—				—
Total fixed maturities		$	596,104				585,255				(10,849	)			494,034				485,155				(8,879	)
Total equity securities		$	25,899				33,477				7,578				42,908				43,000				92

To manage interest rate risk, we perform periodic projections of asset and liability cash flows to evaluate the potential sensitivity of our investments and liabilities. We assess interest rate sensitivity with respect to our fixed maturities investments using hypothetical test scenarios that assume either upward or downward 100 basis point shifts in the prevailing interest rates.

The Company performs an analysis of fair values using 100 basis point upward and downward shifts in interest rates. The following table sets forth the potential amount of unrealized losses that could be caused by 100 basis point upward shifts on our fixed maturities investments as of the dates indicated. Declining interest rate scenarios are not reported due to the fact that current rates are low and further declines are not probable.

		Increases in Interest Rates
		(In thousands)
December 31,		100 Basis Points				200 Basis Points				300 Basis Points
2009		$	(49,599	)			(97,573	)			(132,425	)
2008		$	(55,265	)			(85,159	)			(113,469	)

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

While the test scenario is for illustrative purposes only and does not reflect our expectations regarding future interest rates or the performance of fixed-income markets, it is a near-term change that illustrates the potential impact of such events. Due to the composition of our book of insurance business, we believe it is unlikely we would encounter large surrender activity due an interest rate increase that would force us to dispose of our fixed maturities at a loss.

There are no fixed maturities or other investments that we classify as trading instruments. At December 31, 2009 and 2008, we had no investments in derivative instruments, nor does the Company have any subprime or CDO (collateralized debt obligation) risk.

Market Risk Related to Equity Prices

Changes in the level or volatility of equity prices affect the value of equity securities we hold as investments. However, our equity investments portfolio was less than 5% of our total investments at December 31, 2009. Thus, we believe significant decreases in the equity markets would have an immaterial impact on our total investment portfolio. (See also Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.)

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Reference is made to the financial statements, the notes thereto, and the report of our independent registered public accounting firm, as listed on the table of contents.

All other schedules have been omitted as the required information is inapplicable or the information required is presented in the financial statements or the notes thereto filed elsewhere herein.

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

There was no change in or disagreement with our accountants related to our accounting and financial disclosures.

Item 9A. CONTROLS AND PROCEDURES

(a) Disclosure Controls and Procedures

We have established disclosure controls and procedures to ensure, among other things, material information relating to our Company, including its consolidated subsidiaries, is made known to our officers who certify our financial reports and to the other members of our senior management and the Board of Directors.

Our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”) are responsible for establishing and maintaining our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based upon an evaluation at the end of the period, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this annual report.

(b) Management Report on Internal Control over Financial Reporting

Management of our Company is responsible for establishing and maintaining adequate internal control over financial reporting. Management assessed our internal control over financial reporting based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment, management has concluded that we maintained effective internal control over financial reporting as of December 31, 2009.

Our independent registered public accounting firm, Ernst & Young LLP has issued an attestation report on our internal control over financial reporting. The report is included in item 9A(d) of this annual report.

(c) Change in Internal Control over Financial Reporting

During 2009, there have been no changes in the Company’s internal controls over financial reporting that materially affect or are reasonably likely to affect the Company’s internal controls over financial reporting. The Company implemented an internal audit function during 2008. This function provided an additional layer of review and oversight procedures. The Company’s Director of Internal Audit has significant experience in the life insurance industry, as well as external audit experience, including design and implementation of internal control processes.

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

(d) Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting

Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting

The Board of Directors and Shareholders of Citizens, Inc.:

We have audited Citizens, Inc.’s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Citizens, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management Report on Internal Control over Financial Reporting under Item 9A of the Index. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.’

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Citizens, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statements of financial position as of December 31, 2009 and 2008, and the related consolidated statements of operations, stockholders’ equity and comprehensive income, and cash flows for each of the three years in the period ended December 31, 2009 of Citizens, Inc. and subsidiaries and our report dated March 12, 2010 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Austin, Texas
March 12, 2010

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Item 9B. OTHER INFORMATION

None.

PART III

Items 10, 11, 12, 13 and 14 of this Report incorporate by reference the information in our definitive proxy material under the headings “Election of Directors,” “Executive Officers,” “Executive Officer and Director Compensation,” “Stock and Principal Stockholders,” “Control of the Company,” and “Principal Accounting Fees and Services,” to be filed with the Securities and Exchange Commission within 120 days after December 31, 2009.

PART IV

Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a)

(1) and (2) Filings as Part of this Report

The financial statements and schedules listed on the following index to financial statements and financial statement schedules are filed under Item 8 as part of this Form 10-K.

(b)

(3) Exhibits — See the Exhibit Index

Index to Consolidated Financial Statements and Financial Statement Schedules

		Page
		Reference
Report of independent registered public accounting firm			42
Consolidated statements of financial position at December 31, 2009 and 2008			43
Consolidated statements of operations — years ended December 31, 2009, 2008 and 2007			45
Consolidated statements of stockholders’ equity and comprehensive income — years ended December 31, 2009, 2008 and 2007			46
Consolidated statements of cash flows — years ended December 31, 2009, 2008 and 2007			48
Notes to consolidated financial statements			50
Schedule II — Condensed Financial Information of Registrant			83
Schedule III — Supplementary Insurance Information			86
Schedule IV — Reinsurance			87

All other schedules have been omitted because the required information is inapplicable or the information required is presented in the financial statements or the notes thereto filed elsewhere herein.

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Citizens, Inc.:

We have audited the accompanying consolidated statements of financial position of Citizens, Inc. and subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of operations, stockholders’ equity and comprehensive income, and cash flows for each of the three years in the period ended December 31, 2009. Our audit also included the financial statement schedules II, III, and IV under Item 15 of the Index. These financial statements and schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Citizens, Inc. and subsidiaries at December 31, 2009 and 2008, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Citizens, Inc.’s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 12, 2010 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Austin, Texas
March 12, 2010

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Consolidated Statements of Financial Position
December 31
(In thousands)

		2009				2008
Assets
Investments:
Fixed maturities available-for-sale, at fair value (cost: $389,195 and $494,034 in 2009 and 2008, respectively)		$	385,579				485,155
Fixed maturities held-to-maturity, at amortized cost (fair value: $199,676 in 2009)			206,909				—
Equity securities available-for-sale, at fair value (cost: $25,899 and $42,908 in 2009 and 2008, respectively)			33,477				43,000
Mortgage loans on real estate			1,533				339
Policy loans			32,096				28,955
Real estate held for sale			2,825				4,156
Real estate held for investment (less $374 and $283 accumulated depreciation in 2009 and 2008, respectively)			6,305				4,717
Other long-term investments			86				680
Short-term investments			2,510				2,250
Total investments			671,320				569,252
Cash and cash equivalents			48,625				63,792
Accrued investment income			7,455				7,423
Reinsurance recoverable			11,587				13,241
Deferred policy acquisition costs			115,570				109,114
Cost of customer relationships acquired			34,728				33,805
Goodwill			17,160				15,687
Other intangible assets			1,046				1,073
Federal income tax receivable			4,023				2,090
Property and equipment, net			6,018				6,466
Due premiums, net (less $1,644 and $2,217 allowance for doubtful accounts in 2009 and 2008)			8,960				8,958
Other assets			834				1,375
Total assets		$	927,326				832,276

(Continued)

See accompanying notes to consolidated financial statements.

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Consolidated Statements of Financial Position, Continued
December 31
(In thousands, except share amounts)

		2009				2008
Liabilities and Stockholders’ Equity
Liabilities:
Future policy benefit reserves:
Life insurance		$	592,358				547,621
Annuities			37,882				34,025
Accident and health			6,399				7,442
Dividend accumulations			5,621				4,795
Premiums paid in advance			20,373				18,566
Policy claims payable			10,222				9,318
Other policyholders’ funds			8,105				7,929
Total policy liabilities			680,960				629,696
Commissions payable			2,434				2,350
Deferred federal and state income taxes			8,052				3,951
Payable for securities in process of settlement			6,000				—
Warrants outstanding			1,819				4,973
Other liabilities			11,986				12,052
Total liabilities			711,251				653,022
Commitments and contingencies (Notes 5 and 8)
Cumulative convertible preferred stock — Series A (Series A-1 — $1,000 stated value per share, 6,250 shares issued, authorized and outstanding in 2008; Series A-2 — $935 stated value per share, 5,000 shares authorized, 4,014 shares issued and outstanding in 2008)			—				7,713
Stockholders’ equity:
Common stock:
Class A, no par value, 100,000,000 shares authorized, 51,822,497 shares issued and outstanding in 2009 and 48,781,753 shares issued and outstanding in 2008, including shares in treasury of 3,135,738 in 2009 and 2008			256,703				240,511
Class B, no par value, 2,000,000 shares authorized, 1,001,714 shares issued and outstanding in 2009 and 2008			3,184				3,184
Retained deficit			(38,092	)			(55,432	)
Accumulated other comprehensive income (loss):
Unrealized gains (losses) on securities, net of tax			5,291				(5,711	)
			227,086				182,552
Treasury stock, at cost			(11,011	)			(11,011	)
Total stockholders’ equity			216,075				171,541
Total liabilities and stockholders’ equity		$	927,326				832,276