10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2005

Commission file number 1-13004

CITIZENS, INC.

(Exact name of registrant as specified in its charter)

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

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

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 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. þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.
Large accelerated filer o Accelerated filer þ Non-accelerated filer 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 the registrant’s last business day of its most recently completed second fiscal quarter (June 30, 2005), the aggregate market value of the Class A voting stock held by non-affiliates of the registrant was approximately $192,313,572.

Number of shares of common stock outstanding as of March 1, 2006:

Class A: 40,166,561
Class B: 1,001,714

DOCUMENTS INCORPORATED BY REFERENCE

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

TABLE OF CONTENTS

		Page
PART I
Item 1.	Business		3
Item 1A.	Risk Factors		32
Item 1B.	Unresolved Staff Comments		52
Item 2.	Properties		53
Item 3.	Legal Proceedings		53
Item 4.	Submission of Matters to a Vote of Security Holders		54
PART II
Item 5.	Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Securities		55
Item 6.	Selected Financial Data		55
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operation		56
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk		72
Item 8.	Financial Statements and Supplementary Data		74
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		75
Item 9A.	Controls and Procedures		75
Item 9B.	Other information		79
PART III
Item 10.	Directors and Executive Officers of the Registrant		79
Item 11.	Executive Compensation		79
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		79
Item 13.	Certain Relationships and Related Transactions		79
Item 14.	Principal Accounting Fees and Services		79
PART IV
Item 15.	Exhibits, Financial Statement Schedules		79
Consent of Independent Registered Public Accounting Firm
Certification of CEO Pursuant to Section 302
Certification of CFO Pursuant to Section 302
Certification of CEO Pursuant to Section 906
Certification of CFO Pursuant to Section 906
First Amended and Restated Loan Agreement
Subsidiaries
Consent of Independent Registered Public Accounting Firm
Certification of CEO Pursuant to Section 302
Certification of CFO Pursuant to Section 302
Certification of CEO Pursuant to Section 906
Certification of CFO Pursuant to Section 906

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FORWARD-LOOKING STATEMENTS

Certain statements contained in this Annual Report on Form 10-K are not statements of historical fact and constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act (the “Act”), including, without limitation, the italicized statements and the statements specifically identified as forward-looking statements within this document. Many of these statements contain risk factors as well. In addition, certain statements in future filings by the Company with the Securities and Exchange Commission, in press releases, and in oral and written statements made by or with the approval of the Company which are not statements of historical fact constitute forward-looking statements within the meaning of the Act. Examples of forward-looking statements, include, but are not limited to: (i) projections of revenues, income or loss, earnings or loss per share, the payment or non-payment of dividends, capital structure, and other financial items, (ii) statements of our plans and objectives or our management or Board of Directors including those relating to products or services, (iii) statements of future economic performance and (iv) statements of assumptions underlying such statements. Words such as “believes,” “anticipates,” “expects,” “intends,” “targeted,” “may,” “will” and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.

Forward-looking statements involve risks and uncertainties, which may cause actual results to differ materially from those in such statements. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to: (i) the strength of foreign and U.S. economies in general and the strength of the local economies where our policyholders reside; (ii) the effects of and changes in trade, monetary and fiscal policies and laws; (iii) inflation, interest rates, market and monetary fluctuations and volatility; (iv) the timely development of and acceptance of new products and services and perceived overall value of these products and services by existing and potential customers; (v) changes in consumer spending, borrowing and saving habits; (vi) a concentration of business from persons residing in Latin America and the Pacific Rim; (vii) uncertainties in assimilating acquisitions; (viii) the persistency of existing and future insurance policies sold by the Company and its subsidiaries; (ix) the dependence of the Company on its Chairman of the Board; (x) the ability to control expenses; (xi) the effect of changes in laws and regulations (including laws and regulations concerning insurance) with which the Company and its subsidiaries must comply, (xii) the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies as well as the Financial Accounting Standards Board, (xiii) changes in the Company’s organization and compensation plans; (xiv) the costs and effects of litigation and of unexpected or adverse outcomes in such litigation; and (xv) the success of the Company at managing the risks involved in the foregoing.

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

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

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PART I

ITEM 1. Business

Overview

We are a leading insurance holding company serving the life insurance needs of individuals in more than 35 countries and the United States. We pursue a strategy of offering ordinary life insurance products in niche markets where we believe we are able to achieve competitive advantages. Our core operations include:

• the issuance of ordinary life insurance in U.S. dollar denominated amounts to significant net worth foreign nationals through outside marketing consultants, principally in Latin America and the Pacific Rim; and

• offering final expense ordinary life insurance through the home service distribution channel.

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 life insurance in the international market. In October 2004, we entered the home service distribution channel through the acquisition of Security Plan Life Insurance Company (“Security Plan”), a significant provider of final expense ordinary life insurance in Louisiana. We also provide ordinary life insurance to middle income individuals in various markets in the midwest and southern U.S.

Our objective is to grow our asset base and profitability through:

• building assets through the issuance of cash accumulation and final expense ordinary life insurance products;

• strategic acquisitions of domestic life insurance companies; and

• expanding our distribution channels of ordinary life insurance.

We market our products through our network of 3,000 marketing consultants, independent agents and employee agents, and provide underwriting, investment and administrative functions through 200 employees in our executive offices in Austin, Texas and a support center in Donaldsonville, Louisiana.

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We were formed in 1969 by our Chairman, Harold E. Riley, who had many years of past experience in international and domestic life insurance before forming our Company. Since then our business has grown significantly, both internationally and domestically. Revenues from our international life business segment rose from $63.3 million in 2003 to $72.9 million in 2004 to $79.7 million in 2005. Since 1987 we have completed and integrated the acquisitions of 14 life insurance companies in the United States. We continue to seek acquisitions of other domestic life insurance companies as well as expand our life insurance business.

During the five years ended December 31, 2005, our assets have grown from $282.1 million to $661.9 million, and total stockholders’ equity has increased from $82.7 million to $137.0 million. Presently our revenues are evenly divided between our international business and our domestic business.

We organize and manage our life insurance business through three primary operating business segments. We exited the Domestic Health segment in 2004.

	For the Year Ended December 31,
	2005				2004
	(In thousands)
							Segment
Operating			Segment				income
Business Segment			income				(loss)
and Principal			before				before
Distribution	Total		income		Total		income
Channel	Revenue		tax		Revenue		tax
International Life - - Approximately 2,150 marketing consultants in 35 countries	$	79,675	$	5,762	$	72,886	$	8,841
Home Service Business (1) - Approximately 350 employee agents		49,692		5,902		12,346		2,511
Domestic Life - Approximately 850 independent agents		14,049		34		16,806		(2,946	)

(1) We initiated this segment on October 1, 2004, upon our acquisition of Security Plan. Revenues and segment income before tax are for the quarter ended December 31, 2004 only.

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Each operating business segment focuses on critical activities close to its target markets and customers, including marketing and customer support, while our centralized administrative staff provides support in key functions. At the corporate level, we stress disciplined underwriting and provide support services, including investment, information technology and other administrative and finance functions. This enables the operating business segments to focus on their target markets and distribution relationships while enjoying cost savings realized by operating these segments together.

Our Operating Segments

Our business is comprised of three primary operating business segments:

• International Life;

• Home Service Business (which we acquired on October 1, 2004, and as such, all 2004 income statement amounts are for one quarter only); and

• Domestic Life.

Prior to 2004 we operated a fourth segment, Domestic Health. We exited this area in 2004 through a coinsurance agreement effective January 1, 2004, with total health insurance revenues of $788,000 for the year, and a loss before income tax of $318,000 in 2004, and revenue of $900,000 for 2005, with a gain before tax of $98,000. We continue to have an insignificant amount of revenue in this area.

The following summary, representing revenues and pre-tax income from operations and identifiable assets for our segments, is as follows:

	Year Ended December 31,
	2005		2004		2003
	(In thousands)
Revenue
International Life	$	79,675		72,886		63,346
Home Service Business		49,692		12,346		—
Domestic Life		14,048		16,806		18,020
Domestic Health		900		788		13,736
Total consolidated revenue	$	144,315		102,826		95,102
Premiums and Annuity and Universal Life Consideration
International Life	$	68,444		59,214		51,972
Home Service Business		37,720		9,587		—
Domestic Life		11,603		13,579		11,270
Domestic Health		900		788		14,785
Total consolidated premium income	$	118,667		83,168		78,027
Net Investment Income
International Life	$	10,142		11,414		9,540
Home Service Business		11,573		2,876		—
Domestic Life		1,853		2,715		4,594
Domestic Health		—		—		188
Total consolidated net investment income	$	23,568		17,005		14,322

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	Year Ended December 31,
	2005		2004			2003
	(In thousands)
Income (loss) before federal income tax:
International Life	$	5,762		8,841			4,960
Home Service Business		5,902		2,511			—
Domestic Life		34		(2,946	)		(302	)
Domestic Health		98		(318	)		(1,369	)
Total consolidated income before federal income tax	$	11,796		8,088			3,289

	December 31,
	2005		2004
	(In thousands)
Assets:
International Life	$	233,530		225,360
Home Service Business		300,946		298,396
Domestic Life		115,321		123,160
Domestic Health		12,092		14,295
Total	$	661,889		661,211

The following table categorizes our U.S. and non-U.S. revenues:

	Year ended December 31,
	2005		2004		2003
	(In thousands)
Revenue:
U.S.	$	64,640		29,940		31,757
Non-U.S.		79,675		72,886		63,346
Total consolidated revenue	$	144,315		102,826		95,103

International Life

The acceptance of applications for U.S. dollar denominated ordinary whole life insurance from significant net worth foreign nationals is the foundation upon which we have built our Company. For over the past 30 years, we have participated in the foreign marketplace. We believe positive attributes of our international insurance market include:

• policies are typically larger face amounts than in the U.S. resulting in lower underwriting and administrative costs per policy;

• the premiums are paid annually rather than monthly or quarterly, which saves us administrative expenses and accelerates our cash flow;

• persistency is higher than U.S. policies;

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• the mortality is as good or better than that experienced in the U.S. because our insureds are in the top income brackets in their countries;

• the marketing consultants from whom applications are received are highly professional;

• we do not advance any commissions relating to this business, so we do not have financial exposure in the event monies are advanced and insurance revenues do not cover the advances; and

• the profit margins are higher for us than for typical U.S. policies.

Due to our significant experience in this segment we have implemented numerous policies and procedures to reduce the risks of asset losses. We have no offices, employees or assets outside of the U.S. All of our premiums from outside of the U.S. must be paid in U.S. dollars through a U.S. financial institution. The policies we issue to foreign nationals are designed to alleviate risks inherent in such markets by containing limitations on benefits for certain causes of death, such as homicide. In addition, we have developed disciplined underwriting criteria over many years which include background review of potential marketing consultants, through medical reviews of applicants, including retention of medical doctors who perform detailed medical examinations as well as background and reference checks on applicants. Also, we have a claims policy which requires an investigation of substantially all death claims.

Through our primary insurance company subsidiary, CICA LIFE Insurance Company of America (“CICA”), formerly Citizens Insurance Company of America, we make available ordinary whole life products to significant net worth foreign nationals through contracts with independent marketing organizations and independent marketing consultants. The number of our independent consultants has expanded over the years in this segment to approximately 3,100, and the number of countries from which applications are received is increasing. Historically, the majority of our International Life business has come from Latin America. However, in 2004 the Pacific Rim began to represent a meaningful and growing source of new business, amounting to $2.6 million of issued and paid annualized premium. This increase was also evident in 2005, as issued and paid annualized premiums from this region were $4.1 million. Overall, International Life made up more than 57.7% of our total premium revenues in 2005 and 71.2% of such revenues in 2004.

The following table sets forth our total yearly percentages of annual collected premium income from our International Life segment for the years indicated:

Country	2005				2004				2003
	(Dollars in thousands)
Colombia	$	20,572	30.1	%	$	18,487	31.2	%	$	16,172	31.1	%
Argentina		8,419	12.3			8,592	14.5			9,394	18.1
Venezuela		7,178	10.5			6,557	11.1			5,492	10.6
Uruguay		3,202	4.7			3,527	6.0			4,159	8.0
Taiwan		7,008	10.2			3,748	6.3			2,092	4.0
Other Non-U.S.		22,065	32.2			18,303	30.9			14,663	28.2
Total	$	68,444	100.0	%	$	59,214	100.0	%	$	51,972	100.0	%

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The ordinary whole life policies issued by CICA on residents of foreign countries had an average face amount of approximately $58,000 at December 31, 2005. We accept applications for international insurance policies submitted by several outside marketing consulting firms and marketing consultants in markets pursuant to non-exclusive contracts. These persons specialize in marketing life insurance products to foreign nationals and generally have several years of experience marketing life insurance products. The outside firms provide recruitment, training and supervision of their managers and associates in the placement of U.S. dollar-denominated life insurance products; however, all associates of these firms contract directly with us and receive their compensation directly from us. Accordingly, should the arrangement between any outside marketing consulting firm and us be canceled for any reason, we believe we could continue suitable marketing arrangements with the associates of these outside firms without appreciable loss of present and future sales, as we have done in the past. There is, however, always a risk that insurance sales could decrease. Our standard agreement with individual marketing consultants provides that the consultant is the representative of the prospective insured. Our standard contract with outside marketing consulting firms provides that the firm has the responsibility for recruiting and training its associates. These firms guarantee any debts of their associates to us. In consideration for the services rendered, the firms receive a fee on all new policies placed by them or their associates.

Our foreign outside marketing consultants are independent contractors, responsible for their respective expenses, and are compensated based on a percentage of collected premiums. We encourage these consultants to place ordinary whole life insurance. With respect to our contracts with foreign marketing consulting firms, these firms receive overriding first year and renewal commissions on business written by associates under their supervision, and all marketing expenses related thereto, except sales conventions, are borne by these firms.

Our International Life segment is dependent on the non-U.S. markets for a significant percentage of its ongoing and new life insurance premium revenue. As a result, we are subject to potential risks with regard to the continued ability to write this business should adverse events occur in the countries from which we receive applications. For example, even though we do not conduct business in a foreign country and have no assets or employees in any country outside the U.S, a foreign government could take the position that its residents could not procure insurance through us. While such event has never occurred, if we were faced with such a situation, we could experience increased lapsation rates of our policies. Our policy lapse rate could also increase if funds that flow out of such countries were to become restricted. Based on more than 30 years experience in the marketplace in which we compete, management believes such risks are not significant. We require all premiums to be paid in the U.S. with U.S. dollars via drafts drawn on banks in the U.S., therefore, we are not subject to foreign regulation or restrictions on fund transfers, nor are we subject to currency devaluation or foreign appropriation. Management also believes that many of the inherent risks in foreign countries, such as political instability, inflation and economic disruptions, tend to improve rather than hurt our business over the long term because these risks encourage individuals to convert assets out of local currencies to the more stable U.S. dollar.

Our International Life business grew at a double-digit pace in 2005. New annualized issued and paid premiums from the international market increased by 25.7% during 2004 compared to 2003 and 17.9% during 2005 compared to 2004. The development of the markets in the Pacific Rim and the expansion of existing markets in Latin America contributed to the growth in international revenues. Beginning in 2002, we began

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expansion into the Pacific Rim, particularly Taiwan. We have established relationships with a number of marketing organizations in the Pacific Rim, and during 2004, we generated approximately $2.6 million of annualized issued and paid premium income from that region, and continued that growth with $4.1 million of annualized issued and paid premium in 2005. Additionally, in Brazil, which has never been a country from which large volumes of premiums were received, we began to develop new sales, adding $624,000 of new submitted premium income in 2004 and $1,009,000 during 2005. Overall, issued and paid new annualized premium income for 2005 from the international markets totaled $18.6 million, compared to $15.8 million in 2004 and $12.6 million in 2003. We expect to emphasize growth in this segment for the foreseeable future.

Home Service

On October 1, 2004, following the acquisition of Security Plan Life Insurance Company (“Security Plan”), a new segment, Home Service Business, was established.

Security Plan, which has conducted its operations since 1948, focuses on the life insurance needs of the lower income market in Louisiana. Its policies, which are predominantly ordinary whole life products, provide a means of taking care of individuals’ final expenses, primarily consisting of funeral and other burial costs. The policies are sold and serviced through the home service marketing distribution system utilizing employee-agents who work on a route system to collect premiums and service policyholders. All business has been written in Louisiana, where Security Plan is one of the leading writers of life insurance in the home service business. Security Plan’s premium writings have been supplemented by the acquisition of life insurance policies from numerous companies in its history.

Because of the type of business Security Plan writes, the average life insurance policy face amount in force is relatively small – approximately $1,500 per policy in 2005 – the underwriting performed on these applications is limited due to the small average face amount.

Security Plan’s book of premium income decreased each year for the past five years. Management has replaced Security Plan’s marketing leadership and believes that the new emphasis on sales can halt the shrinkage in the premium income and serve as a base from which to expand the home service business, although the hurricanes which hit Louisiana in 2005 resulted in a delay in implementing this strategy.

Security Plan owns a subsidiary, Security Plan Fire Insurance Company (“SPFIC”), which provides property and casualty coverage to lower income residents of Louisiana. SPFIC utilizes the same employees/agents as Security Plan. The maximum coverage on any one dwelling is $20,000 and content coverage is limited to $10,000. At December 31, 2005, SPFIC had total assets of approximately $7 million and annual revenues of $3.7 million. We expect to utilize SPFIC to augment Security Plan’s insurance sales.

Domestic Life

Our Domestic Life segment consists of ordinary whole life, credit life insurance, credit disability insurance, and final expense policies, and is sold primarily throughout the Midwest and southern U.S. The majority of our Domestic Life business is the result of acquisitions of domestic life insurance companies since 1987. We conduct our Domestic Life business primarily through four operating life insurance subsidiaries.

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We seek to serve middle-income American families through the sale of cash accumulation ordinary whole life insurance products. In 2004, we began emphasizing the development of a sales force comprised primarily of part-time, second career sales associates (such as teachers, coaches, community leaders and others in small communities outside of major metropolitan areas). However, product sales to date have been disappointing, and combined with high lapsation rates on existing business, have resulted in decreased premium income in 2005 compared to 2004.

Total domestic life and disability premium income for 2005 (excluding our Home Service segment) amounted to $11.6 million, compared to $13.6 million in 2004 and $11.3 million in 2003. Management intends to broaden the portfolio of products to include many of the features of our ordinary life policies that we issue to foreign nationals, and expects these policies to be in place in 2006.

Our domestic underwriting policy requires a medical examination of applicants for ordinary insurance in excess of certain prescribed limits. These limits are graduated according to the age of the applicant and the amount of insurance.

The following table sets forth our total yearly direct premium received (as opposed to earned) percentage of domestic life and disability premium income by state for the years indicated, including domestic life, domestic health and annuity.

State	2005				2004				2003
	(Dollars in thousands)
Texas	$	9,172	38.6	%	$	10,212	36.9	%	$	10,548	35.6	%
Kentucky		2,936	12.3			4,377	15.8			5,636	19.0
Oklahoma		3,481	14.6			4,262	15.4			4,687	15.8
Mississippi		1,658	7.0			1,811	6.5			2,021	6.8
Other States		6,545	27.5			7,029	25.4			6,749	22.8
Total	$	23,792	100.0	%	$	27,691	100.0	%	$	29,641	100.0	%

Our Products

International Life

We offer several ordinary whole life insurance products designed to meet the needs of our non-U.S. policy owners through our Millennia 2000 Series. These policies have been structured to provide:

• U.S.-dollar denominated living cash values;

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

• a hedge against local currency inflation;

• protection against devaluation of foreign currency;

• capital transference to a safe haven (U.S.);

• lifetime income;

• tax-free earnings on cash build-up; and

• cash values beginning in the first policy year.

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Our Millennia 2000 Series’ products have living benefit features: every policy contains guaranteed cash values and is participating (i.e., receiving an annual cash dividend). The major portion of each premium payment goes toward building guaranteed cash values, while a lesser portion goes toward trust value building. Once the 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 the dividends to a third-party trust account, along with an annual policy Retirement Fund Benefit.

Home Service

The products of Security Plan are small face amount ordinary whole life policies which are designed to provide a means to taking care of final expenses for the insured, primarily consisting of funeral and burial costs. The policies in effect are those of many small companies that Security Plan has acquired over many years. We intend to continue to market these types of small face amount policies.

Domestic Life

Our domestic products focus primarily on living needs, and provide death benefits as a side effect of accumulating money for the insured. Our domestic life insurance policies are designed to provide for:

• cash accumulation/living benefits;

• tax-deferred interest earnings;

• guaranteed lifetime income at age 65;

• monthly income for loved ones;

• significant accidental death benefits; and

• payment waiver in the event of disability.

Our life insurance products are sold through our Fortune Builder plan, which has been designed to address the issue of outliving an insured’s monthly income, and at the same time, provide death benefits in case of an early demise. The primary purpose of our Fortune Builder plan is to help the insured create capital for needs such as retirement income, children’s higher educational funds, business opportunities, emergencies and healthcare needs.

The uniqueness of the Fortune Builder capital accumulation plan lies in its living insurance provisions which place the emphasis on personally receiving large cash benefits. There are two guaranteed cash value living benefit components. Every Fortune Builder policy contains a cash value build-up account, plus an interest bearing annual annuity account. This dual cash build-up construction causes the major part of each payment to build up cash to provide for income for future use. The annuity is flexible, free of initiation cost with no surrender charges; in other words, an owner may deposit or withdraw funds in the annuity

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with no loss in value at any time. The basis of its growth in value is the money an insured pays in and compound interest earned over time.

Each year, beginning the second policy year, and annually thereafter the policy pays an annuity benefit, equal to approximately half of the annual premium, which is credited to a policy’s annuity account, which pays at a current interest rate of 5.0%. The policy owner may assign the annual benefits to create additional retirement income or educational funds. There are no surrender charges, no entry cost and an insured can put in as much as he or she wishes.

We are in the process of broadening out domestic policies to include many of the features of our policies with foreign nationals and expect the new policies to be in place in 2006.

Operations and Technology

Our administrative operations are conducted primarily at our executive offices in Austin, Texas through approximately 100 administrative, operating and underwriting personnel. Operations of Security Plan are conducted to a large degree from our support center in Donaldsonville, Louisiana through 80 operations personnel. At our offices we perform policy design, marketing oversight, underwriting, accounting, servicing backup and investment.

Our senior management has a history in insurance company operating system design and implementation. Beginning in the mid-1960’s, we developed a new operating system which has evolved continually since that time. We have a single data processing administrative system for our entire Company which is a sophisticated mainframe administrative system. We are presently converting Security Plan’s administrative system to our processing system. Functions of our administrative system include policy set up, several internal control functions, administration, billing and collections, valuation, storage backup and related tasks. Each company we acquire is converted into our administrative system. This system has been in place for several 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 operating system upgrades, delays or failures or the addition of substantial amounts of staff.

Consolidated Information Regarding Our Insurance Business

The following tables set forth certain statistical information on the basis of accounting principles generally accepted in the U.S. concerning our operations for each of the five years ended December 31, 2005.

The following table sets forth certain information about our direct life insurance in force on a yearly comparative basis.

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			New
	In Force,		Business		Claims, Lapses,
	Beginning		Issued		Surrenders			Acquisitions		In Force,
	of Year		During Year		During Year			During Year		End of Year
	(In millions)
2005	$	3,513		618		(444	)		—		3,687
2004		2,435		541		(445	)		982		3,513
2003		2,090		422		(349	)		272		2,435
2002		1,977		390		(355	)		78		2,090
2001		1,914		346		(283	)		—		1,977

The following table sets forth consolidated (i) gross life insurance in force and (ii) mean life insurance in force.

	In Force				Mean Life
	Beginning		In Force		Insurance In
	of Year		End of Year		Force
	(a)		(a)		(a)
	(In millions)
2005	$	3,513		3,687		3,600
2004		2,435		3,513		2,974
2003		2,090		2,435		2,263
2002		1,977		2,090		2,034
2001		1,914		1,977		1,946

(a) Before assuming and ceding reinsurance from reinsurers.

The 2005 growth over 2004 represented the increased volume of new business written and improvements in persistency on policies issued to foreign nationals. The acquisition of Security Plan in October 2004 added approximately $982 million to the life insurance in force at year end, with the remainder of the increase in 2004 reflecting growth in out International Life segment. Increased issuance of new policies coupled with acquisitions contributed to the growth in insurance in force in 2003 compared to 2002. An acquisition in 2002 contributed to the increase in insurance in force in 2002 compared to 2001.

The following table sets forth (i) the ratio of lapses and surrenders to mean life insurance in force and (ii) life reinsurance ceded.

						Reinsurance Ceded
			Ratio ofLapses
			and Surrenders			Gross		Reinsurance
	Lapses and		to Mean in			Amount of		Premium
	Surrenders		Force			Reinsurance		Ceded
	(Dollars in thousands)
2005	$	339,430		9.4	%	$	221,793	$	1,907
2004		248,533		8.4			265,001		1,001
2003		217,888		9.6			301,366		1,382
2002		177,227		8.7			152,103		1,321
2001		113,482		5.8			206,386		1,723

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Lapses and surrenders increased in 2005 compared to 2004 due to Security Plan’s inclusion for the entire year. Reinsurance declined because of a decrease in the average face amount of international policies issued. The significant increase in 2004 ceded premium compared to 2003 related to the 100% cession of the in-force accident and health premiums to another carrier. The decline in ceded premium in 2003 compared to 2002 was related to the termination of a substantial portion of the major medical business acquired with an acquisition. Lapsation and surrender activity attributed to policyholders of two companies we acquired in 2003, contributed approximately $39.6 million to the increase in 2003 lapses and surrenders. The decline in ceded premium in 2002 compared to 2001 related to an increase in our retention from $75,000 on one life to $100,000 thereon. As described above, the uncertain economic climate in Latin American countries contributed to the increased lapsation and surrender activity in 2002 compared to 2001.

The following table sets forth information with respect to our total insurance premiums.

	Ordinary		Annuity &				Group		Accident &
	Life (a)		Universal Life		Casualty		Life		Health (a)		Total
	(In thousands)
2005	$	109,891		3,021		3,627		567		1,560		118,667
2004		77,111		3,520		1,113		636		788		83,168
2003		60,395		2,384		—		464		14,785		78,027
2002		54,033		283		—		420		13,474		68,211
2001		48,142		217		—		544		5,060		53,963

(a) After deduction for reinsurance ceded.

The substantial growth in 2005 compared to 2004 was due to the inclusion of Security Plan for the entire year. In comparing 2004 to 2003, the decline in accident and health premium as a result of the cession of the business to another carrier was offset by increases in our international business and the acquisition of Security Plan. The casualty premiums in 2004 resulted from the acquisition of Security Plan, which has a small casualty company and reflects the quarter ended December 31, 2004 only. The 2003 premium increase over 2002 was related to increased new life revenues and the acquisitions of two domestic life insurance companies. The 2002 increase in accident and health premiums compared to 2001 was attributable to a domestic life insurance company acquisition.

The following table sets forth information relating to the ratio of our underwriting and other expenses to insurance revenues.

								Commissions, Underwriting and Operating
								Expenses, Policy Reserve Increases,
			Commissions, Underwriting and					Policyholder Benefits and Dividends to
			Operating Expenses					Policyholders
	Insurance				Ratio to
	Premiums				Insurance					Ratio to Insurance
	(a)		Amount (a)		Premiums			Amount (a)		Premiums
	(Dollars in thousands)
2005	$	118,667	$	58,414		49.2	%	$	140,713		118.6	%
2004		83,168		38,665		46.5			98,840		118.9
2003		78,027		37,201		47.7			89,455		114.7
2002		68,211		31,411		46.1			79,320		116.3
2001		53,963		24,085		44.6			63,253		117.2

(a) After premiums ceded to reinsurers.

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During 2005, operating expenses increased compared to 2004 due to the inclusion of Security Plan for the entire year. In 2004, expense reductions resulted in improvement in the ratio of expenses to premiums compared to 2003; however, the claims incurred by Security Plan caused the overall expense and benefit ratio to increase slightly. Because of the nature of Security Plan’s business, a high benefit ratio is not unusual. During 2003, increased new life revenues from new business and two domestic life insurance company acquisitions resulted in decreases in the ratio of benefits compared to 2002; however, the expenses of these two acquisitions resulted in increases in the ratios of expenses to premiums. During 2002, increased new life revenues and increased accident and health premiums attributable to an acquisition resulted in decreases in the ratio of benefits to premiums compared to 2001; however, the expenses associated with conversion efforts and the administration of the accident and health business increased the ratio of expenses to premiums.

The following table sets forth changes in the face amount of new life insurance business produced between participating and non-participating policies. Dividends paid on participating policies are at the discretion of the insurance company issuing the policy.

			Participating					Non-participating
	Total New
	Business		Amount		Percent			Amount		Percent
	(Dollars in thousands)
2005	$	725,199	$	399,008		55.0	%	$	326,191		45.0	%
2004		570,462		339,008		59.4			231,454		40.6
2003		433,697		266,303		61.4			167,394		38.6
2002		410,352		265,476		64.7			144,876		35.3
2001		346,132		235,847		68.1			110,285		31.9

The 2004 purchase of Security Plan increased the percentage of non-participating business. During 2003, two acquisitions of domestic life insurance companies contributed to the increase in non-participating new business compared to 2002.

The following table sets forth changes in the face amount of new life insurance business issued according to policy types.

			Whole Life
	Total New		and Endowment					Term					Credit
	Business		Amount		Percent			Amount		Percent			Amount		Percent
	(Dollars in thousands)
2005	$	725,199	$	569,933		78.6	%	$	79,025		10.9	%	$	76,241		10.5	%
2004		570,462		406,075		71.2			82,839		14.5			81,548		14.3
2003		433,697		297,280		68.5			76,637		17.7			59,780		13.8
2002		410,352		289,976		70.7			80,342		19.5			40,034		9.8
2001		346,132		238,765		69.0			71,900		20.8			35,467		10.2

In 2005, Security Plan, whose business is virtually all whole life, was included for the entire year, plus new international policies grew significantly. In 2004, new life business, measured in paid, annualized premiums, increased 145% compared to the prior year. The

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addition of Security Plan, which contributed three months results, coupled with growth in CICA’s overseas business, increased the percentage of whole life insurance in force. The 2003 growth was slowed by the economic downturn in several Latin American countries. In 2002, new life business increased 17.7% compared to 2001 due to acquisitions and internal growth, while in 2003 the increase was 2.9% over the prior year.

The following table sets forth deferred policy acquisition costs capitalized and amortized compared to new life insurance business issued.

	Total Face
	Amount of New		Deferred Policy
	Business		Acquisition Costs
	Issued		Capitalized		Amortized
	(In thousands)
2005	$	725,199		24,388		10,313
2004		570,462		17,241		8,438
2003		433,697		16,558		11,807
2002		410,352		14,423		10,039
2001		346,132		11,112		8,568

The 2005 growth in capitalized expenses and amortization compared to 2004 resulted from the inclusion of Security Plan for the full year and the increase in new international business. In 2004, persistency on our international business improved, contributing to lower amortization, as well as no amortization for the accident and health business that was ceded in 2004. Amortization expense in 2002 and 2003 increased over the prior year due to higher surrender activity.

Investments

State insurance statutes prescribe the quality and percentage of the various types of investments which may be made by insurance companies and generally permit investment in qualified state, municipal, federal and foreign government obligations, high quality corporate bonds, preferred and common stock, real estate and mortgage loans within certain specified percentages.

The administration of our investment portfolios is handled by management, with all trades 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. 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.

Valuation of Investments in Fixed Maturity and Equity Securities

At December 31, 2005, investments in fixed maturity and equity securities were 94.5% of our total investments. Approximately 98.3% of our fixed maturities were classified as available-for-sale securities at December 31, 2005, with the remaining 1.7% classified as held-to-maturity securities based upon our intent and ability to hold these securities to maturity. We had no fixed maturity or equity securities that are classified as trading securities at December 31, 2005.

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At December 31, 2005, 63.3% of our fixed maturity securities were invested in securities backed by the full faith and credit of the U.S. government or U.S. government-sponsored enterprises.

We evaluate the carrying value of our fixed maturity and equity securities at least quarterly. A decline in the fair value of any fixed maturity or equity security below cost that is deemed other than temporary is charged to earnings resulting in the establishment of a new cost basis for the security. The new cost basis is not changed for subsequent recoveries in the fair value of the fixed maturity or equity security. With the exception of Security Plan, virtually all subsidiaries’ investments are in bonds that carry the full faith and credit of the U.S. government or U.S. government-sponsored enterprises. Security Plan has significant investments in corporate and municipal bonds. Based upon our emphasis on investing in fixed maturity securities primarily composed of obligations of U.S. government sponsored corporations, U.S. Treasury securities and obligations of the U.S. government and agencies and our analysis whether declines in fair value below cost are temporary or other than temporary, management believes that our investments in fixed maturity and equity securities at December 31, 2005 are not impaired, and no “other than temporary losses” need to be recorded.

Gross unrealized losses on fixed maturities available-for-sale amounted to $10,460,000 as of December 31, 2005 and $3,857,000 as of December 31, 2004 due primarily to increases in interest rates.

The following table summarizes the composition of our investment portfolio and cash and cash equivalents.

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

(1) U.S. Government and government agencies include U.S. Government Agency securities ($24,866,000) and private corporations of U.S. government-sponsored enterprises ($264,809,000).

The following table shows the distribution of the contractual maturities of our portfolio of fixed maturity securities by carrying value as of December 31, 2005. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties:

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	Fixed maturities held-to-maturity
	Amortized
	cost		Fair value
Due after ten years	$	7,639,505	$	9,143,212

	Fixed maturities available-for-sale
	Amortized
	cost		Fair value
Due in one year or less	$	15,130,057		14,944,322
Due after one year through five years		39,676,838		38,641,376
Due after five years through ten years		31,692,412		30,939,025
Due after ten years		316,534,810		313,828,531
		403,034,117		398,353,254
Securities not due at a single maturity date		54,352,226		51,577,913
Totals	$	457,386,343		449,931,167

The securities not due at a single maturity date are obligations of U.S. government-sponsored enterprises.

At December 31, 2005, the average duration of our investment portfolio was 8.2 years.

The following table sets forth the mean amount of our invested assets and net investment income from our investment portfolio.

					Ratio of Net
					Investment Income
Year Ended	Mean Amount of		Net Investment		to Mean Amount
December 31,	Invested Assets		Income (a)		of Invested Assets (a)
	(In thousands)
2005	$	480,306	$	23,568		4.9	%
2004		375,495		17,005		4.5
2003		250,598		14,322		5.7
2002		216,352		14,252		6.6
2001		200,450		13,296		6.6

(a) Does not include realized and unrealized gains and losses on investments.

In 2005, Security Plan was included for the entire year; however, available returns in the bond market remained low. In 2004, only Security Plan’s investment income for the fourth quarter was included, leading to a further decline in percentage return. During 2003, the low interest rates available on newly invested money relative to prior years and the significant call activity on the bonds owned negatively impacted our net investment income compared to 2002 and 2001. During 2002 we were able to maintain our investment yield by continuing to place less emphasis on government guaranteed pass-through instruments and more emphasis on investments in callable instruments issued by U.S. government agencies.

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Reserves

Our insurance subsidiaries established liabilities for policyholders’ account balances and future policy benefits to meet obligations on various policies and contracts. Reserves for policyholders’ account balances for investment-type policies are equal to cumulative account balances consisting of deposits plus credited interest, less expense and mortality charges and withdrawals. Future policy benefits for ordinary life products are computed on the net level premium method, which utilizes assumed investment yields, mortality, persistency, morbidity and expenses (including a margin for adverse deviation). These reserves are established at the time of issuance of a policy and generally vary by product, year of issue and policy duration. We periodically review both reserve assumptions and policyholder liabilities. In addition, we retain an independent actuary to review our reserves on a quarterly basis and provide reports thereon.

Reinsurance

As is customary among insurance companies, our insurance company subsidiaries reinsures with other companies portions of the life insurance risks they underwrite. The primary purpose of reinsurance agreements is to enable an insurance company to reduce the amount of risk on any particular policy and, by reinsuring the amount exceeding the maximum amount the insurance company is willing to retain, to write policies in amounts larger than it could without such agreements. Even though a portion of the risk may be reinsured, 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.

Insurance Ceded

CICA retains up to $100,000 of risk on any one person. As of December 31, 2005, the aggregate amount of life insurance ceded was $209,441,000 or 6.5% of its total direct and assumed life insurance in force, and at December 31, 2004 was $171,283,000 or 5.3% of its direct insurance in force. CICA is contingently liable with respect to ceded insurance should any reinsurer be unable to meet the obligations reinsured.

CICA has in effect automatic reinsurance agreements with nonaffiliated reinsurers that provide for cessions of ordinary insurance from CICA. These treaties provide for both automatic and facultative reinsurance of standard and substandard risks ceded to them by CICA for life, accident and health and supplemental benefits above CICA’s retention limit on a yearly renewable term, or coinsurance basis. Automatic cession means that so long as the risk is within the limits of the reinsurance agreement the reinsurer must assume the risk. Facultative cases are subject to specific underwriting approval of the reinsurer.

Since 2003, CICA has obtained reinsurance with Worldwide Reassurance of England (Worldwide) and Converium Ruckversicherung Deutschland Ag of Germany (Converium). At December 31, 2005, CICA had ceded $49,416,000 in face amount of insurance to Worldwide and $9,113,000 to Converium. Prior to that time, CICA had outside reinsurance from Employers Reassurance (ERC), American United Life Insurance Company (AUL) and Businessmen’s Assurance (BMA). The former reinsurers retain their risk on business previously ceded.

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At December 31, 2005, CICA had ceded $48,553,000 in face amount of insurance to ERC, $20,111,000 to Riunione Adriatica di Sicurta of Italy, a predecessor to AUL, $14,066,000 to BMA, $22,388,000 to AUL and $45,546,000 to Optimum Re.

In late 2002, AUL notified CICA that it would no longer be accepting new reinsurance business effective January 1, 2003, as a result of being purchased by ERC, which was owned by General Electric. Subsequently, ERC indicated a desire to withdraw from the international reinsurance market because of a decision on the part of its new parent.

Worldwide and Converium are unauthorized reinsurers in the state of Colorado. However, they have each agreed in writing to provide a letter of credit issued by a U.S. Bank in the amount of any liabilities they may incur under the reinsurance agreements with CICA in the event that a reinsurance credit is significant. There were no such significant credits as of December 31, 2005, and no letter of credit was necessary or provided.

In addition, a reinsurance treaty with Swiss Re Life & Health America, Inc. (Swiss Re) covers all of CICA’s accidental death insurance supplementing its life insurance policies. These cessions are on a yearly renewable term basis and occur automatically if total accidental death benefits known to CICA are less than $250,000 or otherwise on a facultative review basis. At December 31, 2005, CICA had ceded $1.3 billion of supplemental life insurance benefits to Swiss Re under this treaty.

Effective January 1, 2004, CICA entered into a coinsurance agreement with Texas International Life Insurance Company (TILIC), an unaffiliated party, whereby TILIC administers and reinsures all of CICA’s non-credit accident and health business. TILIC has applied to the Texas Department of Insurance to have the assumption of this business approved. Negotiations were underway as of December 31, 2005, with the assuming party to sell CNLIC, which represents approximately 70.0% of ceded business. A formal contract was signed in the first quarter of 2006. The remaining 30% of business will continue to cede under the same contract.

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

Consistent with the general practice in the life insurance industry, Security Plan has reinsured portions of the coverage provided by its insurance products with other non-affiliated insurance companies. Insurance is ceded principally to reduce net liability on individual risks, to provide protection against large losses and to obtain a greater diversification of risk. Although reinsurance does not legally discharge the ceding insurer from its primary liability for the full amount of policies reinsured, it does make the reinsurers liable to the insurer to the fullest extent of the reinsurance ceded.

Security Plan seeks to enter into reinsurance treaties with well capitalized insurers. Its policy is to use reinsurers who, in the opinion of management, have significant levels of capital and surplus. We believe that we have established appropriate reinsurance coverage based upon our net retained insured liabilities compared to our surplus. Based on a review of our reinsurers’ financial positions and reputations in the reinsurance marketplace, we believe that our reinsurers are financially sound. In addition, Security Plan maintains a coinsurance agreement with the former parent of Security Plan on a closed block of business and with other carriers as necessary that represents less than 1% of total business

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in force. The total face amounts ceded at December 31, 2005 was $6.4 million or less than 1% of Security Plan’s insurance force. Security Plan also maintains agreements with unaffiliated reinsurers to provide catastrophe coverage in the event of a significant loss.

SPFIC had reinsurance agreements in place to protect it from catastrophic events such as Hurricanes Katrina and Rita that struck Louisiana in 2005. The agreements in place during 2005 provided that SPFIC bore responsibility for the first $250,000 of incurred claims. Reinsurers indemnified SPFIC for losses in excess of $250,000 up to $7.1 million per event. Any amount over that was SPFIC’s responsibility. The Company incurred claims of $749,583 in excess of $7.1 million on Hurricane Katrina. Once the cap was met, SPFIC had an opportunity to pay for “2^nd event” coverage, upon payment of approximately $400,000 in premium. SPFIC elected to do so and the claims for Hurricane Rita were covered under this second event reinsurance. Through December 31, 2005, claims related to Hurricane Rita were approximately $3.7 million and were 100% reinsured. We do not expect the claims for Hurricane Rita to exceed our reinsurers’ limits. For calendar year 2006, SPFIC elected to increase the amount of 1^st event catastrophe reinsurance to $10 million and raise the deductible to $500,000 by paying an annual premium of $798,750.

Insurance Assumed

At December 31, 2005, CICA had in-force reinsurance assumed as follows:

		Amount
	Type of	in force at
	Business	end of year
Name of Company	Assumed	(In thousands)
Prudential Insurance Company (Prudential)	Group Life	$	592,636

The reinsurance agreement with Prudential provides for CICA to assume a portion of the insurance under a group insurance policy issued by Prudential to the Administrator of Veterans’ Affairs. CICA’s portion of the total insurance under the policy is allocated to CICA in accordance with the criteria established by the administrator.

Competition

The life insurance business is highly competitive, and we compete with a large number of stock and mutual life companies both internationally and domestically as well as from financial institutions which offer insurance products. There are more than 1,000 other life insurance companies in the U.S., some of which we also provide insurance to foreign nationals.

International Market. A large percentage of our first year and renewal life insurance premium income comes from the international market. Given the significance of our international business, the variety of markets in which we make ordinary whole-life insurance available and the impact that economic changes have on these foreign markets, it is not possible to ascertain our competitive position. Our international marketing plan stresses making available dollar-denominated life insurance products to significant net worth individuals residing around the world. We experience competition primarily from the following sources:

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Locally Operated Companies with Local Currency Policies. We compete with companies formed and operated in the country in which the insureds reside.

However, because our premiums must be paid in U.S. dollars drawn on U.S. banks, and we pay claims in U.S. dollars, we have a different clientele and product than foreign-domiciled companies. Our products are usually acquired by persons in the top income of their respective countries. The policies sold by foreign companies are offered broadly and are priced based on the mortality of the entire populace of the respective geographic region. Because of the predominance of lower incomes in most of these countries, the mortality experience tends to be very high on the average compared to the U.S., causing mortality charges that are considered unreasonable based on the life mortality experience of the upper income of the local population.

Additionally, the assets that back up the policies issued by foreign companies are substantially invested in the respective countries, and thus, are exposed to the inflationary risks and economic crises that historically have impacted many foreign countries. Another reason that we experience an advantage is that many of our policyholders desire to transfer capital out of their countries due to the perceived financial strength and security of the U.S.

U.S. Companies issuing U.S. Dollar Policies. We also face direct competition from companies that operate in the same manner as we do. We compete using our history of performance and our products.

Competitors in our international markets include National Western Life Insurance Company, Best Meridian Insurance Company and to a lesser extent, Pan American Life and AIG, although these companies tend to focus on non-traditional life insurance and annuities.

Foreign Operated Companies with Local Currency Policies. Another group of competitors consists of companies which are foreign to the countries in which the policies are sold but use the local currencies of those countries. These competitors include a number of large U.S. issuers who maintain foreign brackets. Local currency policies entail risk of uncertainty due to local currency fluctuations as well as the perceived instability and weakness of local currencies. We have observed that local currency policies, whether issued by foreign or locally operated companies, tend to focus on universal life insurance and annuities instead of whole life insurance as we do.

Some companies may be deemed to have a competitive advantage due to histories of successful operations and large agency forces. Management believes that its experience, combined with the special features of CICA’s unique policies, allows CICA to compete effectively in pursuing new business.

Home Service. Security Plan faces competition in Louisiana with a handful of other companies who specialize in home service distribution of insurance. Competitors include Presidential Life, Monumental Life and Union National Life. Security Plan also competes indirectly with other domestic life insurance companies operating in Louisiana.

Domestic Market. The life insurance industry in the U.S. is a mature industry which, in recent years, has experienced no growth in life insurance sales. Competition has also increased because the life insurance industry is consolidating, with larger, more effective organizations emerging from consolidation. Furthermore, mutual insurance companies are

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converting to stock ownership, which should give them greater access to capital markets, resulting in greater competition with respect to corporate finance as well. Additionally, legislation became effective in 2000 permitting commercial banks, insurance companies and investment banks to combine. This law permits, for instance, a commercial bank to acquire or form an insurance company. These factors increased competitive pressures in general. Because of our limited nature of domestic marketing activities, there are no readily identifiable domestic competitors.

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

Employees

We have 200 administrative, underwriting and operations employees, including our management, and we have approximately 350 employee agents who work exclusively for Security Plan. We consider our employee relationships to be good.

Other Operations

We have several small operations conducted through subsidiaries that are not material to our business, including a funeral home in Baker, Louisiana, an aircraft and a data processing operation.

REGULATION

General

Our U.S. insurance operations are subject to a wide variety of laws and regulations. State insurance laws regulate most aspects of our U.S. insurance businesses, and our insurance subsidiaries are regulated by the insurance departments of each the states in which they are licensed. 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 which 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.

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Many of our independent agents also operate in regulated environments. Changes in the regulations that affect their operations also may affect our business relationships with them and their ability to purchase or to distribute our products.

At the present time, our insurance subsidiaries are collectively licensed to transact business in 27 states. We have insurance subsidiaries domiciled in the states of Colorado, Illinois, Louisiana, Missouri and Texas.

U.S. Insurance Regulation

Our U.S. insurance subsidiaries are licensed and regulated in all 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.

The types of U.S. insurance laws and regulations applicable to us or our U.S. insurance subsidiaries are described in more detail below.

Insurance holding company regulation

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 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.

Policy forms

Our U.S. insurance subsidiaries’ policy forms are subject to regulation in every U.S. jurisdiction in which such subsidiaries are licensed to transact insurance business. In most U.S. jurisdictions, policy forms must be filed prior to their use. In some U.S. jurisdictions, forms must also be approved prior to use.

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Dividend limitations

The payment of dividends or other distributions to us by our U.S. insurance subsidiaries is regulated by the insurance laws and regulations of their respective states of domicile. In general, an insurance company subsidiary may not pay an “extraordinary” dividend or distribution until 30 days after the applicable insurance regulator has received notice of the intended payment and has not objected in such period or has approved the payment within the 30-day period. In general, an “extraordinary” dividend or distribution is defined by these laws and regulations as a dividend or distribution that, together with other dividends and distributions made within the preceding 12 months exceeds the greater (or, in some jurisdictions, the lesser) of:

• 10% of the insurer’s statutory surplus as of the immediately prior year end; or

• the statutory net gain from the insurer’s operations (if a life insurer) or the statutory net income (if not a life insurer) during the prior calendar year.

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.

Market conduct regulation

The laws and regulations of U.S. jurisdictions include numerous provisions governing the marketplace activities of insurers, including provisions governing the form and content of disclosure to consumers, product illustrations, advertising, product replacement, sales and underwriting practices, complaint handling and claims handling. The regulatory authorities in U.S. jurisdictions generally enforce these provisions through periodic market conduct examinations. These examinations may be conducted by a single state or by multiple states (“association” exams).

Financial examinations

As part of their regulatory oversight process, insurance departments in U.S. jurisdictions also conduct periodic detailed examinations of the books, records, accounts and financial practices of insurers domiciled in their jurisdictions. These examinations generally are conducted in cooperation with the insurance departments of two or three other states or jurisdictions, representing each of the NAIC zones, under guidelines promulgated by the National Association of Insurance Commissioners (“NAIC”). In the three-year period ended December 31, 2005, we have not received any material adverse findings resulting from any insurance department examinations of our U.S. insurance subsidiaries.

Guaranty funds or associations

Most of the jurisdictions in which our U.S. insurance subsidiaries are licensed to transact business require life insurers doing business within the jurisdiction to participate in guaranty funds or associations, which are established by state law, subject to regulation by the state insurance department and are organized to pay, subject to statutory limits,

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conditions, and priorities, contractual benefits owed pursuant to insurance policies of insurers who become impaired or insolvent. These funds or associations levy assessments, up to prescribed limits, on all member insurers in a particular jurisdiction on the basis of the proportionate share of the premiums written by member insurers in the lines of business in which the impaired, insolvent or failed insurer is engaged. Some jurisdictions permit member insurers to recover assessments paid through full or partial premium tax offsets.

Aggregate assessments levied against our U.S. insurance subsidiaries were immaterial for the years ended December 31, 2005, 2004 and 2003, respectively. Although the amount and timing of future assessments are not predictable, we have established liabilities for guaranty fund assessments that we consider adequate for assessments with respect to insurers that currently are subject to insolvency proceedings.

Change of control

The laws and regulations of the jurisdictions in which our U.S. insurance subsidiaries are domiciled require that a person obtain the approval of the insurance commissioner of the insurance company’s jurisdiction of domicile prior to acquiring control of the insurer. 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, the 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. Approval of an acquisition is not required in these states, but the state insurance departments could take action to impose conditions on an acquisition that could delay or prevent its consummation. These laws may discourage potential acquisition proposals and may delay, deter or prevent a change of control involving us, including through transactions, and in particular unsolicited transactions, that some or all of our stockholders might consider to be desirable.

Policy and contract reserve sufficiency analysis

Under the laws and regulations of their jurisdictions of domicile, our U.S. life insurance subsidiaries are required to conduct annual analyses of the sufficiency of their life insurance and annuity statutory reserves. In addition, other jurisdictions in which these subsidiaries are licensed may have certain reserve requirements that differ from those of their domiciliary jurisdictions. In each case, a qualified actuary must submit an opinion that states that the aggregate statutory reserves, when considered in light of the assets held with respect to such reserves, make good and sufficient provision for the associated contractual obligations and related expenses of the insurer. If such an opinion cannot be provided, the affected insurer must set up additional reserves by moving funds from surplus. Our U.S. life insurance subsidiaries submit these opinions annually to applicable insurance regulatory authorities in support of and as part of their required annual statements.

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Surplus and capital requirements

Insurers must satisfy capital and surplus requirements to be licensed. Insurance regulators have the discretionary authority, in connection with the regulation of our U.S. insurance subsidiaries, to limit or prohibit the ability of an insurer to issue new policies if, in the regulators’ judgment, the insurer is not maintaining a minimum amount of surplus or is in hazardous financial condition as defined in the insurance laws. Insurance regulators may also limit the ability of an insurer to issue new life insurance policies and annuity contracts above an amount based upon the face amount and premiums of policies of a similar type issued in the prior year. We do not believe that the current or anticipated levels of statutory surplus of our U.S. insurance subsidiaries present a material risk such that any such regulator would limit the amount of new policies that our U.S. insurance subsidiaries may issue.

Statutory accounting principles

Statutory accounting principles, or SAP, is a basis of accounting developed by U.S. insurance regulators to monitor and regulate the solvency of insurance companies. In developing SAP, insurance regulators were primarily concerned with assuring an insurer’s ability to pay all its current and future obligations to policyholders. As a result, statutory accounting focuses on conservatively valuing the assets and liabilities of insurers, generally in accordance with standards specified by the insurer’s domiciliary jurisdiction. Uniform statutory accounting practices are established by the NAIC and adopted by regulators in the various U.S. jurisdictions. These accounting principles and related regulations determine, among other things, the amounts our insurance subsidiaries may pay to us as dividends.

U.S. GAAP is designed to measure a business on a going-concern basis. It gives consideration to matching of revenue and expenses and, as a result, certain expenses are capitalized when incurred and then amortized over the life of the associated policies. The valuation of assets and liabilities under U.S. GAAP is based in part upon best estimate assumptions made by the insurer. Stockholders’ equity represents both amounts currently available and amounts expected to emerge over the life of the business. As a result, the values for assets, liabilities and equity reflected in financial statements prepared in accordance with U.S. GAAP may be, and in fact usually are, different from those reflected in financial statements prepared under SAP.

Insurance Regulatory Information System

The NAIC Insurance Regulatory Information System (IRIS) was developed to help state regulators identify companies that may require special attention. The IRIS system consists of a statistical phase and an analytical phase whereby financial examiners review annual statements and financial ratios. The statistical phase consists of 12 key financial ratios based on year-end data that are generated from the NAIC database annually; each ratio has an established “usual range” of results. These ratios assist state insurance departments in executing their statutory mandate to oversee the financial condition of insurance companies.

A ratio result falling outside the usual range of IRIS ratios is not considered a failing result; rather, unusual values are viewed as part of the regulatory early monitoring system. Furthermore, in some years, it may not be unusual for financially sound companies to have several ratios with results outside the usual ranges. Generally, an insurance company will

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become subject to regulatory scrutiny if it falls outside the usual ranges of four or more of the ratios. In the past, variances in certain ratios of our insurance subsidiaries have resulted in inquiries from insurance departments, to which we have responded. These inquiries have not led to any restrictions affecting our operations.

Risk-Based Capital (RBC) Requirements

In order to enhance the regulation of insurer solvency, the NAIC has adopted formulas and model laws to implement RBC requirements for life and health insurers, for property and casualty insurers, and, most recently, for health organizations. These formulas and model laws are designed to determine minimum capital requirements and to raise the level of protection that statutory surplus provides for policyholder obligations.

Under laws adopted by individual states, insurers having less total adjusted capital (generally, as defined by the NAIC), than that required by the relevant RBC formula will be subject to varying degrees of regulatory action, depending on the level of capital inadequacy. The RBC laws provide for four levels of regulatory action. The extent of regulatory intervention and action increases as the ratio of total adjusted capital to RBC falls. The first level, the company action level, requires an insurer to submit a plan of corrective actions to the regulator if total adjusted capital falls below 200% of the RBC amount (or below 250%, when the insurer has a “negative trend” as defined under the RBC laws). The second level, the regulatory action level, requires an insurer to submit a plan containing corrective actions and requires the relevant insurance commissioner to perform an examination or other analysis and issue a corrective order if total adjusted capital falls below 150% of the RBC amount. The third level, the authorized control level, authorizes the relevant insurance commissioner to take whatever regulatory actions considered necessary to protect the best interests of the policyholders and creditors of the insurer, which may include the actions necessary to cause the insurer to be placed under regulatory control, i.e., rehabilitation or liquidation, if total adjusted capital falls below 100% of the RBC amount. The fourth action level is the mandatory control level, which requires the relevant insurance commissioner to place the insurer under regulatory control if total adjusted capital falls below 70% of the RBC amount.

The formulas have not been designed to differentiate among adequately capitalized companies that operate with higher levels of capital. At December 31, 2005, all of our insurance subsidiaries had total adjusted capital in excess of amounts requiring company or regulatory action at any prescribed RBC action level.

Regulation of investments

Each of our U.S. insurance subsidiaries is subject to laws and regulations that require diversification of its investment portfolio and limit the amount of investments in certain asset categories, such as below investment grade fixed maturities, equity real estate, other equity investments and derivatives. Failure to comply with these laws and regulations would cause investments exceeding regulatory limitations to be treated as non-admitted assets for purposes of measuring surplus, and, in some instances, would require divestiture of such non-complying investments. We believe the investments made by our U.S. insurance subsidiaries comply with these laws and regulations.

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Federal initiatives

Although the federal government generally does not directly regulate the insurance business, federal initiatives often and increasingly have an impact on the business in a variety of ways. From time to time, federal measures are proposed which may significantly affect the insurance business, including limitations on antitrust immunity, tax incentives for lifetime annuity payouts, simplification bills affecting tax-advantaged or tax-exempt savings and retirement vehicles, and proposals to modify or make permanent the estate tax repeal enacted in 2001. In addition, various forms of direct federal regulation of insurance have been proposed in recent years. These proposals have included “The Federal Insurance Consumer Protection Act of 2003” and “The State Modernization and Regulatory Transparency Act.” The Federal Insurance Consumer Protection Act of 2003 would have established comprehensive and exclusive federal regulation over all “interstate insurers,” including all life insurers selling in more than one state. This proposed legislation was not enacted. The State Modernization and Regulatory Transparency Act would maintain state-based regulation of insurance but would change the way that states regulate certain aspects of the business of insurance including rates, agent and company licensing, and market conduct examinations. This proposed legislation remains pending. We cannot predict whether this or other proposals will be adopted, or what impact, if any, such proposals or, if adopted, such laws may have on our business, financial condition or results of operation.

Changes in tax laws

Changes in tax laws could make some of our products less attractive to consumers. For example, the gradual repeal of the federal estate tax, begun in 2001, is continuing to be phased in through 2010. The repeal and continuing uncertainty created by the repeal of the federal estate tax has resulted in reduced sales, and could continue to adversely affect sales and surrenders, of some of our insurance policies. In May 2003, President Bush signed into law the Jobs and Growth Tax Relief Reconciliation Act of 2003, which lowered the federal income tax rate on capital gains and certain ordinary dividends. This reduction may provide an incentive for certain of our customers and potential customers to shift assets into mutual funds and away from our products, including annuities that are designed to defer taxes payable on investment returns.

Other Laws and Regulations

USA Patriot Act

The USA Patriot Act of 2001, or the Patriot Act, enacted in response to the terrorist attacks on September 11, 2001, contains anti-money laundering and financial transparency laws and mandates the implementation of various new regulations applicable to broker/dealers and other financial services companies including insurance companies. The Patriot Act seeks to promote cooperation among financial institutions, regulators and law enforcement entities in identifying parties that may be involved in terrorism or money laundering. Anti-money laundering laws outside of the U.S. contain similar provisions. The increased obligations of financial institutions to identify their customers, watch for and report suspicious transactions, respond to requests for information by regulatory authorities and law enforcement agencies, and share information with other financial institutions, require the implementation and maintenance of internal practices, procedures and controls. In March 2006, the Patriot Act was reenacted with several revisions. We are in the process of reviewing the new provisions and expect to comply with them.

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The International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001

The International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001 (“IMLAFATA”), a part of the Patriot Act, authorizes the Secretary of the Treasury, in consultation with the heads of other government agencies, to adopt special measures applicable to banks and other financial institutions to enhance record keeping and reporting requirements for certain financial transactions that are of primary money laundering concern. Among its other provisions, IMLAFATA requires each financial institution to: (i) establish an anti-money laundering program; (ii) establish due diligence policies, procedures and controls with respect to its private banking accounts and correspondent banking accounts involving individuals and certain foreign banks; and (iii) avoid establishing, maintaining, administering, or managing correspondent accounts in the Untied States for, or on behalf of, a foreign bank that does not have a physical presence in any country. In addition, IMLAFATA contains a provision encouraging cooperation among financial institutions, regulatory authorities and law enforcement authorities with respect to individuals, entities and organizations engaged in, or reasonably suspected of engaging in, terrorist acts or money laundering activities.

The Treasury Department’s regulations implementing IMLAFATA mandate that federally-insured banks and other financial institutions establish customer identification programs designed to verify the identity of persons opening new accounts, maintain the records used for verification, and determine whether the person appears on any list of known or suspected terrorists or terrorist organizations.

The Bank Secrecy Act of 1970

Congress enacted the Bank Secrecy Act of 1970 (the “BSA”) to require financial institutions to maintain certain records and to report certain transactions to prevent such institutions from being used to hide money derived from criminal activity and tax evasion. Although the federal regulations for the BSA do not specifically refer to insurance companies, the definition of financial institution is broad enough to include insurance companies. The BSA establishes, among other things, (a) record keeping requirements to assist government enforcement agencies in tracing financial transactions and flow of funds; (b) reporting requirements for Suspicious Activity Reports and Currency Transaction Reports to assist government enforcement agencies in detecting patterns of criminal activity; (c) enforcement provisions authorizing criminal and civil penalties for illegal activities and violations of the BSA and its implementing regulations; and (d) safe harbor provisions that protect financial institutions from civil liability for their cooperative efforts.

The Money Laundering Control Act of 1986

The Money Laundering Control Act imposes sanctions, including revocation of federal deposit insurance, for institutions convicted of money laundering. Specifically, the Money Laundering Control Act of 1986 criminalized the act of laundering money, prohibited structuring transactions to avoid Currency Transaction Report filings, and introduced criminal and civil forfeiture for BSA violations.

Privacy of consumer information

U.S. federal and state laws and regulations require financial institutions, including insurance companies, to protect the security and confidentiality of consumer financial information and to notify consumers about their policies and practices relating to their

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collection and disclosure of consumer information and their policies relating to protecting the security and confidentiality of that information. Similarly, federal and state laws and regulations also govern the disclosure and security of consumer health information. In particular, regulations promulgated by the U.S. Department of Health and Human Services regulate the disclosure and use of protected health information by health insurers and others, the physical and procedural safeguards employed to protect the security of that information and the electronic transmission of such information. Congress and state legislatures are expected to consider additional legislation relating to privacy and other aspects of consumer information.

The Terrorism Risk Insurance Act

On November 26, 2002, the Terrorism Risk Insurance Act was enacted to ensure the availability of insurance coverage for terrorist acts in the U.S.. This law requires insurers writing certain lines of property and casualty insurance to offer coverage against certain acts of terrorism causing damage within the U.S. or to U.S. flagged vessels or aircraft. In return, the law requires the federal government to indemnify such insurers for 90% of insured losses resulting from covered acts of terrorism, subject to a premium-based deductible. Any existing policy exclusions for such coverage were immediately nullified by the law, although such exclusions may be reinstated if either the insured consents to reinstatement or fails to pay any applicable increase in premium resulting from the additional coverage within 30 days of being notified of such an increase. It should be noted that an “act of terrorism” as defined by the law excludes purely domestic terrorism. For an act of terrorism to have occurred, the U.S. Secretary of the Treasury must make several findings, including that the act was committed on behalf of a foreign person or foreign interest. The law expires automatically at the end of 2005.

The Terrorism Risk Insurance Act required the U.S. Secretary of the Treasury to conduct an expedited study as to whether or not group life insurance should be covered under the law. Based on the study, the Secretary concluded that inclusion of group life insurance was not appropriate.

Given that our property and casualty insurance products primarily cover personal residences and personal property, we do not believe our property and casualty exposure to terrorist acts to be significant.

Gramm-Leach-Bliley Act

On November 12, 1999, the Gramm-Leach-Bliley Act of 1999 became law, implementing fundamental changes in the regulation of the financial services industry in the U.S.. The act permits the transformation of the already converging banking, insurance and securities industries by permitting mergers that combine commercial banks, insurers and securities firms under one holding company. Under the Act, national banks retain their existing ability to sell insurance products in some circumstances. In addition, bank holding companies that qualify and elect to be treated as “financial holding companies” may engage in activities, and acquire companies engaged in activities, that are “financial” in nature or “incidental” or “complementary” to such financial activities, including acting as principal, agent or broker in selling life, property and casualty and other forms of insurance, including annuities. A financial holding company can own any kind of insurance company or insurance broker or agent, but its bank subsidiary cannot own the insurance company. Under state law, the financial holding company would need to apply to the insurance commissioner in the

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insurer’s state of domicile for prior approval of the acquisition of the insurer, and the act provides that the commissioner, in considering the application, may not discriminate against the financial holding company because it is affiliated with a bank. Under the Act, no state may prevent or interfere with affiliations between banks and insurers, insurance agents or brokers, or the licensing of a bank or affiliate as an insurer or agent or broker. Privacy provisions of the Act became fully effective in 2001. These provisions established consumer protections regarding the security and confidentiality of nonpublic personal information and require us to make full disclosure of our privacy policies to our customers.

Environmental considerations

As an owner and operator of real property, we are subject to extensive U.S. federal and state and non-U.S. environmental laws and regulations. Potential environmental liabilities and costs in connection with any required remediation of such properties also is an inherent risk in property ownership and operation. We cannot provide assurance that unexpected environmental liabilities will not arise. However, based upon information currently available to us, we believe that any costs associated with compliance with environmental laws and regulations or any remediation of such properties will not have a material adverse effect on our business, financial condition or results of operations.

Legislative Developments

There is legislation pending in the U.S. Congress and in various states designed to provide additional privacy protections to consumer customers of financial institutions. These statutes, including the Fair Credit Reporting Act, and similar legislation and regulations in the U.S. or other jurisdictions could affect our ability to market our products or otherwise limit the nature or scope of our insurance operations.

The NAIC and individual states have been studying small face amount life insurance for the past two years. Some initiatives that have been raised at the NAIC include further disclosure for small face amount policies and restrictions on premium to benefit ratios. The NAIC is also studying other issues such as “suitability” of insurance products for certain customers. This may have an effect on our home service pre-funded funeral insurance business. Suitability requirements such as a customer assets and needs worksheet could extend and complicate the sale of pre-funded funeral insurance products.

We are unable to evaluate new legislation that may be proposed and when or whether any such legislation will be enacted and implemented. However, many of the proposals, if adopted, could have a material adverse effect on our financial condition, cash flows or results of operations, while others, if adopted, could potentially benefit our business.

Item 1A. Risk Factors

Set forth below are risks with respect to our Company. Readers should 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.

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From Item 1A. Risk Factors

We are a defendant in a class action lawsuit and other lawsuits, which may adversely affect our financial condition and detract from our management’s time

We are a defendant in a class action lawsuit filed in Texas, styled Citizens Insurance Company of America, Citizens, Inc., Harold E. Riley and Mark A. Oliver, Petitioners v. Fernando Hakim Daccach, Respondent, in the Supreme Court of Texas, in which a class has been certified by the Texas District Court, Austin, Texas, 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, and oral arguments occurred on October 21, 2004. We have not yet received a decision from the Texas Supreme Court.

The suit names as a class all non-U.S. residents who purchased insurance policies or made premium payments since August 1996 to our international life insurance subsidiary, CICA, and assigned policy dividends to two non-U.S. trusts for the purchase of our Class A common stock. The beneficiaries of the trusts are approximately 80,000 non-U.S. policyholders of CICA, who have assigned their life insurance policy dividends to the two trusts administered by Gala Management Services, Inc., a Panamanian trust services company. As of February 26, 2006, this trustee held of record approximately 35.4% of our Class A common stock on behalf of the CICA policyholders who were beneficiaries of the trusts. The purchases of our Class A common stock by this trustee to the trusts on behalf of policyholders, all of which have been made in the open market, were approximately $15.3 million in 2005, $13.4 million in 2004, and $11.1 million in 2003. The elections to assign insurance policy dividends to the trusts were made by the policyholders in consultation with independent marketing consultants of CICA. The suit alleges that the life insurance policies which we made available to these non-U.S. residents, when combined with a policy feature which allows policy dividends to be assigned to the 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 registration provisions of the Texas securities laws. The remedy sought is rescission and return of the insurance premiums. However, the elections by the policyholders to contribute their policy dividends and other amounts to the trusts were made outside of the U.S. We believe, among other things, that U.S. law, including Texas law, does not apply to the operations of the trusts, and therefore, no securities registration provisions apply, nor do U.S. laws relating to broker-dealer registration apply. We believe the securities claims based on Texas securities laws are not valid, that no broker-dealer registration is required of us or our marketing consultants, and the class as defined is not appropriate for class certification because it does not meet the legal requirements for class action treatment under Texas law.

We intend to continue to defend vigorously against class certification, as well as against the other claims in the case. We are unable to determine the potential financial magnitude of the claims if the class certification were to become final and the plaintiff was able to prevail on the substantive claims, although we would expect a significant adverse financial impact from an adverse final class action judgment.

We are also a party to various legal proceedings incidental to our business. We have been named as a defendant in various legal actions seeking payments for claims denied by us and other damages. In the opinion of our management, the ultimate liability, if any, resulting from any contingent liabilities that might arise from such litigation, is not material in relation to our financial position or results of operations. Reserves for claims payable are based on the expected claim amounts to be paid after a case-by-case review of the facts and circumstances relating to each claim. A contingency exists with regard to these reserves until the claims are adjudicated and paid.

Litigation, such as the matters described above, also can require significant amounts of time of our management which would otherwise be devoted to our business.

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Our business is subject to risks related to litigation and regulatory actions.

In addition to the Daccach case and other legal proceedings as described above, 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 overseas trusts that, as described above, purchase and hold our Class A common stock on behalf of CICA policyholders. For example, if the plaintiffs were able to prevail on their claims that Texas securities laws apply to the assignment of policy dividends, as asserted in the Daccach case, or that U.S. or Texas securities laws otherwise apply, we could face the possibility of other securities law claims within the United States. We also could face claims in foreign countries relating to noncompliance with their securities laws in connection with policyholders who participate in a non-U.S. trust and who beneficially own our Class A common stock. We cannot, for example, ensure that our foreign sales associates are in compliance with foreign securities and insurance laws, because we do not have oversight over such persons. We have not obtained any opinion of counsel as to the applicability of foreign securities laws to the above actions. Also, the estimation of any liabilities from any possible claims would be difficult to determine;

• disputes over insurance coverage or claims adjudication;

• disputes regarding sales practices, disclosures or absence of disclosures in connection with the offer and sale of our insurance policies and the option available to policyholders to assign dividends to a non-U.S. trust for the purpose of accumulating our Class A common stock, premium refunds, licensing and regulatory compliance with insurance and securities laws in the United States and in foreign countries;

• disputes with our consultants or employee agents over compensation and termination of contracts and related claims;

• disputes regarding our tax liabilities; and

• disputes relating to businesses acquired by us.

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. We could be faced with contingent liabilities with respect to possible claims for violations of foreign and domestic securities and insurance laws, the extent of which would be difficult to determine.

In addition, plaintiffs continue to bring new types of legal claims against insurance and related companies. Current and future court decisions and legislative activity may increase our exposure to these types of claims. Multiparty or class action claims may result in additional exposure to substantial economic, noneconomic or punitive damage awards, including the litigation to which we are currently a party. The loss of even one of these actions, if it resulted in a significant damage award or a judicial ruling that was otherwise substantially detrimental, could have a material adverse effect on our results of operations and financial condition. The risk of incurring a large liability in the event of an unsuccessful defense may make it more difficult to settle claims on reasonable terms. We cannot determine with any certainty what theories of recovery may evolve or what the impact of litigation or regulatory changes may be on our businesses.

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A substantial amount of our revenue comes from foreign nationals. This involves risks associated with business in other countries, such as might result from political or economic instability or the application of laws or regulations to our business.

A substantial part of our insurance policy sales are from foreign countries, primarily in Latin America. There is a risk of losing a significant portion of these sales should adverse events occur in the countries from which we receive insurance policy applications. Approximately 55.2% of our consolidated revenues in 2005 were from our International Life segment. If economic or political crises were to occur in any of the countries where our foreign policyowners reside, our revenues would likely decline. For example, Argentina underwent a severe financial economic recession in the early 2000’s. As a result, our lapse rates relating to insureds residing there increased significantly and our new insurance business generated there declined dramatically. Also, foreign expropriation laws could adversely affect our revenues by imposing restrictions on fund transfers outside of a country where our insureds reside. In addition, a country could decide that we are subject to their insurance, securities and other regulation, or that we are required to maintain assets in that country as a part of our operations. Such actions would require us to reevaluate our existing products, including the cessation of accepting new applications from residents of that country. Our revenues from nationals of that country would likely be reduced significantly. While our management has over 30 years of experience in writing life insurance policies for residents of foreign countries without any significant regulatory action or any significant adverse expropriation controls relating to our insureds, there can be no assurance that such situations will not occur and that our revenues will not be affected adversely. We have not obtained any opinion of counsel addressing whether we may be required to qualify to do business or become licensed as an insurance company in, or the applicability of any securities laws of, any foreign country to our operations or to that of foreign trusts who hold our Class A common stock for our policyholders, nor have we sought or obtained any order of any foreign regulatory body relating to these issues.

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

Over the past years, we have acquired several U.S. life insurance companies. 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 allowing us to realize certain operating efficiencies associated with economies of scale. Prior to 2004, increases in earnings were not significant from the completed acquisitions compared to increases in existing business.

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On an ongoing basis we evaluate possible acquisition transactions and, at any given time, we may be engaged in discussions with respect to possible acquisitions. While our business model is not dependent primarily upon acquisitions, the time frame for achieving or further improving our market positions can be significantly shortened through acquisitions. There can be no assurance that suitable acquisitions which present opportunities for continued growth and operating efficiencies will continue to be available to us, or that we will realize the anticipated financial results from acquisitions. Our failure to address adequately these acquisition risks may materially adversely affect our results of operations and financial condition.

We may be unable to integrate our acquisitions on an economic basis, and the process of integrating companies we acquire could have a material adverse effect on our results of operations and financial condition. Implementation of an acquisition strategy could entail a number of risks, including among other things:

• inaccurate assessment of undisclosed liabilities;

• difficulties in realizing projected efficiencies, synergies and cost savings;

• failure to achieve anticipated revenues, earnings or cash flow;

• an increase in indebtedness and a limitation in our ability to access additional capital when needed; and

• adverse changes in the economies of geographic regions in which the businesses of our acquisitions are concentrated, due to natural disasters, changing population demographics, governmental actions and other causes.

For example, virtually all of the premium income of Security Plan, from which we obtained premium revenues of approximately $37.7 million in 2005, is generated in Louisiana. Premium income for Security Plan for the fourth quarter of 2005, following the two hurricanes that hit Louisiana in 2005, totaled $9,220,000 compared to $9,587,000 in the fourth quarter of 2004. As with other geographic areas in the United States in which the business operations of our acquisitions are located, Louisiana could again experience natural disasters, such as hurricanes and flooding. A large-scale natural disaster such as this would be expected to have an adverse effect on the economy of that area, which in turn could result in a material adverse effect on our premium income from Security Plan.

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

We distribute our insurance products through a variety of distribution channels, including independent marketing consultants, employee agents and third-party marketing organizations.

Our relationships with these persons are significant both for our revenues and profits. In our Domestic Life segment, we depend in large part on the services of independent marketers. In our Home Service segment we depend on employee agents whose role in our distribution process is critical, in particular to develop and maintain client relationships. In our International Life segment we depend on outside marketing

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consulting organizations and outside consultants. Strong competition exists among insurers to form relationships with marketers of demonstrated ability. We compete with other insurers for representatives and consultants primarily on the basis of our compensation and support services. Any diminishment in our inability to attract and retain effective sales representatives could materially adversely affect our results of operations and financial condition.

Policy lapses in excess of those actuarially anticipated would have a negative impact on our financial performance.

If our insurance policy lapse and surrender rates were to exceed the assumptions upon which we priced our insurance policies, our business could be adversely affected. The prices and expected future profitability of our insurance products are based in part upon expected patterns of premiums, expenses and benefits, using a number of assumptions, including those related to persistency, which is the probability that a policy or contract will remain in-force from one period to the next. Lapses occur when premium payments are not made. Surrender of a policy occurs by an affirmative act of the policyholder and is usually accompanied by an economic benefit for the policyholder because the policy has accumulated value. Policy acquisition costs are deferred and recognized over the life of a policy. Actual persistency that is lower than our persistency assumptions could have an adverse impact on profitability, especially in the early years of a policy or contract, primarily because we would be required to accelerate the amortization of expenses we deferred in connection with the acquisition of the policy or contract.

Our actual claims losses may exceed our reserves for claims, which may require us to establish additional reserves, which in turn may materially reduce our earnings, profitability and capital.

We maintain reserves to cover our estimated exposure for claims relating to our issued insurance policies. Reserves, whether calculated under Accounting Principles Generally Accepted in the United States (“U.S. GAAP”) or statutory accounting principles (“SAP”), 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 which are determined by various regulatory entities. 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. Adjustments to reserves, both positive and negative, are reflected in our statements of operations of the period in which such estimates are updated. Because establishment of reserves is an inherently uncertain process involving estimates of future losses, there can be no certainty that ultimate losses will not exceed existing claims reserves and have a material adverse effect on our results of operations and financial condition. During the three years ended December 31, 2005, we did not experience substantial deviations in actual claims losses from reserve estimates previously established. However, future loss development could require reserves to be increased, which could have a material adverse effect on our earnings in the periods in which such increases are made.

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

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Our investment portfolio may suffer reduced returns or losses that could reduce our profitability.

Investment returns are an important part of our overall profitability and significant fluctuations in the fixed income market could impair our profitability, financial condition and cash flows. Our investments are subject to market-wide risks and fluctuations, as well as to risks inherent in particular securities. If we do not structure our investment portfolio so that it is appropriately matched with our insurance liabilities, we may be forced to liquidate investments prior to maturity at a significant loss to cover such liabilities. For the year ended December 31, 2005, our net investment income was $23.6 million and our net realized gains on investments were $419,000, which collectively accounted for approximately 16.6% of our total revenues during the year. For the year ended December 31, 2004, our net investment income was $17.0 million and our net realized gains on investments were $389,000, which collectively accounted for approximately 16.9% of our total revenues during such period.

The performance of our investment portfolio is subject to fluctuations due to changes in interest rates and market conditions.

Changes in interest rates can negatively affect the performance of most of our investments. Interest rate volatility can reduce unrealized gains or create unrealized losses in our portfolios. Interest rates are highly sensitive to many factors, including governmental monetary policies, domestic and international economic and political conditions and other factors beyond our control. Fluctuations in interest rates affect our returns on, and the market value of, fixed maturity investments, which comprised $457.6 million, or 94.4%, of the carrying value of our total investments as of December 31, 2005.

The fair market value of the fixed maturity securities in our portfolio and the investment income from these securities fluctuate depending on general economic and market conditions. The fair market value generally increases or decreases in an inverse relationship with fluctuations in interest rates, while net investment income realized by us from future investments in fixed maturity securities will generally increase or decrease with interest rates.

In addition, actual net investment income and/or cash flows from investments that carry prepayment risk, such as mortgage-backed and other asset-backed securities, may differ from those anticipated at the time of investment as a result of interest rate fluctuations. A significant portion of our investment portfolio is subject to prepayment risks. These investments were 10.6% and 12.2% of our investment portfolio assets at December 31, 2005 and 2004, respectively.

Because substantially all of our fixed maturity securities are classified as available for sale, changes in the market value of these securities are reflected in our assets and in stockholders’ equity. Similar treatment is not available for liabilities. Therefore, interest rate fluctuations affect the value of our investments and could materially adversely affect our results of operations and financial condition.

We do not employ specific asset/liability matching strategies to reduce the adverse effects of interest rate volatility and to ensure that cash flows are available to pay claims as they become due. We are subject to adverse effects of interest rate volatility, and no assurances

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can be given that significant fluctuations in the level of interest rates will not have a material adverse effect on our results of operations and financial condition.

Our investment portfolio is subject to credit risk.

We are subject to credit risk in our investment portfolio, primarily from our investments in corporate bonds, including bonds of U.S. government-sponsored entities. If third parties that owe amounts to us for bonds or other obligations were to default in the payment or performance of their obligations, this could reduce our investment income and realized investment gains or result in investment losses. Further, the value of any particular fixed maturity security is subject to impairment based on the creditworthiness of a given issuer. As of December 31, 2005, we held $264.8 million in bonds of U.S. government-sponsored enterprises. A significant increase in defaults and impairments on our fixed maturity securities portfolio could materially adversely affect our results of operations and financial condition.

We may be required to accelerate the amortization of deferred acquisition costs and the cost of customer relationships acquired, which would increase our expenses and reduce profitability.

Deferred acquisition costs, or DAC, represent costs that vary with and are primarily related to the sale and issuance of our insurance policies that 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 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 CCR, represents the actuarially estimated present value of future cash flows from the acquired policies. We amortize the value of this intangible asset in a manner similar to the amortization of DAC. Our amortization of DAC and CCR generally depends upon anticipated profits from investments, surrender and other policy charges, mortality, morbidity and maintenance expense margins. Unfavorable experience with regard to expected expenses, investment returns, mortality, morbidity, withdrawals or lapses may cause us to increase the amortization of DAC or CCR, or both, or to record a charge to increase benefit reserves.

We regularly review DAC and CCR quality 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. For example, if we determine that we are unable to recover DAC from profits over the life of a block of insurance policies, or if withdrawals or surrender charges associated with early withdrawals do not fully offset the unamortized acquisition costs related to those policies or annuities, we would be required to recognize the additional DAC amortization as a current-period expense.

At December 31, 2005, we had approximately $70.4 million of such deferred policy acquisition costs. These 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. Excess policy lapses, however, would

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cause the immediate expensing or amortizing of deferred policy acquisition costs, which would adversely affect our profitability.

We may be required to recognize impairment in the value of our excess of cost over net assets acquired, which would increase our expenses and reduce our profitability.

Excess of cost over net assets acquired, or “goodwill”, represents the excess of the amount paid 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 one level below the operating segment. Goodwill is impaired if the fair value of the reporting unit as a whole is less than the fair value of the identifiable assets and liabilities of the reporting unit, plus the carrying value of goodwill, at the date of the test. For example, goodwill may become impaired if the fair value of a reporting unit as a whole were to decline by an amount greater than the decline in the value of its individual identifiable assets and liabilities. 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 of return 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.

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, Harold E. Riley (age 77), our Vice Chairman of the Board, Rick D. Riley (age 52), and our President and Chief Executive Officer, Mark A. Oliver (age 47), in connection with the development and execution of 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 one of these individuals would likely have a significant adverse effect on us in these respects. We do not have an employment agreement with any of these persons nor do we carry a key-man insurance policy on any of their lives. In addition, our only credit agreement with a bank provides that an event of default will occur in the event any of Messrs. Harold E. Riley, Rick D. Riley or Mark A. Oliver is not employed by us.

We operate in a highly competitive, mature industry within the U.S., which could limit our ability to increase our domestic insurance operations.

We compete with more than 1,000 other life insurance companies of various sizes in the U.S. The life insurance business is highly competitive, in part because it is a mature industry in the U.S. which, in recent years, has experienced little growth in life insurance sales. Competition has also increased because the life insurance industry is consolidating, with larger, more efficient organizations emerging from consolidation. Furthermore, mutual insurance companies are converting to stock ownership, which should give them greater access to capital markets, resulting in greater competition with respect to corporate finance as well. Additionally, legislation became effective in 2000 permitting commercial banks, insurance companies and investment banks to combine. This law permits, for

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instance, a commercial bank to acquire or form an insurance company. We believe these factors have increased competitive pressures in general.

Many domestic life insurance companies have greater financial resources, longer business histories, and more diversified lines of insurance coverage than we do. These companies also generally have larger sales forces. Although we may be at a competitive disadvantage to these entities, we seek to provide products that are competitive in the marketplace.

Competition in our insurance businesses is based on many factors, including quality of service, product features, price, scope of distribution, scale, financial strength ratings and name recognition. We also compete for marketing consultants and agents to sell our insurance products. Some of our competitors may offer a broader array of products than we do with which they compete in particular markets, may have a greater diversity of distribution resources, may have better brand recognition, may from time to time have more competitive pricing, may have lower cost structures or may have higher financial strength or claims paying ratings. Moreover, some of our competitors may have a lower target for returns on capital allocated to their business than we do, which may lead them to price their products lower than we do. 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, which could materially adversely affect our results of operations and financial condition.

Our international operations face competition from several sources.

Our international marketing plan stresses making available dollar-denominated life insurance products to significant net worth individuals residing around the world. New competition could also cause the supply of insurance to change, which could affect our ability to price our products at attractive rates and thereby adversely affect our underwriting results. Although there are some impediments facing potential competitors who wish to enter the markets we serve, the entry of new competitors into our markets can occur, affording our customers significant flexibility in moving to other insurance providers. We experience competition primarily from the following sources around the world:

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 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. Also, as a result of the foregoing factors, the statistical cost of insurance for these companies tends to be higher than ours. However, they hold their assets in local currencies, which may be preferable to some potential customers.

Companies foreign to the countries in which policies are sold but that issue local currency policies. Another group of our competitors consists of companies which are foreign to the countries in which the policies are sold but use 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. We have observed that local

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currency policies, whether issued by foreign or locally operated companies, tend to focus on universal life insurance and annuities instead of whole life insurance as we do.

Foreign operated companies with U.S. dollar policies. We also face direct competition from companies that operate in the same manner as we do. We compete using our history of performance and our products.

Competitors in our international markets include National Western Life Insurance Company, Best Meridian Insurance Company and to a lesser extent, Pan American Life Insurance Company and American International Group, Inc. There can be no assurances that competition from the above companies will not adversely affect our business.

Our ability to compete is dependent upon, among other things, our ability:

• to attract marketing organizations and individuals who will market our products;

• to market our insurance products;

• to develop competitive and profitable products; and

• to maintain our underwriting and claims handling criteria.

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

We and our U.S. life insurance subsidiaries are subject to extensive regulation and supervision in the U.S. jurisdictions in which we and they do business. This regulation is generally designed to protect the interests of policyholders, as opposed to stockholders and other investors. To that end, the laws of the various states establish insurance departments with broad powers with respect to such things as:

• licensing companies to transact business;

• authorizing lines of business;

• mandating capital and surplus requirements;

• imposing dividend limitations;

• regulating changes in control;

• licensing agents and distributors of insurance products;

• placing limitations on the minimum size of life insurance contracts;

• restricting companies’ ability to enter and exit markets;

• admitting statutory assets;

• mandating certain insurance benefits;

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• restricting companies’ ability to terminate or cancel coverage;

• requiring companies to provide certain types of coverage;

• regulating premium rates, including the ability to increase premium rates;

• approving policy forms;

• regulating trade and claims practices;

• imposing privacy requirements;

• establishing reserve requirements and solvency standards;

• restricting certain transactions between affiliates;

• regulating the content of disclosures to debtors in the credit insurance area;

• mandating assessments or other surcharges for guaranty funds;

• regulating market conduct and sales practices of insurers and their marketers; and

• restricting contact with consumers, such as the recently created national “do not call” list, and imposing consumer protection measures.

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

If we are unable to maintain all required licenses and approvals, or if our U.S. domestic insurance business is determined not to fully comply with the wide variety of applicable laws and regulations or the relevant authority’s interpretation of the laws and regulations, our business could be harmed. Also, some regulatory authorities have relatively broad discretion to grant, renew or revoke licenses and approvals, and could preclude or temporarily suspend us from carrying on some or all of our activities or monetarily penalize us. Any of these actions could materially adversely affect our results of operations and financial condition.

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

We do not have any assets or employees in foreign countries. In connection with business from foreign countries, we only accept applications at our executive office in Austin,

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Texas. In addition, we require premium payments to be in U.S. dollars, which may include checks drawn on U.S. banks. As a result, we have not been subject to regulation in the foreign countries from which we receive applications for insurance. Although we provide insurance to foreign nationals, independent associates and marketing consulting firms, rather than our employees, submit the applications. In addition, we do not at present ensure that our independent sales associates certify as to compliance with foreign securities laws in connection with the ability of foreign nationals to assign policy dividends to a non-U.S. trust for the purpose of accumulating our Class A common stock. We are unable to predict whether foreign regulation will be asserted or implemented in the future. If this was to happen, and we were to agree to submit to such regulation, we would expect to devote significant amounts of time and incur substantial ongoing expenses in complying with any foreign regulation imposed on us. We have not sought or obtained any opinion of counsel addressing whether we may be required to qualify to do business or become licensed as an insurer in any foreign country, or whether the above trust arrangements are subject to foreign securities laws, nor have we sought or obtained any order or declaration of any foreign regulatory authority or court relating to these issues.

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

State insurance regulators and the National Association of Insurance Commissioners (NAIC), regularly re-examine existing laws and regulations applicable to insurance companies and their products. Changes in these laws and regulations, or in interpretations thereof, are often made for the benefit of the consumer at the expense of the insurer and thus could adversely affect our financial condition and results of operations.

In December 2004, the NAIC approved amendments to its model Producer Licensing Act. The amendments contain new disclosure requirements for producers regarding compensation arrangements. If adopted, the NAIC amendments would require producers to disclose to customers, in certain circumstances, information concerning compensation arrangements with producers. The NAIC also directed its Executive Task Force on Broker Activities to further consider the development of additional requirements for recognition of a fiduciary responsibility on the part of producers, disclosure of all quotes received by a broker and disclosures relating to reinsurance arrangements between insurers and reinsurance companies affiliated with a producer. We cannot predict the effect the NAIC’s recent compensation disclosure amendments or anticipated future activities in this area, at the NAIC or state level, will have on influencing future legal actions, changes to business practices or regulatory requirements applicable to us.

Currently, the U.S. government does not regulate directly the insurance business. However, federal legislation and administrative policies in several areas can significantly and adversely affect insurance companies. These areas include 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. These proposals include “The State Modernization and Regulatory Transparency Act,” which would maintain state-based regulation of insurance but would affect state regulation of certain aspects of the insurance business, including rates, agent and company licensing and market conduct examinations. We cannot predict whether this or other proposals will be adopted, or what impact, if enacted, such laws may have on our business, financial condition or results of operations.

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Many of our independent marketers also operate in regulated environments. Changes in regulations that affect their operations also may affect our business relationships with them and their ability to purchase or to distribute our products. Accordingly, these changes could have an adverse effect on our financial condition and results of operation.

Changes in laws and regulations which apply to us and our marketing representatives may materially increase our expense of doing business, thus having an adverse effect on our financial condition and results of operations.

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

We reinsure certain risks underwritten by our various operating segments, including life and casualty. 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 operating results.

Although our reinsurers are liable to us to the extent of the ceded reinsurance, we remain liable as the direct insurer on all risks reinsured. As a result, ceded reinsurance arrangements do not eliminate our obligation to pay claims. We are subject to credit risk with respect to our ability to recover amounts due from reinsurers. Our reinsurers may not pay the reinsurance recoverables that they owe to us or they may not pay such recoverables on a timely basis. A reinsurer’s insolvency, underwriting results or investment returns may affect its ability to fulfill reinsurance obligations.

Our reinsurance facilities are generally subject to annual renewal. We may not be able to maintain our current reinsurance facilities and, even where highly desirable or necessary, we may not be able to obtain other reinsurance facilities in adequate amounts and at favorable rates. 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. Either of these potential developments could materially adversely affect our results of operations and financial condition.

For the majority of our business we retain only the first $100,000 of risk on any one life and cede the remaining risk to our reinsurers, with the remainder of our policies having lower levels of retained risk. In 2005, we reinsured $222 million of face amount of our life insurance policies, and in 2004 we reinsured $265 million of face amount of our life insurance policies. Amounts reinsured in 2005 and 2004 represented approximately 5.2% and 6.6%, respectively, of the face amount of life insurance in effect in those years. 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 the cost of reinsurance were to increase with respect to policies for which we have guaranteed the rates, we could be adversely affected.

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

Our business is dependent upon our ability to keep up to date with technological advances. This is particularly important in our life insurance operations, where our information

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systems are critical to the operation of our business. Our failure to update these systems to reflect technological advancements or to protect our systems may adversely affect our ability to do 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. 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. If we do not maintain adequate systems we could experience adverse consequences, including:

• inadequate information on which to base pricing, underwriting and reserve decisions.

• the loss of existing customers;

• difficulty in attracting new customers;

• customer and marketer disputes;

• regulatory problems, such as failure to meet prompt payment obligations;

• litigation exposure; or

• increases in administrative expenses.

In addition, our management information, internal control and financial reporting systems may need further enhancements and development to satisfy the financial and other reporting requirements of being a public company. There is a risk that we may not be able to adequately upgrade and improve our information systems on an ongoing basis, which could have an adverse effect on our business.

Failure to protect confidential information and privacy could result in the loss of customers, reduction to our profitability and subject us to fines and penalties.

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 any changes in state or federal privacy and compliance requirements.

• drafting appropriate contractual provisions into any contract that raises proprietary and confidentiality issues;

• maintaining secure storage facilities for tangible records; and

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• limiting access to electronic information in order to safeguard certain current information.

In addition, the Gramm-Leach-Bliley Act requires that we deliver a notice regarding our privacy policy both at the delivery of the insurance policy and annually thereafter. Certain exceptions are allowed for sharing of information under joint marketing agreements. However, certain state laws may require individuals to opt in to information sharing instead of being immediately included. Additionally, when final U.S. Treasury Department regulations are promulgated in connection with the USA Patriot Act, we will likely have to expend additional resources to tailor our existing efforts to the new rules.

We have and maintain 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 problems, loss of reputation and litigation.

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

The nature of the markets for the insurance products we provide, including international life and home service, is that 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 another insurance company engages in practices resulting in increased public attention to our businesses. Negative publicity may result in lower sales of insurance, increased regulation and legislative scrutiny of industry practices as well as increased litigation, which may further increase our costs of doing business and adversely affect our profitability by impeding our ability to market our products, requiring us to change our products or increasing the regulatory burdens under which we operate.

General economic, financial market and political conditions may 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 U.S. and in the foreign countries where our non-U.S. policy owners reside. These conditions include economic cycles such as:

• insurance industry cycles;

• levels of employment;

• levels of consumer spending;

• levels of inflation; and

• movements of the financial markets.

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Fluctuations in interest rates, monetary policy, demographics, and legislative and competitive factors also influence our performance. During periods of economic downturn, individuals and businesses may choose not to purchase our insurance products and other related products and services, may terminate existing policies or contracts, permit them to lapse or may choose to reduce the amount of coverage purchased.

The inability of our subsidiaries to make payments to us in sufficient amounts for us to conduct operations could harm our ability to meet our obligations.

As a holding company whose principal assets are the capital stock of our subsidiaries, we will rely primarily on statutorily permissible payments from our subsidiaries to meet our obligations for payment of corporate expenses. The ability of our subsidiaries to make payments to us and to make other payments in the future will depend on their statutory surplus (which is the excess of assets over liabilities as determined in accordance with statutory accounting principles set by state insurance regulatory authorities), future statutory earnings (which are earnings as determined in accordance with statutory accounting principles) and regulatory restrictions. Except to the extent that we are a creditor with recognized claims against our subsidiaries, claims of the subsidiaries’ creditors, including policyholders, have priority with respect to the assets and earnings of the subsidiaries over the claims of our creditors. If any of our subsidiaries becomes insolvent, liquidates or otherwise reorganizes, our creditors and shareholders will have no right to proceed 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.

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

Our Class A share price is likely to fluctuate in the future because of the volatility of the stock market in general and as a result of a variety of other factors, many of which are beyond our control, including:

• quarterly variations in actual or anticipated results of our operations including for individual products;

• interest rate fluctuations;

• changes in financial estimates by securities analysts;

• our failure to meet the expectations of securities analysts and investors; and

• actions or announcements by our competitors.

Class A common stockholders will always be minority holders who will not control us, will have a limited ability to influence our business policies and corporate actions, and will not by themselves be able to elect any directors.

It is difficult for our minority shareholders to elect any of our directors or otherwise exert influence over our business. Our outstanding Class B common stock elects a simple majority of our board of directors. All of the Class B common stock is owned indirectly by

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Harold E. Riley, Chairman of the Board, through the Harold E. Riley Trust. Additionally, Mr. Riley is the largest Class A shareholder. Therefore, Mr. Riley has virtually complete control over significant corporate transactions. These factors would also make it more difficult and time consuming for a third party to acquire control of, or to change, our board of directors.

Our articles of incorporation, bylaws and insurance laws may discourage takeovers and business combinations that our stockholders might consider in their best interests.

Our articles of incorporation and bylaws, as well as various state insurance laws, may delay, defer, prevent or render more difficult a takeover attempt that our stockholders might consider in their best interests. For instance, they may prevent our stockholders from receiving the benefit from any premium to the market price of our common stock 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 common stock if they are viewed as discouraging takeover attempts in the future.

Our articles of incorporation and bylaws may also make it difficult for stockholders to replace or remove our directors. These provisions may facilitate entrenchment of our directors, which may delay, defer or prevent a change in our control, which may not be in the best interests of our stockholders.

The following provisions in our articles of incorporation and bylaws have anti-takeover effects that may delay, defer or prevent a takeover attempt. In particular, our articles of incorporation and bylaws:

• provide that our Class B common stock elects a simple majority of our board of directors; all of such stock is beneficially owned by Harold E. Riley; and

• permit our board of directors to issue one or more series of preferred stock.

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 laws may discourage potential acquisition proposals and may delay, deter or prevent a change of control involving us, including through transactions, and in particular unsolicited transactions, that some or all of our stockholders might consider to be desirable.

You should not anticipate receiving cash dividends on your Citizens Class A common stock, because we have not paid any cash dividends and do not anticipate doing so in the foreseeable future.

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To date we have not paid cash dividends on our Class A common stock or Class B common stock, because it is our policy to retain earnings for use in the operation and expansion of our business. Thus, you should not rely on your investment in us for periodic dividend income. The only return on your investment in our Class A common stock will be the appreciation in its market value, if any.

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

There were 43,300,934 shares of our Class A common stock outstanding as of December 31, 2005.

The outstanding shares of our Series A-1 Convertible Preferred Stock were convertible, as February 26, 2006, into 1,974,723 shares of Class A common stock at a conversion price of $6.33 per share. Although we have no present plans to do so, if we were to increase the Series A-1 Preferred Stock issue size from its existing $12.5 million up to a maximum of $25 million, then an additional 1,974,723 shares of our Class A common stock may be issuable upon conversion of those preferred shares.

The unit warrants, which were also issued on July 12, 2004, entitled the investors to purchase from the Company up to $5 million of Series A-2 Convertible Preferred Stock. Three of the four investors exercised their unit warrants, for an exercise price of approximately $3.75 million, before the unit warrants expired in October 2005. The three issuances of Series A-2 Preferred Stock are convertible into Class A common stock at conversion prices equal to 110% of the average market closing prices of the Class A common stock for the 30 trading days before the respective dates of issuance of the Series A-2 Preferred Stock to the three investors.

The conversion, exercise and redemption prices set forth in this and the two following risk factors, along with the numbers of shares and warrants, except as otherwise provided in the amendment to our articles of incorporation establishing the Series A Preferred Stock, have been adjusted for the respective stock dividends paid December 31, 2004 and December 30, 2005. For further discussion concerning the Series A Preferred Stock, see Notes 1(i) and 8 to the audited financial statement included in this annual report.

The three investors exercised their unit warrants in July, September and October 2005. Upon exercise, these three investors each acquired 1,338 shares of Series A-2 Preferred Stock, together totaling 4,014 shares. The Series A-2 Preferred Stock is convertible into Class A common stock at prices ranging from $6.11 to $7.26 per common share. In addition, in connection with their unit warrant exercises, the three investors received additional warrants to purchase a total of 151,349 shares of Class A common stock at exercise prices ranging from $6.72 to $7.99 per share.

In connection with the issuance of Series A-1 Preferred Stock and associated warrants in July 2004, the finders with respect to these transactions received, as part of the finders’ compensation, warrants to purchase 98,977 shares of Series A common stock at an exercise price of $6.95 per share. In connection with the issuances of Series A-2 Preferred Stock and associated warrants in 2005, the finders received, as part of the finders’

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compensation, warrants to purchase 27,621 shares of Class A common stock at exercise prices ranging from $6.72 to $7.99.

Holders of the Series A Preferred Stock receive a 4% annual dividend that is payable by issuing Class A common stock. Furthermore, we could be obligated to issue a significant number of shares of Class A common stock if the Series A Preferred Stock and warrants noted above are exercised and converted.

In addition, members of our management and other affiliates owned approximately 6,309,503 shares of our Class A common stock, representing approximately 14.6% of our outstanding Class A common stock as of December 31, 2005. Sale of a substantial number of the shares described above would likely have a significant negative affect on the market price of our Class A common stock.

If our stockholders sell a large number of shares of our Class A common stock, or if we issue a large number of shares of our Class A common stock in connection with future acquisitions, financings, or other circumstances, the market price of shares of our Class A common stock could decline significantly. Moreover, the perception in the public market that our stockholders might sell shares of our Class A common stock could depress the market price of those shares.

Provisions of our Series A Preferred Stock may prevent or make it more difficult for us to raise funds or take certain other actions.

In July 2004, we completed the private placement to four institutional investors of (i) an aggregate of 25,000 shares of our Series A-1 Senior Convertible Preferred Stock, (ii) seven-year warrants to purchase up to an aggregate of 543,790 shares of our Class A common stock at an exercise price of $6.95 per share. In addition, Series A-2 Preferred stock and additional warrants were issued upon the exercise, by three of the four institutional investors, of their unit warrants as discussed in the immediately foregoing risk factor. Provisions of the currently outstanding Series A Preferred Stock may require us to obtain the approval of the holders of such shares, or otherwise trigger rights of first refusal or payment provisions, to (i) incur debt or allow liens on our property, other than certain permitted debt and liens, (ii) issue or sell additional shares of our Class A common stock, (iii) amend our articles of incorporation so as to affect adversely any rights of the preferred shareholders, (iv) authorize or create a new class of stock that will be senior or equal to the Series A Preferred Stock in terms of dividends, redemption or distribution of assets, or (v) take certain other actions. For example, we cannot incur debts of greater than $3 million without approval of the holders of the Series A Preferred Stock. These provisions may make it more difficult for us to take certain corporate actions and could delay, discourage or prevent future financings.

Holders of our Series A Preferred Stock have the right to require us to redeem their Series A Preferred Stock at any time, and we will be required to redeem any shares of Series A Preferred Stock that remain outstanding on the fifth anniversary of their issuance.

The provisions of the Series A Preferred Stock require that if (i) at any time after the original issue date of the stock, the closing price of our Class A common stock for any 42 days is less than $5.50, or (ii) we issue Class A common stock or common stock equivalents for less than $6.11 per share, then the holders of the Series A Preferred Stock

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may require us to redeem their shares of Series A Preferred Stock at a price equal to the amount of the original holder’s original investment, plus all accrued but unpaid dividends thereon to the date of payment and any applicable penalties. The preferred holders’ right to require a redemption have been triggered under clause (i) above. Thus, they can require us to redeem their preferred stock at any time. In addition, we will be required to redeem any shares of the Series A Preferred Stock that remain outstanding on the fifth anniversary after their issuance at a price equal to the amount of the original holder’s original investment, plus all accrued but unpaid dividends thereon to the date of such payment.

We can elect to pay the redemption price in shares of our Class A common stock if:

• the average closing price of our Class A common stock is $3.50 per share or above;

• we have sufficient number of shares of Class A common stock available for issuance;

• our Class A common stock is listed on NYSE or other eligible market;

• the shares of Class A common stock to be issued are registered under an effective registration statement;

• the shares to be issued can be issued without violating the rules of the NYSE or any applicable trading market or a provision of our agreement with the holders;

• we have not filed for protection under applicable bankruptcy laws; and

• certain other enumerated conditions.

We would likely pay the redemption price of any Series A Preferred Stock in shares of our Class A common stock, assuming we met the foregoing criteria. The number of shares of Class A common stock which we would be required to issue to redeem the preferred stock would be determined by dividing the sum of the stated value of $500 per preferred share, plus accrued dividends at 4% per annum (paid quarterly), by the lesser of $6.11 or 95% of the volume weighted average price per share of the common stock for 15 days before the redemption date. The number of additional shares of common stock which we may be required to issue to redeem these shares of Series A Preferred Stock could have a significant dilutive effect on the book value of the shares of Class A common stock held by existing stockholders.

There can be no assurance that the holders of the Class A Preferred Stock will not elect to require us to redeem their shares. In addition, there are provisions of the Series A Preferred Stock, that could, under certain circumstances, including failure to meet the requirements enumerated above, require us to pay part or all of the redemption price in cash rather than common stock. If we are required or elect to redeem shares of the Series A Preferred Stock using cash, we may have to curtail our expansion and acquisition plans. In that event we would likely try to raise additional capital by issuing new stock, but there can be no assurance that capital will be available on acceptable terms or at all.

Item 1B. Unresolved Staff Comments

None.

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Item 2. Properties

We own our principal office in Austin, Texas, consisting of an 80,000 square foot office building and approximately one acre of land nearby that contains housing storage facilities. Approximately 50,000 square feet is occupied or reserved for our operations with the remainder of the building being leased to a single tenant under a lease expiring in late 2006.

We also own a 6,324 square foot funeral home in Baker, Louisiana acquired at a total cost of $527,000. This facility, acquired in a 1995 acquisition, is owned and operated by FHA. In addition, we own other properties in Texas and Louisiana that are incidental to our operations.

Item 3. Legal Proceedings

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

This lawsuit has been certified by the Texas District Court, Austin, Texas, 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, with oral arguments occurring on October 21, 2004. We have not yet received a decision from the Texas Supreme Court.

The suit names as a class all non-U.S. residents who purchased insurance policies or made premium payments since August 1996 and assigned policy dividends to two non-U.S. trusts for the purchase of our Class A common stock. It alleges that the life insurance policies which we made available to these non-U.S. residents, when combined with a policy feature which allows policy dividends to be assigned to 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 Texas securities laws. The remedy sought is rescission and return of the insurance premiums.

We believe, among other things, that U.S. law, including Texas law, does not apply to the operations of the trusts, and therefore, no securities registration provisions apply, nor do U.S. laws relating to broker-dealer registration apply. Further, it is our position that the securities claims, based on Texas securities laws, are not valid, that no broker-dealer registration is required of us or our marketing consultants, and the class as defined is not appropriate for class certification because it does not meet the legal requirements for class action treatment under Texas law.

We intend to continue to defend vigorously against class certification, as well as against the other claims in the case. We are unable to determine the potential financial magnitude of the claims if the class certification were to become final and the plaintiff was able to prevail on the substantive claims, although we would expect a significant adverse financial impact from an adverse final class action judgment. Additional information concerning this lawsuit is set forth in “Risk Factors” above.

We are also a party to various legal proceedings incidental to our business. We have been named as a defendant in various legal actions seeking payments for claims denied by us and other monetary damages. In the opinion of management, the ultimate liability, if any, resulting from any contingent liabilities that might arise from such litigation,

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is not material in relation to our financial position or results of operations. Reserves for claims payable are based on the expected claim amounts to be paid after a case-by-case review of the facts and circumstances relating to each claim. A contingency exists with regard to these reserves until the claims are adjudicated and paid.

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

None.

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PART II

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Securities

Our Class A common stock is traded on the New York Stock Exchange (NYSE) under the symbol CIA. The quarterly high and low prices per share as reported by the NYSE are shown below. These prices have been adjusted to reflect 7% stock dividends paid in 2004 and 2005.

	2005				2004
Quarter Ended	High		Low		High		Low
March 31	$	5.80		5.01		8.73		6.39
June 30		5.79		4.79		7.33		5.27
September 30		6.93		5.70		6.97		4.28
December 31		6.05		4.92		6.19		4.74

As of December 31, 2005, the approximate number of record owners of our Class A common stock was 20,000. Management estimates the number of beneficial owners to be approximately 100,000.

On December 31, 2004, we paid a 7% common stock dividend to holders of record as of December 1, 2004. The dividend resulted in the issuance of 2,649,695 Class A shares (including 191,722 shares in treasury) and 61,246 Class B shares.

On December 31, 2005, we paid a 7% common stock dividend to holders of record as of December 15, 2005. The dividend resulted in the issuance of 2,840,821 Class A shares (including 205,142 shares in treasury) and 65,533 Class B shares.

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

We did not purchases any of our equity securities during the fourth quarter of 2005 or during any quarter in 2003, 2004 and 2005.

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 2005. (See Note 8 of the “Notes to Consolidated Financial Statements.”)

Item 6. Selected Financial Data

The table below sets forth, in summary form, selected data of the Company. This data, which is not covered in the report of our independent auditors, should be read in conjunction with the consolidated financial statements and notes, which are included

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elsewhere herein. The net income (loss) per share amounts have been adjusted retroactively for all periods presented to reflect the 7% common stock dividends paid on December 31, 2005 and December 31, 2004.

	Year Ended December 31,
	(In thousands except per share data)
	2005		2004		2003		2002		2001
Total Revenues	$	144,315		102,826		95,103		83,004		67,647
Net Income		7,302		7,732		3,126		4,254		3,963
Net Income Per Share		.13		.17		.08		.12		.11
Total Assets at December 31		661,889		661,212		390,093		326,291		282,086
Long-term Debt		—		30,000		—		—		—
Total Liabilities		513,380		520,179		263,066		224,499		199,364
Total Stockholders’ Equity		136,963		135,131		127,027		101,792		82,722
Book Value Per Share		3.33		3.29		3.10		2.76		2.34

See Item I — Business (a) and (b), and Item 7 — Management’s Discussion and Analysis, for information that may affect the comparability of the financial data contained in the above table.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

We conduct operations as an insurance holding company emphasizing ordinary life insurance products in niche markets where we believe we can achieve competitive advantages. Our core operations include:

• the issuance of ordinary life insurance in U.S. dollar denominated amounts to foreign nationals with significant net worth; and

• offering final expense ordinary life insurance through the home service distribution channel in Louisiana.

We also offer ordinary life insurance products to middle to low income individuals in the Midwest and southern U.S. We operate through three segments as follows:

International Life. For the past 30 years, CICA and its predecessors have participated in the foreign marketplace through the issuance of U.S. dollar denominated ordinary whole life insurance to foreign nationals. Traditionally, this market has focused on 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 middle classes develop in South America. We make our insurance products available using independent marketing organizations and independent marketing consultants. The number of our producing independent consultants has expanded over the years in this segment to approximately 3,100, and we presently receive applications from more than 35 countries outside of the U.S. Historically, the majority of our international business has come from Latin America. However, in 2004 the Pacific Rim began to represent a meaningful and

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growing source of new business, and in 2005 was the leading source of new premium income.

In 2005, our International Life segment generated revenue of approximately $79.7 million which accounted for 55.2% of our total revenue. For the year ended December 31, 2004, this segment produced revenue of $72.9 million which accounted for 70.9% of our total revenue, compared to 2003, when it produced approximately $63.3 million, or 67.0% of total revenue. The decrease in percentage of total revenue in 2005 relates to the inclusion of Security Plan’s results for all of 2005, as the revenues from Security Plan were only included in the fourth quarter of 2004 because it was acquired by us on October 1, 2004. Our strategy in operating our International Life segment is to increase new business written through our existing marketers as well as expand the number of countries from which we receive policy applications. Our international business grew at a double-digit pace during 2003, 2004 and 2005. New annualized issued and paid premiums from the international market increased by more than 25.7% during 2004 compared to 2003, and increased an additional 17.9% during 2005 compared to 2004. The development of new markets in the Pacific Rim, particularly Taiwan, and the expansion of existing markets in Latin America were the primary contributors to the growth in this segment.

Home Service Life. Through a subsidiary we acquired in October 2004, Security Plan, we provide final expense ordinary life insurance to middle to lower income individuals in Louisiana. Our policies in this segment are sold and serviced through the home service marketing distribution system utilizing employee-agents who work on a route system to collect premiums and service policyholders.

During 2005, revenue from this segment was $49.7 million, which accounted for 34.4% of our total revenue. For the year ended December 31, 2004, revenue from this segment was $12.3 million or 12.0% of our total revenue, although we only operated this segment for the fourth quarter as we entered into this business upon the acquisition of Security Plan. Our business strategy in this segment is to continue to serve existing customers in Louisiana as well as expand the business through new marketing management which we put in place in early 2005.

In August and September 2005, Hurricanes Katrina and Rita struck the Louisiana coast, causing significant damage and disruption to the New Orleans area. Management estimates one third of Security Plan’s premium income is located in the affected area. Security Plan was not significantly impacted by death claims related to the storms (approximately $100,000); however, because of uncertainty regarding the collectability of future premiums from the area, we amortized approximately $2.3 million of cost of customer relationships acquired in the Security Plan acquisition during the third quarter of 2005 because of the decrease in collected premiums during the quarter. Ultimately, Security Plan closed the year with only a 4.5% decline in premium income compared to 2004.

Security Plan’s casualty subsidiary, SPFIC, had sufficient catastrophe reinsurance agreements in place that out of approximately $11.4 million in estimated hurricane-related claims and expenses, the financial impact on SPFIC was approximately $2,000,000 ($1,250,000 in claims and $750,000 in second event premiums) during the third and fourth quarters of 2005. The reinsurance agreements specify a maximum coverage per event. SPFIC has reached the maximum retention for Hurricane Katrina under the catastrophe reinsurance agreements. Hurricane Rita was the second catastrophe. SPFIC had secured a new catastrophe reinsurance contract for any additional catastrophes that might have

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occurred by year end 2005. For 2006, SPFIC has increased its catastrophe reinsurance to cover up to $10 million in claims per event.

Domestic Life. Through our Domestic Life segment, we provide ordinary whole life, credit life insurance, and final expense policies to middle income individuals in certain markets in the Midwest and southern U.S. The majority of our revenues in this segment are the result of acquisitions of domestic life insurance companies since 1987. We conduct our Domestic Life business through our four operating life insurance subsidiaries.

During 2005, revenue from this segment was $14.0 million, which was 9.7% of total revenue. For the year ended December 31, 2004, revenue from this segment was $16.8 million which was 16.3% of our total revenue, and in 2003, this segment contributed $18.0 million, or 18.9% of total revenue. Our business strategy in this segment is to seek to expand the agency force through second career independent agents while also reviewing additional opportunities to add to the agency force through acquisitions of domestic life insurance companies. However, the domestic marketing program experienced higher than anticipated lapsation on the books of business acquired in the acquisitions of First Alliance Corporation in 2003 and CNLIC in 2002, which precipitated the 16.4% decrease in revenues during 2005 compared to 2004. We previously operated an accident and health segment, which we exited in 2004.

We also realize earnings from our investment portfolio. Life insurance companies earn profits on the investment float, 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 will realize from our investment portfolio.

Marketplace Conditions and Trends

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

• As an increasing percentage of the world population reaches retirement age, we believe we will benefit from increased demand for living products rather than death products, as aging baby boomers will require cash accumulation to provide expenses to meet their lifetime needs. Our ordinary life products are designed for our policyowners to accumulate cash values to provide for living expenses in the insured’s later years while continuously providing a death benefit.

• The volatility in the equity markets over the past few years has posed a number of problems for some companies in the life insurance industry. Even though the capital markets have recovered, not all companies have participated evenly in the recovery. We historically have had minimal equity exposure, including less than 1% of total invested assets as of December 31, 2005 and December 31, 2004, and we plan to continue to have minimal assets in equity investments in the future.

• Corporate bond defaults and credit downgrades, which have resulted in other-than- temporary impairment in the value of many securities, have had a material

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

Significant Recent Transactions

Cessation of Accident and Health Business

We entered into coinsurance agreements, effective January 1, 2004, and ceded approximately $14 million of our annual accident and health premium and corresponding benefits and claims. In consideration for these cessions, we made a closing settlement payment of $10,440,000 to the reinsurer in June 2004. Due to this cession, we also reduced our January 1, 2004 deferred policy acquisition costs, cost of customer relationships acquired and policy benefit reserves by $2,197,000, $2,886,000 and $14,960,000, respectively. We recorded an initial amount payable to the reinsurer of $10,440,000, resulting in a first quarter 2004 charge of $634,000 and a deferred gain of $72,000, which was amortized during 2004. The coinsurance agreements provide that this ceded business will revert to the reinsurer when parallel assumption reinsurance agreements are approved by the various state insurance departments holding jurisdiction. We also participate in future profits on the accident and health business subject to the coinsurance agreements over a 10-year period. During 2004, we recognized approximately $809,000 as profit under the agreements. No amounts were recognized in 2005. Negotiations were underway, as of December 31, 2005, with the assuming party to sell our primary accident and health insurance subsidiary, CNLIC, which represents approximately 70% of the ceded business.

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A formal contract was signed in the first quarter of 2006 and is expected to close in mid-2006. The remaining 30% of the accident and health business will continue to be ceded under the existing coinsurance agreements.

Acquisition of Security Plan

The acquisition of Security Plan on October 1, 2004, was, at $85 million, our largest ever, and it provides a meaningful source of revenue and a solid asset base. We used a $30 million line of credit from Regions Bank to supplement available cash in completing the transaction. This debt was repaid in April 2005.

Management continues to seek acquisitions that can add value to our Company, although at this time, we have no agreements or understandings with respect to any acquisition. Because of the growth in our asset base and level of capital, management expects to seek opportunities for larger acquisition transactions (those in the $50 million to $100 million purchase price range). Historically, Security Plan is made up of more than 100 such companies or books of business, and management expects to pursue such opportunities should they present themselves.

Consolidated Results

The following table sets forth our net income for periods indicated:

Year Ended			Net Income Per		Change from
December 31	Net Income		Class A & B Share		Previous Year
2005	$	7,302,000	$	0.13		(5.6	%)
2004		7,732,000		0.17		147.3	%
2003		3,126,000		0.08		(26.5	%)

As further discussed below, increases in revenues offset by increased amortization expenses, contributed to a 45.8% increase in earnings before Federal income tax in 2005. A significant increase in Federal income tax expense, as described below, resulted in 2005 net income approximating that of 2004. Earnings per share declined in 2005 by 23.5% compared to 2004 as the result of significantly increased taxes and higher expenses relating to our outstanding preferred stock. (See Note 1(i) of the Notes to Consolidated Financial Statements.)

Total revenues for 2005 were $144.3 million, a 40.3% increase over 2004 revenues of $102.8 million. Total revenues for 2003 were $95.1 million. The inclusion of Security Plan (Home Service segment) for all of 2005 contributed $49.7 million in revenues, compared to $12.3 million in 2004. Total revenues from our International Life segment amounted to $79.7 million during 2005, compared to $72.9 million for 2004 and $63.3 million for 2003, reflecting continued growth in new business. In our Domestic Life segment, total U.S. life revenues for 2005 amounted to $14.0 million compared to $16.8 million in the same period of 2004 and $18.0 million in 2003, the decline in 2005 resulting primarily from higher lapsation experienced on books of business acquired in previous years. Our domestic accident and health revenues were $900,000 in 2005, compared to $788,000 in 2004 and $13.7 million in 2003. The decline from 2003 to 2004 was the result of the cession of the accident and health business.

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Premium Income. Premium income (including annuity and universal life considerations) during 2005 increased to $118,667,000 from $83,168,000 in 2004, or 42.7%. The 2005 increase was attributable to the inclusion of a full year of Security Plan, which had $37,720,000 of premium income during the year, as well as the growth in premium income in our International Life segment, which benefited from the large increase in new premiums written in 2004 and 2005. First year issued and paid annualized life premium for this segment increased 17.9% from $15,795,000 in 2004 to $18,619,000 in 2005. Premium income increased by 6.6% to $83,168,000 in 2004, from $78,027,000 in 2003. The increase in 2004 was driven by a 6.3% increase in premiums from CICA, as well as the inclusion of Security Plan and SPFIC, which added $9,587,000 after their acquisition in October 2004, which offset the loss of approximately $14 million of accident and health premium ceded.

Net Investment Income. Net investment income increased 38.6% during 2005 to $23,568,000 compared to $17,005,000 during 2004 and $14,322,000 in 2003. Our Home Service Life segment’s inclusion added $11,573,000 to the 2005 results and $2,875,000 to 2004 results. Available returns were slightly higher during 2005 compared to 2004 and 2003, however, the remaining companies’ investment income declined slightly during 2005 due to the sale of a significant amount of bonds to fund the acquisition of Security Plan and the transfer of the accident and health business in 2004 and the sale/maturity of $30 million of bonds to retire the outstanding bank debt. We continue to invest in bonds U.S. government-sponsored enterprises, such as FNMA and FHLMC. Also, during 2005, approximately $20 million of AAA-rated, tax-exempt municipal bonds were purchased, which generated tax-equivalent yields of 30-40 basis points higher than on agency instruments.

Reserves. The change in future policy benefit reserves increased from $18,627,000 in 2004 to $24,223,000 in 2005, predominantly due to an improvement in persistency on our international business, as well as a change in product mix which resulted in larger first year reserves. During 2004 and 2005, a shift in products sold occurred with the addition of sales in the Pacific Rim, which resulted in a more rapid rise in reserves. Our Home Service segment decreased net reserves by $244,000 in 2005, due to minimal loss of business as the result of hurricanes. The change in future policy benefit reserves increased from $7,904,000 in 2003 to $18,627,000 in 2004, due predominantly to increased persistency on our business and an increase and change in product mix in new business. New issuances of policies to several large producing areas shifted to endowment products, which build reserves at a much higher rate.

Policy Dividends. Policyholder dividends increased 15.6% during 2005 to $4,789,000 from $4,142,000 in 2004 and $3,666,000 in 2003, due to improved persistency and the continued sale of participating ordinary whole life products. Virtually all of our policies on foreign nationals are participating, and the improvement in persistency and increase in new business on our international business have contributed to the growth in dividends. The dividends are factored into the premiums and have no impact on profitability.

Claims and Surrenders. As noted in the table below, claims and surrenders increased 42.5% from $37,407,000 in 2004 to $53,288,000 in 2005. The 2005 increase primarily related to the acquisition of Security Plan. which was only reflected in 2004 comparative results of operations for the last quarter of 2004 .

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

Death benefits increased 119.1% from $10,224,000 in 2004 to $22,404,000 in 2005. Death claims in 2003 were $6,399,000. The 2005 death claims of our Home Service segment totaled $15,694,000. In 2004, claims in this segment amounted to $3,688,000, reflecting only one quarter of results of Security Plan. Claims on our remaining books of business remained static or down slightly during 2005. Because of the nature of our Home Service business, incurred claims historically are higher than those incurred on our international business. Recent hurricane activity that affected Louisiana had minimal impact on 2005 death claims.

Policy surrenders decreased 8.0% in 2005 to $16,940,000 from $18,406,000 in 2004. The 2004 results represented a 2.3% increase over 2003 when surrenders amounted to $17,986,000, due primarily to the acquisitions of two domestic life insurers, which generated $3,428,000 in additional surrenders, plus the inclusion of Security Plan which added $432,000. The small face amount size of our Home Service policies, coupled with the nature of the policies, is such that surrenders on that book of business are relatively low. However, the inclusion of this segment in 2005 added $1,429,000 in surrender benefits to the 2005 results. Improved persistency on our international business contributed to the decrease in surrenders in 2005 compared to 2004. Internationally, we experienced a significant improvement on persistency in 2005, as countries in South America rebounded from economic downturns.

Endowment benefits increased 20.1% from $7,509,000 in 2004 to $9,021,000 in 2005. Endowments totaled $6,416,000 in 2003. We have a series of international policies that carry an immediate endowment benefit of an amount elected by the policy owner. This endowment is factored into the premium of the policy and is paid annually. Like policy dividends, endowments are factored into the premium and, as such, the increase should have no adverse impact on profitability.

Accident and health benefits of $446,000 have been nominal since the cession of the majority of our accident and health business in force according to coinsurance agreements effective January 1, 2004.

Casualty claims and other policy benefits amounted to $4,477,000 in 2005, compared to $1,328,000 in 2004 and $780,000 in 2003. These other benefits are comprised of supplemental contract benefits, interest on policy funds and assorted other miscellaneous policy benefits. In 2005, Home Service casualty claims totaled $3,685,000, compared to $562,000 in 2004. Of these 2005 casualty claims, $1,250,000 were due to Hurricanes Katrina and Rita, as discussed earlier.

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Commissions. Commissions increased 55.0% during 2005 to $32,985,000 from $21,274,000 in 2004 and $18,228,000 in 2003, primarily due to the inclusion of our Home Service segment for all of 2005. Commissions paid by our Home Service segment in 2005 totaled $11,762,000, compared to $2,211,000 in 2004, as the segment was only included in the fourth quarter of 2004. Additionally, our International Life segment commissions were higher in 2005 and 2004 as a result of the increase in issued new business described above.

Underwriting, Acquisition and Insurance Expense. Underwriting, acquisition and insurance expenses increased 46.2% to $25,429,000 in 2005 compared to $17,391,000 during 2004. The increase was largely attributable to our Home Service segment’s inclusion for the entire year, whose expenses were approximately $9,571,000 in 2005, as the segment was only included in the fourth quarter of 2004. Underwriting, acquisition and insurance expenses decreased 8.3% to $17,391,000 in 2004, compared to $18,966,000 in 2003, due primarily to economies of scale being achieved in administration of the business of our domestic insurance subsidiaries.

Deferred Policy Acquisition Costs. Capitalized deferred policy acquisition costs increased 41.5% from $17,241,000 in 2004 to $24,388,000 in 2005. These costs were $16,558,000 in 2003. This increase was primarily related to the increase in new life production discussed above. Capitalized expenses for the Home Service segment, which were not included in 2005 results, were $3,076,000. Amortization of these costs was $10,313,000 and $8,438,000, respectively, in 2005 and 2004.

Cost of Customer Relationships Acquired. Amortization of cost of customer relationships acquired and other intangibles increased from $4,136,000 in 2004 to $5,881,000 in 2005. Amortization of these items related to the Security Plan acquisition was $3,811,000 in 2005 and $848,572 for the fourth quarter of 2004. These costs decreased in 2004 to $4,136,000 from $7,110,000 in 2003. With most of the accident and health business ceded effective January 1, 2004, amortization of these costs was minimal in 2004.

Federal Income Tax. Federal income tax expense was $162,000, $356,000 and $4,493,000 in 2003, 2004 and 2005, respectively. This represents effective tax rates of 4.9%, 4.4% and 38.1%, respectively. In 2003 and to a lesser extent in 2004, we benefited from the small life insurance company deduction. After the acquisition of Security Plan in late 2004, this deduction was no longer available since it is based on consolidated assets. In 2004, a previously established valuation allowance in the amount of $1,319,000 was released, which reduced our effective tax rate by 16.3%. In 2005, a valuation allowance in the amount of $1,103,000 was established which added 9.3% to our effective tax rate. The 2005 allowance was due to the anticipated sale of CNLIC, which has a $1,103,000 net deferred tax asset at December 31, 2005, primarily related to net operating losses that will not be available in future years as CNLIC will no longer be part of the Company’s consolidated group. Additionally, a 45.8% increase in pre-tax earnings added approximately $1.3 million to tax expense from 2004 to 2005. We expect our effective Federal tax rate to approximately 34.0% in coming years.

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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.

Liquidity requirements are met primarily by funds provided from operations. Premium deposits and revenues, investment income and investment maturities are the primary sources of funds while investment purchases, policy benefits, and operating expenses are the primary uses of funds. Although we historically have not had to liquidate invested assets to provide cash flow, our investments consist primarily of marketable debt securities that could be readily converted to cash for liquidity needs.

A primary liquidity concern is the risk of an extraordinary level of early policyholder withdrawals. 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, were largely consistent with our assumptions in asset liability management, our associated cash outflows have to date 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.

In the past, cash flows from our insurance operations have been sufficient to meet current needs. Cash flows from operating activities were $34.5 million and $8.7 million for the years ended December 31, 2005 and 2004, respectively. We have traditionally also had significant cash flows from both scheduled and unscheduled investment security maturities, redemptions, and prepayments. Net cash outflows from investment activity totaled $22.6 million and $34.1 million for the years ended December 31, 2005 and 2004, respectively. The outflows from investing activity for the year ended December 31, 2005, primarily related to the investment of excess cash and cash equivalents generated from operations during 2005. In 2004, the outflow resulted from the $85 million expended to acquire Security Plan.

Stockholders’ equity at December 31, 2005 was $136,963,000 compared to $135,131,000 at December 31, 2004. The 2005 increase was lower than expected, due to unrealized losses on our bond portfolio net of tax of $4,801,000. The unrealized losses result from increases in interest rates late in 2005, which offset the income earned during 2005.

Invested assets increased to $484,811,000 at December 31, 2005 from $475,802,000 at December 31, 2004. Invested assets grew by 1.9%, after retiring our $30 million outstanding term loan in April. Fixed maturities are categorized into two classifications: fixed maturities held-to-maturity, which are valued at amortized cost, and fixed maturities available-for-sale which are valued at fair value.

Fixed maturities available-for-sale and fixed maturities held-to-maturity were 92.8% and 1.6%, respectively, of invested assets at December 31, 2005. Fixed maturities held to maturity, amounting to $7,640,000 at December 31, 2005, consist of U.S. Treasury and

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U.S. government agency securities. Management has the intent and believes we have the ability to hold the securities to maturity.

Policy loans comprised 4.9% of invested assets at December 31, 2005 compared to 5.1% at December 31, 2004. These loans, which are secured by the underlying policy values, have yields ranging from 5% to 10% and maturities that are related to the maturity or termination of the applicable policies. Management believes that we maintain adequate liquidity despite the uncertain maturities of these loans.

Our cash balances at our primary depositories were significantly in excess of Federal Deposit Insurance Corporation coverage at December 31, 2005 and December 31, 2004. 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 2006, we intend to continue to utilize high grade commercial paper as a cash management tool to minimize excess cash balances and enhance returns.

In the wake of bankruptcy filings by large corporations in recent years, 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 description, and we do not use such investments to hedge our investment positions.

The NAIC has established minimum capital requirements in the form of Risk-Based Capital (“RBC”). Risk-based capital factors the type of business written by an insurance company, the quality of its assets, and various other factors into account to develop a minimum level of capital called “authorized control level risk-based capital” and compares this level to an adjusted statutory capital that includes capital and surplus as reported under statutory accounting principles, plus certain investment reserves. Should the ratio of adjusted statutory capital to control level risk-based capital fall below 200%, a series of actions by the affected company would begin. At December 31, 2005 and December 31, 2004, all of our insurance subsidiaries were above required minimum levels.

We signed a revolving line of credit agreement from Regions Bank for a $30 million credit facility for use in acquisitions in March 2004. On October 1, 2004, we entered into a Second Amendment to the Loan Agreement that converted into a term loan a $30 million advance against the line of credit made in connection with the acquisition of Security Plan. The loan was repaid in April 2005. In November 2005, we executed documents to renew the line of credit through October 2006, and to increase the borrowing capacity to $75 million. No amounts were outstanding at December 31, 2005. Provisions of the outstanding preferred stock issue limit the amount we can borrow without the holders’ consent to $30.0 million.

We have committed to the following contractual obligations as of December 31, 2005 with the payments due by the period indicated below:

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

The payments related to the future policy benefits and policy claims payable reflected in the table above have been projected utilizing assumptions based upon our historical experience and anticipated future experience.

Parent Company Liquidity and Capital Resources

We are a holding company and have had minimal operations of our own. Our assets 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 Security Plan. The ability to make payments is limited by applicable laws and regulations of Colorado, the state in which CICA is domiciled, and Louisiana, the state in which Security Plan is domiciled, 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.

We are not currently planning to make any significant capital expenditures or acquisitions in 2006 or subsequent years. However, in the event we make an acquisition, we could incur debt as we did in the Security Plan acquisition. In April 2005, we repaid the $30 million we borrowed on October 1, 2004 for the acquisition.

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Critical Accounting Policies

Our critical accounting policies are as follows:

Policy Liabilities

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

We continue to use the original assumptions (including a provision for the risk of adverse deviation) in subsequent periods to determine the changes in the liability for future policy benefits (the “lock-in concept”) unless a premium deficiency exists. Management monitors these assumptions and has determined that a premium deficiency does not exist. Management believes that our policy liabilities and increase in future policy benefit reserves as of and for the years ended December 31, 2005, 2004 and 2003 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.

Lapses and surrenders increased in 2005 compared to 2004 due to Security Plan’s inclusion for the entire year. Reinsurance declined because of a decrease in the average face amount of international policies issued. The significant increase in 2004 ceded premium compared to 2003 related to the 100% cession of the in-force accident and health premiums to another carrier.

During 2005, operating expenses increased compared to 2004 due to the inclusion of Security Plan for the entire year. In 2004, expense reductions resulted in improvement in the ratio of expenses to premiums compared to 2003; however, the claims incurred by Security Plan caused the overall expense and benefit ratio to increase slightly. Because of the nature of Security Plan’s business, a high benefit ratio is not unusual.

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

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method limits the amount of deferred costs to its estimated realizable value, provided actual experience is comparable to that contemplated in the factors.

Inherent in the capitalization and amortization of deferred policy acquisition costs are certain management judgments about what acquisition costs are deferred, the ending asset balance and the annual amortization. Over 85% of our capitalized deferred acquisition costs are attributed to first year excess commissions. The remaining 15% are attributed to costs that vary with and are directly related to the acquisition of new and renewal insurance business. Those costs generally include costs related to the production, underwriting and issuance of new business. Use of the factor method, as discussed above, limits the amount of unamortized deferred policy acquisition costs to its estimated realizable value provided actual experience is comparable to that contemplated in the factors and results in amortization amounts such that policies that lapse or surrender during the period are no longer included in the ending deferred policy acquisition cost balance.

A recoverability test that considers among other things, actual experience and projected future experience, is performed at least annually by third party actuarial consultants. These annual recoverability tests initially calculate the available premium (gross premium less benefit net premium less percent of premium expense) for the next 30 years. The available premium per policy and the deferred policy acquisition costs per policy are then calculated. The deferred policy acquisition costs are then 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. Based upon the analysis performed to only capitalize expenses that vary with and are directly related to the acquisition of new and renewal insurance business, utilization of the factor method and annual recoverability testing, management believes that our deferred policy acquisition costs and related amortization as of and for the years ended December 31, 2005, 2004 and 2003 limits the amount of deferred costs to its estimated realizable value.

Valuation of Investments in Fixed Maturity and Equity Securities

At December 31, 2005, investments in fixed maturity and equity securities were 94.4% and 0.1%, respectively, of total investments. Approximately 98.3% of our fixed maturities were classified as available-for-sale securities at December 31, 2005, with the remaining 1.7% classified as held-to-maturity securities based upon our intent and ability to hold these securities to maturity. All equity securities at December 31, 2005 are classified as available-for-sale securities. We have no fixed maturity or equity securities that are classified as trading securities at December 31, 2005.

Additionally, at December 31, 2005, 63.3% of our fixed maturity securities were invested in securities backed by the full faith and credit of the U.S. government or U.S. government-sponsored entities. We evaluate the carrying value of our fixed maturity and equity securities at least quarterly. A decline in the fair value of any fixed maturity or equity security below cost that is deemed other than temporary is charged to earnings resulting in the establishment of a new cost basis for the security. The new cost basis is not changed for subsequent recoveries in the fair value of the fixed maturity or equity security. With the exception of Security Plan, virtually all investments of our subsidiaries are in bonds that carry the full faith and credit of the U.S. government or U.S. government-sponsored enterprises. Security Plan has significant investments in corporate and municipal bonds.

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Based upon our emphasis on investing in fixed maturity securities primarily composed of obligations of U.S. government sponsored corporation, U.S. Treasury securities and obligations of the U.S. government and agencies and our analysis whether declines in fair value below cost are temporary or other than temporary, management believes that our investments in fixed maturity and equity securities at December 31, 2005 are not impaired, and no “other-than-temporary losses” need to be recorded.

Gross unrealized losses on fixed maturities available-for-sale amounted to $10,460,000 as of December 31, 2005. Of the 2005 total gross unrealized loss, $6,754,000 were in a continuous loss situation for 12 months or more and $3,706,000 were in a continuous loss situation for less than 12 months. Gross unrealized losses on fixed maturities available-for-sale as of December 31, 2004 were $3,857,000, of which $2,018,000 were in a continuous loss situation for 12 months or more and $1,839,000 were in a continuous loss situation for less than 12 months. The majority of the fixed maturities available-for-sale that have been in a continuous loss situation for less than 12 months are from investments owned by Security Plan. The losses are due to the coupon interest rate being less than the prevailing market interest rates at December 31, 2005. We have determined that there is no need to establish a new cost basis for these securities.

The fixed maturities available-for-sale in a gross unrealized loss situation for more than 12 months are primarily investments in callable instruments issued by U.S. government sponsored enterprises and U.S. government agencies. It is remote that unrealized losses on these instruments will result in realized losses, since we have the intent and believe we have the ability to hold these securities to the call date or maturity date.

These securities are being monitored by us to determine if the unrealized loss as of December 31, 2005 indicates that there is a loss which is other-than-temporary. As of December 31, 2005, we had determined that there is no need to establish a new cost basis for these securities.

Accounting Pronouncements

In September 2005, the American Institute of Certified Public Accountants (“AICPA”) issued Statement of Position (“SOP”) 05-1, “Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts” (“SOP 05-1”). SOP 05-1 provides guidance on accounting by insurance enterprises for deferred acquisition costs on internal replacements of insurance and investment contracts other than those specifically described in Statement of Financial Accounting Standards (“SFAS”) No. 97, “Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and For Realized Gains and Losses from the Sale of Investments.” SOP 05-1 defines an internal replacement as a modification in product benefits, features, rights, or coverages that occurs by the exchange of a contract for a new contract, or by amendment, endorsement, or rider to a contract, or by the election of a feature or coverage within a contract. Under SOP 05-1, modifications that result in a substantially unchanged contract will be accounted for as a continuation of the replaced contract. A replacement contract that is substantially changed will be accounted for as an extinguishment of the replaced contract resulting in a release of unamortized deferred acquisition costs and unearned inducements associated with the replaced contract. The guidance in SOP 05-1 will be applied prospectively and is effective for internal replacements occurring in fiscal years beginning after December 15, 2006. The Company is

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currently evaluating the impact of SOP 05-1 and does not expect that the pronouncement will have a material impact on the Company’s consolidated financial statements.

In September 2005, the Emerging Issues Task Force (“EITF”) reached consensus on Issue No. 05-7, “Accounting for Modifications to Conversion Options Embedded in Debt Instruments and Related Issues” (“EITF 05-7”). EITF 05-7 provides guidance on whether a modification of conversion options embedded in debt results in an extinguishment of that debt. In certain situations, companies may change the terms of an embedded conversion option as part of a debt modification. The EITF concluded that the change in the fair value of an embedded conversion option upon modification should be included in the analysis of EITF Issue No. 96-19, “Debtor’s Accounting for a Modification or Exchange of Debt Instrument,” to determine whether a modification or extinguishment has occurred and that a change in the fair value of a conversion option should be recognized upon the modification as a discount (or premium) associated with the debt, and an increase (or decrease) in additional paid-in capital. EITF 05-7 will be applied prospectively and is effective for all debt modifications occurring in periods beginning after December 15, 2005. EITF 05-7 is not expected to have a material impact on the Company’s consolidated financial statements.

In September 2005, the EITF reached consensus on Issue No. 05-8, “Income Tax Consequences of Issuing Convertible Debt with a Beneficial Conversion Feature” (“EITF 05-8”). EITF 05-8 concludes that (i)the issuance of convertible debt with a beneficial conversion feature results in a basis difference that should be accounted for as a temporary difference and (ii) the establishment of the deferred tax liability for the basis difference should result in an adjustment to additional paid in capital. EITF 05-8 will be applied retrospectively for all instruments with a beneficial conversion feature accounted for in accordance with EITF Issue No. 98-5, “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios,” and EITF Issue No. 00-27, “Application of Issue No. 98-5 to Certain Convertible Instruments,” and is effective for periods beginning after December 15, 2005. The Company’s Series A-1 Convertible Preferred Stock has a beneficial conversion feature, and we will implement EITF 05-8 in the first quarter of 2006. The implementation is not expected to have a material impact on the financial position, results of operations or liquidity of the Company.

In December 2004, SFAS No. 153, “Exchanges of Nonmonetary Assets, an amendment of Accounting Principles Board” (“APB”) Opinion No. 29 (“SFAS 153”) was issued. SFAS 153 amended prior guidance to eliminate the exception for nonmonetary exchanges of similar productive assets and replaced it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The provisions of SFAS 153 are required to be applied prospectively for fiscal years beginning after June 30, 2005. SFAS 153 is not expected to have a material impact on the Company’s consolidated financial statements.

Effective July 1, 2005, the Company adopted EITF Issue No. 05-6, “Determining the Amortization Period for Leasehold Improvements” (“EITF 05-6”). EITF 05-6 provides guidance on determining the amortization period for leasehold improvements acquired in a business combination or acquired subsequent to lease inception. As required by EITF 05-6, the Company adopted this guidance on a prospective basis which had no material impact on the Company’s consolidated financial statements.

In June 2005, the Financial Accounting Standards Board (“FASB”) completed its review of EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its

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Application to Certain Investments” (“EITF 03-1”). EITF 03-1 provides accounting guidance regarding the determination of when an impairment of debt and marketable equity securities and investments accounted for under the cost method should be considered other-than-temporary and recognized in income. EITF 03-1 also requires certain quantitative and qualitative disclosures for debt and marketable equity securities classified as available-for-sale or held-to-maturity under SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities” (“SFAS 115”), that are impaired at the balance sheet date but for which an other-than-temporary impairment has not been recognized. The FASB decided not to provide additional guidance on the meaning of other-than-temporary impairment but has issued FASB Staff Position (“FSP”) 115-1, “The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments” (“FSP 115-1”), which nullifies the accounting guidance on the determination of whether an investment is other-than-temporarily impaired as set forth in EITF 03-1. FSP 115-1 is effective on a prospective basis for other-than-temporary impairments on certain investments in periods beginning after December 15, 2005. The Company does not anticipate that the adoption of FSP 115-1 will have a material impact on its consolidated financial statements.

In June 2005, the EITF reached consensus on Issue No. 04-5, “Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights” (“EITF 04-5”). EITF 04-5 provides a framework for determining whether a general partner controls and should consolidate a limited partnership or a similar entity in light of certain rights held by the limited partners. The consensus also provides additional guidance on substantive rights. EITF 04-5 was effective after June 29, 2005 for all newly formed partnerships and for any pre-existing limited partnerships that modified their partnership agreements after that date. The adoption of this provision of EITF 04-5 did not have a material impact on the Company’s consolidated financial statements. EITF 04-5 must be adopted by January 1, 2006 for all other limited partnerships through a cumulative effect of a change in accounting principle recorded in opening equity or it may be applied retrospectively by adjusting prior period financial statements. The adoption of this provision of EITF 04-5 is not expected to have a material impact on the Company’s consolidated financial statements.

In June 2005, the FASB cleared SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”), Implementation Issue No. B38, “Embedded Derivatives: Evaluation of Net Settlement with Respect to the Settlement of a Debt Instrument through Exercise of an Embedded Put Option or Call Option” (“Issue B38”) and Implementation Issue No. B39, “Embedded Derivatives: Application of Paragraph 13(b) to Call Options That Are Exercisable Only by the Debtor” (“Issue B39”). Issue B38 clarifies that the potential settlement of a debtor’s obligation to a creditor that would occur upon exercise of a put or call option meets the net settlement criteria of SFAS No. 133. Issue B39 clarifies that an embedded call option, in which the underlying is an interest rate or interest rate index, that can accelerate the settlement of a debt host financial instrument should not be bifurcated and fair valued if the right to accelerate the settlement can be exercised only by the debtor (issuer/borrower) and the investor will recover substantially all of its initial net investment. Issue Nos. B38 and B39, which must be adopted as of the first day of the first fiscal quarter beginning after December 15, 2005, are not expected to have a material impact on the Company’s consolidated financial statements.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections,” a replacement of APB Opinion No. 20 and FASB Statement No. 3 (“SFAS 154”). The statement requires retrospective application to prior periods’ financial statements for a voluntary change in accounting principle unless it is deemed impracticable.

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It also requires that a change in the method of depreciation, amortization, or depletion for long-lived, non-financial assets be accounted for as a change in accounting estimate rather than a change in accounting principle. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. SFAS 154 is not expected to have a material impact on the Company’s consolidated financial statements.

In December 2004, the FASB issued SFAS 123 (revised 2004) “Share-Based Payments” (“SFAS 123(R)”), which revised SFAS No. 123, “Accounting for Stock-Based Compensation and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees.” SFAS 123(R) provides additional guidance on determining whether certain financial instruments awarded in share-based payment transactions are liabilities. SFAS 123(R) also requires that the cost of all share-based transactions be measured at fair value and recognized over the period during which an employee is required to provide service in exchange for an award. The SEC issued a final ruling in April 2005 allowing a public company that is not a small business issuer to implement SFAS 123(R) at the beginning of the next fiscal year after June 15, 2005. The Company does not expect the adoption of the revision of SFAS No. 123 to have a material impact on the consolidated financial statements.

In December 2004, the FASB issued FSP 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004” (“FSP 109-2”). The American Jobs Creation Act of 2004 (“AJCA”) introduced a one-time dividend received deduction on the repatriation of certain earnings to a U.S. taxpayer. FSP 109-2 provides companies additional time beyond the financial reporting period of enactment to evaluate the effects of the AJCA on their plans to repatriate foreign earnings for purposes of applying SFAS No. 109, “Accounting for Income Taxes.” The Company does not have any foreign subsidiaries.

At the September 2004 meeting, the EITF reached a consensus with respect to Issue No. 04-8, “Accounting Issues Related to Certain Features of Contingently Convertible Debt and the Effect on Diluted Earnings per Share.” This Issue addresses when the dilutive effect of contingently convertible debt with a market price trigger should be included in diluted earnings per share (EPS). The adoption of Issue No. 04-8 did not have a material effect on our diluted EPS.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

General

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

Market Risk Related to Interest Rates

Our exposure to interest rate changes results from our significant holdings of fixed maturity investments, policy loans and mortgage loans on real estate, all of which comprised almost 99% of our investment portfolio as of December 31, 2005. These

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investments are mainly exposed to changes in treasury rates. Our fixed maturities investments include U.S. government bonds, securities issued by government agencies, and corporate bonds. Approximately 63.3% of the fixed maturities we owned at December 31, 2005 are instruments of U.S. government sponsored enterprises, or are backed by U.S. government agencies.

To manage interest rate risk, we perform periodic projections of asset and liability cash flows to evaluate the potential sensitivity of our investments and liabilities. We assess interest rate sensitivity with respect to our available-for-sale fixed maturities investments using hypothetical test scenarios that assume either upward or downward 100 basis point shifts in the prevailing interest rates. The following tables set forth the potential amount of unrealized gains (losses) that could be caused by 100 basis point upward and downward shifts on our available-for-sale fixed maturities investments as of the dates indicated:

	Decreases in Interest Rates
	100 Basis		200 Basis		300 Basis
	Points		Points		Points
December 31, 2005	$	23,279,000		42,730,000		65,930,000
December 31, 2004		28,368,000		47,412,000		69,321,000

	Increases in Interest Rates
	100 Basis			200 Basis			300 Basis
	Points			Points			Points
December 31, 2005	$	(42,198,000	)		(73,921,000	)		(102,269,000	)
December 31, 2004		(20,298,000	)		(48,702,000	)		( 74,613,000	)

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

There are no fixed maturities or other investments that we classify as trading instruments. At December 31, 2005 and 2004, we had no investments in derivative instruments.

Market Risk Related to Equity Prices

Changes in the level or volatility of equity prices affect the value of equity securities we hold as investments. However, our equity investments portfolio was less than 1% of our total investments at December 31, 2005. Thus, we believe that significant decreases in the equity markets would have an immaterial impact on our total investment portfolio. See also Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

73

Item 8. Financial Statements and Supplementary Data

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Index to Consolidated Financial Statements and
Financial Statement Schedules

	Page
	Reference
Report of independent registered public accounting firm		81
Consolidated statements of financial position at December 31, 2005 and 2004		82
Consolidated statements of operations
- years ended December 31, 2005, 2004 and 2003		84
Consolidated statements of stockholders’ equity and comprehensive
income – years ended December 31, 2005, 2004 and 2003		86
Consolidated statements of cash flows
- years ended December 31, 2005, 2004 and 2003		88
Notes to consolidated financial statements		91
Schedules at December 31, 2005 and 2004:
Schedule II – Condensed Financial
Information of Registrant		127
Schedules for each of the years in the three-year period ended December 31, 2005:
Schedule III – Supplementary Insurance Information		130
Schedule IV – Reinsurance		132

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.

74

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

During the 24 months preceding the date of the audited financial statements included herein, we have not changed accountants, nor have we reported on Form 8-K any disagreements between our independent accountants and us.

Item 9A. Controls and Procedures

(a) Disclosure Controls and Procedures

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

Our President and Chief Executive Officer (CEO) and our Chief Financial Officer (CFO) are responsible for establishing and maintaining disclosure controls and procedures for the Company (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”)). Based upon our evaluation at the end of the period, the President and Chief Executive Officer and Chief Financial Officer concluded that the Company’s 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 the Company is responsible for establishing and maintaining adequate internal control over financial reporting. Management assessed the Company’s internal control over financial reporting based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management has concluded the Company did maintain effective internal control over financial reporting as of December 31, 2005.

The Company’s independent registered public accounting firm, KPMG LLP, has issued an audit report on management’s assessment of the Company’s internal control over financial reporting. Their report is included in item 9A(d).

(c) Change in Internal Control over Financial Reporting

During the third and fourth quarter of 2005, we completed remediation efforts relating to a material weakness in financial reporting identified in 2004, which primarily included hiring additional personnel to address U.S. GAAP relating to our operations, additional training for our accounting staff, particularly relating to U.S. GAAP, and enhanced management review procedures.

In order to address the findings of our internal control assessment, we implemented the following improvements to our internal controls and procedures in the financial

75

accounting area which we believe has improved our internal control over financial reporting:

• Hired a new Chief Financial Officer with significant experience in U.S. GAAP and SEC reporting who is responsible for the preparation and supervision of the Company’s financial statements. This individual reports directly to the Chief Executive Officer.

• Hired new personnel to work with the Chief Financial Officer to develop additional expertise in U.S. GAAP and SEC reporting and to ensure that adequate depth is developed in the Company’s financial reporting area.

• Strengthened the process of workpaper review by senior members of management to ensure the completeness and accuracy of supporting workpapers and schedules, including formalized sign-off processes.

• Provided additional training of accounting department personnel in U.S. GAAP and SEC reporting.

• Adopted procedures to seek a more thorough and timely review process by senior management of the financial statement process.

These actions remediated the material weakness as of December 31, 2005.

76

(d) Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
Citizens, Inc.:

We have audited management’s assessment, included in the accompanying Management Report on Internal Control over Financial Reporting (Item 9A(b)), that Citizens, Inc. and subsidiaries (the Company) maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

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

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

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

77

In our opinion, management’s assessment that Citizens, Inc. and subsidiaries maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the accompanying consolidated statements of financial position of Citizens, Inc. and subsidiaries (the Company) as of December 31, 2005 and 2004, and the related consolidated statements of operations, stockholders’ equity and comprehensive income and cash flows for each of the years in the three-year period ended December 31, 2005, and the related financial statement schedules, and our report dated March 16, 2006 expressed an unqualified opinion on those consolidated financial statements and the financial statement schedules.

KPMG LLP

Dallas, Texas
March 16, 2006

78

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, 2005.

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

79

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Index to Consolidated Financial Statements and
Financial Statement Schedules

	Page
	Reference
Report of independent registered public accounting firm		81
Consolidated statements of financial position at December 31, 2005 and 2004		82
Consolidated statements of operations - - years ended December 31, 2005, 2004 and 2003		84
Consolidated statements of stockholders’ equity and comprehensive income – years ended December 31, 2005, 2004 and 2003		86
Consolidated statements of cash flows - - years ended December 31, 2005, 2004 and 2003		88
Notes to consolidated financial statements		91
Schedules at December 31, 2005 and 2004: Schedule II – Condensed Financial Information of Registrant		127
Schedules for each of the years in the three-year
period ended December 31, 2005:
Schedule III – Supplementary Insurance Information		130
Schedule IV – Reinsurance		132

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.

80

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders
Citizens, Inc.:

We have audited the accompanying consolidated statements of financial position of Citizens, Inc. and subsidiaries (the Company) as of December 31, 2005 and 2004, and the related consolidated statements of operations, stockholders’ equity and comprehensive income and cash flows for each of the years in the three-year period ended December 31, 2005. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedules II to IV. These consolidated financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Citizens, Inc. and subsidiaries as of December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects, the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Citizens, Inc.’s internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 16, 2006 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.

KPMG LLP

Dallas, Texas
March 16, 2006

81

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Consolidated Statements of Financial Position
December 31, 2005 and 2004

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

(Continued)

82

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Financial Position, Continued
December 31, 2005 and 2004

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

See accompanying notes to consolidated financial statements.

83

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Consolidated Statements of Operations
Years ended December 31, 2005, 2004 and 2003

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

(Continued)

84

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Operations, Continued
Years ended December 31, 2005, 2004 and 2003

	2005		2004		2003
Income before Federal income tax	$	11,795,921		8,087,760		3,288,322
Federal income tax expense		4,493,429		356,021		162,057
Net income	$	7,302,492		7,731,739		3,126,265
Net income applicable to common stock	$	5,325,807		6,803,226		3,126,265
Basic and diluted earnings per share of common stock	$	0.13		0.17		0.08

See accompanying notes to consolidated financial statements.

85

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity and Comprehensive Income

Years ended December 31, 2005, 2004 and 2003

								Accumulated
								other
	Common stock				Retained			comprehensive			Treasury			Stockholders’
	Class A		Class B		deficit			income (loss)			stock			equity
Balance at December 31, 2002	$	129,125,099		1,870,389		(25,887,787	)		3,582,025			(6,897,421	)		101,792,305
Comprehensive income:
Net income		—		—		3,126,265			—			—			3,126,265
Unrealized investment losses, net		—		—		—			(2,309,918	)		—			(2,309,918	)
Comprehensive income		—		—		3,126,265			(2,309,918	)		—			816,347
Acquisition of First Alliance		17,194,513		—		—			—			—			17,194,513
Acquisition of Mid-American		7,223,557		—		—			—			—			7,223,557
Stock dividend		24,522,796		566,663		(23,315,572	)		—			(1,773,887	)		—
Balance at December 31, 2003	$	178,065,965		2,437,052		(46,077,094	)		1,272,107			(8,671,308	)		127,026,722
Comprehensive income:
Net income		—		—		7,731,739			—			—			7,731,739
Unrealized investment losses, net		—		—		—			(2,021,306	)		—			(2,021,306	)
Comprehensive income		—		—		7,731,739			(2,021,306	)		—			5,710,433
Beneficial conversion feature on preferred stock		3,073,204		—		—			—			—			3,073,204
Accretion of deferred issuance costs and discounts on preferred stock		—		—		(679,280	)		—			—			(679,280	)
Common stock dividend on preferred stock		249,233		—		(249,233	)		—			—
Stock dividend		16,878,553		390,139		(16,047,419	)		—			(1,221,273	)		—
Balance at December 31, 2004	$	198,266,955		2,827,191		(55,321,287	)		(749,199	)		(9,892,581	)		135,131,079
Comprehensive income:
Net income		—		—		7,302,492			—			—			7,302,492
Unrealized investment losses, net		—		—		—			(4,052,032	)		—			(4,052,032	)
Comprehensive income		—		—		7,302,492			(4,052,032	)		—			3,250,460
Accretion of deferred issuance costs and discounts on preferred stock		—		—		(1,418,449	)		—			—			(1,418,449	)
Common stock dividend on preferred stock		558,236		—		(558,236	)		—			—
Stock dividend		15,482,474		357,159		(14,721,608	)		—			(1,118,025	)		—
Balance at December 31, 2005	$	214,307,665		3,184,350		(64,717,088	)		(4,801,231	)		(11,010,606	)		136,963,090

86

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity and Comprehensive Income
Continued
Years ended December 31, 2005, 2004 and 2003

A summary of the number of shares of common stock of Class A, Class B and treasury stock issued is as follows:

	Common stock				Treasury
	Class A		Class B		stock
Balance at December 31, 2002		31,862,650		817,696		(2,559,693	)
Acquisition of First Alliance		2,560,994		—		—
Acquisition of Mid-American		774,229		—		—
Stock dividend		2,476,420		57,239		(179,181	)
Balance at December 31, 2003		37,674,293		874,935		(2,738,874	)
Stock dividends		2,690,039		61,246		(191,722	)
Balance at December 31, 2004		40,364,332		936,181		(2,930,596	)
Stock dividends		2,936,602		65,533		(205,142	)
Balance at December 31, 2005		43,300,934		1,001,714		(3,135,738	)

See accompanying notes to consolidated financial statements.

87

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Consolidated Statements of Cash Flows
Years ended December 31, 2005, 2004 and 2003

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

(Continued)

88

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
Years ended December 31, 2005, 2004, and 2003

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

	2005		2004		2003
Cash paid (recovered) during the year for:
Interest	$	695,408		—		—
Income taxes	$	2,449,987		779,343		(51,370	)

Supplemental disclosures of non-cash investing and financing activities:

In 2005, the company sold real estate and made a mortgage loan for $185,000. Additionally, an airplane was sold and a note receivable for $875,000 was issued.

In the first quarter of 2003, the Company issued 2,560,994 Class A common shares in connection with the acquisition of FAIC. In the third quarter of 2003, the Company issued 774,229 Class A common shares in connection with the acquisition of Mid-American. On October 1, 2004, CICA acquired 100% of the outstanding stock of SPLIC and paid $85 million in cash plus acquisition costs of $1,012,790 of related expenses—see note 9. In conjunction with the acquisitions, cash and cash equivalents were provided by acquisitions as follows:

(Continued)

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
Years ended December 31, 2005, 2004, and 2003

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

On March 9, 2004, the Company entered into coinsurance agreements, effective January 1, 2004, ceding the majority of its accident and health premiums and corresponding benefits and claims. Due to this cession, the Company ceded its January 1, 2004, deferred policy acquisition costs and cost of customer relationships acquired and increased reinsurance recoverable and funds withheld under coinsurance agreements by $2,197,434, $2,886,060, $14,960,408 and $10,439,830, respectively, resulting in a loss of $634,461 and a deferred gain of $71,545. The deferred gain was fully amortized to earnings in 2004.

On July 12, 2004, the Company completed a private placement of $12.5 million of Series A-1 Senior Convertible Preferred Stock to four unaffiliated institutional investors. The Company initially recognized deferred issuance costs of $1,485,846 ($1,210,655 in cash and $275,191 in seven-year warrants), discounts on beneficial conversion features of $3,073,204 and discounts on fair value of options and warrants of $2,718,959. On July 7, 2005, September 30, 2005, and October 6, 2005, three of the four unaffiliated investors exercised their right to purchase the Series A-2 Convertible Preferred Stock. The Company recognized deferred issuance costs of $247,301 ($187,599 paid in cash and $59,702 in seven year warrants), and a premium of $720,630 related to the liability for the option recorded at the date of the respective exercises.

The Company recognized accretion of those deferrals and discounts amounting to $679,280 in 2004 and $1,418,449 in 2005. These net discounts, premiums and deferrals have decreased the carrying amount of the Convertible Preferred Stock in the statement of financial position. The 4% dividend to the Preferred Stock amounted to $558,236 in 2005 and $249,233 in 2004.

See accompanying notes to consolidated financial statements.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements
December 31, 2005, 2004 and 2003

(1) Summary of Significant Accounting Policies

(a)	Nature of Business
	The consolidated financial statements include the accounts and operations of Citizens, Inc. (Citizens), incorporated in the state of Colorado on November 8, 1977 and its wholly-owned subsidiaries, CICA Life Insurance Company of America (CICA), Computing Technology, Inc. (CTI), Funeral Homes of America, Inc. (FHA), Insurance Investors, Inc. (III), Citizens USA Life Insurance Company (CUSA), Citizens National Life Insurance Company (CNLIC), First Alliance Insurance Company(FAIC), KYWIDE Insurance Management, Inc. (KYWIDE), Mid-American Alliance Corporation (MAAC), Mid American Century Life Insurance Company (MACLIC), Security Alliance Insurance Company (SAIC), Security Plan Life Insurance Company (SPLIC), Security Plan Fire Insurance Company, (SPFIC), Mid-American Associates, Agency, Inc. (MAAAI), and Mid-American Alliance Insurance Agency, Inc. (MAAIA). Citizens and its consolidated subsidiaries are collectively referred to as “the Company.”
	During 2004, Citizens acquired SPLIC and its subsidiary, SPFIC. In addition, First Alliance Corporation and Alliance Insurance Management, a dormant subsidiary, were dissolved, and Combined Underwriters Life Insurance Company was renamed CNLIC. On March 1, 2005, FAIC was merged into CICA, and on April 1, 2005, MAAIA was sold to an unrelated party for an immaterial amount. On August 10, 2005, Citizens Insurance Company of America was renamed CICA LIFE Insurance Company of America. On December 8, 2005, MAAC was dissolved, and on December 31, 2005, MACLIC was merged into CICA.
	Citizens provides life and health insurance policies through six of its subsidiaries - CICA, CUSA, CNLIC, FAIC, SPLIC and SAIC. CICA issues ordinary whole-life policies international and domestically, and burial insurance, pre-need policies, accident and health specified disease, hospital indemnity and accidental death policies, throughout the midwestern and southern United States. CUSA sells life insurance business in four states and administers an in-force block of life insurance. CNLIC markets life and accident and health insurance business throughout the southern United States. Effective January 1, 2004, CNLIC and CICA entered into a coinsurance agreement with Texas International Life Insurance Company (TILIC), whereby CNLIC and CICA coinsured 100% of its accident and health insurance business with TILIC. Effective December 31, 2004, CNLIC and CICA entered into an administrative services agreement with TILIC whereby TILIC assumed all administration duties and responsibilities of and for the accident and health insurance business of CNLIC. FAIC offers life and annuity business primarily in Kentucky. FAIC was merged into CICA on March 1, 2005. MACLIC markets life and annuity business throughout Missouri and SAIC is a dormant life insurer. MACLIC was

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

merged into CICA on December 31, 2005. SPLIC offers home service life insurance in Louisiana and Mississippi, and SPFIC, a wholly owned subsidiary of SPLIC, writes a limited amount of casualty insurance in Louisiana.

III provides aviation transportation to the Company. CTI provides data processing systems and services as well as furniture and equipment to the Company. FHA is a funeral home operator. KYWIDE, MAAAI and MAAIA are insurance agencies. MAAIA was sold effective April 1, 2005.

(b)	Basis of Presentation
	The accompanying consolidated financial statements of the Company and its wholly owned subsidiaries have been prepared in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP). All significant inter-company accounts and transactions have been eliminated.
(c)	Investments
	Fixed maturities consist primarily of bonds. Fixed maturities, which the Company has the ability and intent to hold to maturity, are carried at amortized cost. Fixed maturities, which may be sold prior to maturity to support the Company’s investment strategies, are considered held as available-for-sale and carried at fair value as of the balance sheet date. Equity securities (including non-redeemable preferred stock) are considered available-for-sale and are reported at fair value.
	Unrealized appreciation (depreciation) of equity securities and fixed maturities held as available-for-sale is shown as a separate component of stockholders’ equity, net of tax, and is a separate component of comprehensive income.
	Mortgage loans on real estate and policy loans are reported at unpaid principal balances less an allowance for uncollectable amounts. Mortgage loans have an allowance for uncollectable amounts of $50,000 at December 31, 2005 and 2004 which was estimated by the Company based upon historical amounts that proved uncollectable.
	Other long-term investments consist primarily of real estate that is recorded at the lower of fair value, minus estimated costs to sell, or cost. If the fair value of the real estate is less than the carrying value, an impairment loss is recognized and charged to earnings.
	A decline in the fair value of any available-for-sale or held-to-maturity security below cost that is deemed other than temporary is charged to earnings resulting in the establishment of a new cost basis for the security.

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

Premiums and discounts are amortized or accreted over the life of the related security as an adjustment to yield using the effective interest method. Dividend and interest income is recognized when earned. Realized gains and losses for securities classified as available-for-sale and held-to-maturity are included in earnings and are derived using the specific identification method for determining the cost of securities sold.

Policy loans and other investments are primarily reported at cost.

The Company had assets with a fair value of $11,557,941 and $30,564,326 at December 31, 2005 and 2004, respectively, on deposit with various state regulatory authorities to fulfill statutory requirements.

(d)	Premium Revenue and Related Expenses
	Premiums on life and accident and health policies are reported as earned when received or, for short duration contracts, over the contract period on a pro rata basis. Benefits and expenses are associated with earned premiums so as to result in recognition of profits over the estimated life of the contracts. This matching is accomplished by means of provisions for future benefits and the capitalization and amortization of deferred policy acquisition costs.
	Annuities are accounted for in a manner consistent with accounting for interest bearing financial instruments. The annuity products issued do not include fees or other such charges.
(e)	Deferred Policy Acquisition Costs and Cost of Customer Relationships Acquired
	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.
	The Company utilizes the factor method to determine the amount of costs to be capitalized and the ending asset balance. The factor method ensures that policies that lapsed or surrendered during the reporting period are no longer included in the deferred policy acquisition costs or the cost of customer relationships acquired calculation. The factor method limits the amount of deferred costs to its estimated realizable value, provided actual experience is comparable to that contemplated in the factors. A recoverability test that considers among other things, actual experience and projected future experience, is performed at least annually.

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

The value of customer relationships acquired in the Company’s various acquisitions, which is included in cost of customer relationships acquired in the accompanying consolidated financial statements, was determined based on the present value of future profits discounted at a risk rate of return. The cost of customer relationships acquired is being amortized over the anticipated premium paying period of the related policies.

Deferred policy acquisition costs on universal life contracts are capitalized and amortized over the life of the contract at a constant rate based on the present value of the estimated gross profit amounts expected to be earned over the life of the universal life contracts.

(f)	Policy Liabilities and Accruals
	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 the Company’s and industry experience, which provide for possible unfavorable deviation.
	Annuity benefits are carried at accumulated contract values based on consideration paid by participants, annuity rates of return ranging from 3.0% to 7.0% (primarily at 4.0% to 5.5%) and annuity withdrawals.
	Premium deposits accrue interest at rates ranging from 3.5% to 8.25% per annum. Cost of insurance is included in premium when collected and interest is credited annually to the deposit account.
	Policy and contract claims are based on case-basis estimates for reported claims, and on estimates, based on experience, for incurred but unreported claims and loss expenses.
	Premiums collected on universal life contracts are not reported as revenues in the statement of operations but are included in the liability for policy benefits for universal life contracts based on policyholders’ account balances. Revenues from universal life contracts are amounts assessed the policyholder for mortality and expenses and are reported when assessed based upon one-year service periods. Amounts assessed for services to be provided in future periods are reported as unearned revenue and are recognized in income over the benefit period.
	The liability for policy benefits for universal life contracts is based on the balance that accrues to the benefit of policyholders. It includes any amounts assessed to compensate the Company for services to be performed over future periods, any amounts previously assessed by the Company against the policyholders that are refundable at termination of the contract and any premium deficiency.

94

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

(g)	Excess of Cost Over Net Assets Acquired and Other Intangible Assets
	Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets.” Under the guidelines of SFAS No. 142, excess of cost over net assets acquired (goodwill) and other intangible assets determined to have an indefinite useful life will no longer be amortized. Instead goodwill and other intangible assets with indefinite lives are subjected to annual impairment analyses under SFAS No. 142, while intangibles with definitive lives are amortized over the life of the asset. The Company performed assessments of whether there was an indication that goodwill and intangible assets were impaired on December 31, 2005 and concluded there was no goodwill or intangible impairment as of that date. The Company’s 2004 assessment determined that intangible assets totaling $668,000 were impaired, and amortized the entire amount in 2004. In 2004 and 2005, $432,096 and $235,944, respectively, of intangible assets with definitive lives were amortized.
	The Company continually monitors long-lived assets and certain intangible assets, such as excess of cost over net assets acquired, cost of customer relationships acquired and other intangible assets, for impairment. An impairment loss is recorded in the period in which the carrying value of the assets exceeds the fair value of expected future cash flows. Any amounts deemed to be impaired are charged, in the period in which such impairment was determined, as an expense against earnings. No such loss was recorded in 2005 or 2003.
(h)	Participating Policies
	At December 31, 2005 and 2004, participating business approximated 47.2% and 45.3%, respectively, of life insurance in force.
	Policyholder dividends are determined based on the discretion of the Company’s Board of Directors. The Company utilizes contractual life insurance dividend scales as shown in published dividend illustrations at the date the insurance contracts are issued (unrelated to the Company’s net income) in determining policyholder dividends. Policyholder dividends are accrued over the premium paying periods of the insurance contracts.
(i)	Earnings Per Share
	Basic and diluted earnings per share have been computed using the weighted average number of shares of common stock outstanding during each period. The weighted average shares outstanding for the year ended December 31, 2005, were 41,104,737, compared to 41,016,742 for 2004 and 39,720,456 for 2003. The per share amounts have been adjusted retroactively for all periods presented to reflect the change in capital structure resulting from 7% stock dividends paid in 2005, 2004 and 2003.

95

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

The 2005 stock dividend resulted in the issuance of 2,840,821 Class A shares (including 205,142 treasury shares) and 65,533 Class B shares. The 2004 stock dividend resulted in the issuance of 2,649,695 Class A shares (including 191,722 treasury shares) and 61,246 Class B shares. The 2003 stock dividend resulted in the issuance of 2,476,420 Class A shares (including 179,181 shares in treasury) and 57,239 Class B shares. In addition, 2,560,994 Class A shares were issued in February 2003 in conjunction with the acquisition of First Alliance and 774,229 Class A shares were issued in November 2003 for the acquisition of Mid-American.

On March 4, 2004, at a special meeting of the Company’s shareholders, the Company’s Articles of Incorporation were amended to increase the number of authorized shares of its Class A and Class B common stock from 50,000,000 to 100,000,000 and from 1,000,000 to 2,000,000, respectively. In addition, a class of 25,000,000 shares of preferred stock was authorized to be available for future issuance in series with terms and preferences designated by the Company’s Board of Directors.

In July 2004, the Company completed a private placement of $12.5 million of Series A-1 Convertible Preferred Stock to four unaffiliated institutional investors. In addition to the preferred stock, the Company issued warrants to purchase Series A common stock and unit warrants to the investors. The Company also issued warrants to the finders as a portion of finders’ compensation. Three of the four investors exercised the unit warrants in 2005, receiving Series A-2 Convertible Preferred Stock and additional warrants. Additional warrants were also issued to the finders as a portion of their compensation. This private placement, including the respective payments of the 4% dividends, exercise of the unit warrants by three of the investors, the respective conversion, exercise and redemption prices, and other pertinent facts concerning the preferred stock, are discussed below in Note 8.

The following table sets forth the computation of basic and diluted earnings per share:

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

	Year ended
	December 31
	2005			2004			2003
Basic and diluted income per share:
Numerator:
Net income	$	7,302,492			7,731,739			3,126,265
Less: Preferred stock dividend		(558,236	)		(249,233	)		—
Accretion of deferred issuance costs and discounts on preferred stock		(1,418,449	)		(679,280	)		—
Net income to common stockholders	$	5,325,807			6,803,226			3,126,265
Denominator:
Weighted average shares outstanding		41,104,737			41,016,742			39,720,456
Basic and diluted income per share	$	0.13			0.17			0.08

The effects of Series A-1 Convertible Preferred Stock and warrants, along with the Series A-2 Convertible Preferred Stock and warrants, are antidilutive for all periods. The preferred stock is antidilutive because the amount of the dividend and accretion of deferred issuance costs and discounts for the year ended December 31, 2005 in relation to the Class A common stock obtainable on conversion exceeds basic income per share. The warrants issued with the preferred stock are also antidilutive because the exercise price is in excess of the average Class A common stock market price for the year ended December 31, 2005.

(j) Income Taxes

For the year ended December 31, 2005, the Company will file seven separate tax returns as follows: 1) Citizens, Inc., CICA, CUSA and all its direct non-life subsidiaries, 2) KYWIDE, 3) CNLIC, 4) MACLIC, 5) SAIC, 6) MAAAI, and 7) SPLIC and SPFIC consolidated return.

For the year ended December 31, 2004, the Company filed ten separate tax returns as follows: 1) Citizens, Inc., CICA, CUSA and all its direct non-life subsidiaries, 2) KYWIDE, 3) CNLIC, 4) FAIC, 5) MACLIC, 6) SAIC, 7) MAAIA, 8) MAAAI, 9) SPLIC and 10) SPFIC.

Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

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

(k) Accounting Pronouncements

In September 2005, the American Institute of Certified Public Accountants (“AICPA”) issued Statement of Position (“SOP”) 05-1, “Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts” (“SOP 05-1”). SOP 05-1 provides guidance on accounting by insurance enterprises for deferred acquisition costs on internal replacements of insurance and investment contracts other than those specifically described in Statement of Financial Accounting Standards (“SFAS”) No. 97, “Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and For Realized Gains and Losses from the Sale of Investments.” SOP 05-1 defines an internal replacement as a modification in product benefits, features, rights, or coverages that occurs by the exchange of a contract for a new contract, or by amendment, endorsement, or rider to a contract, or by the election of a feature or coverage within a contract. Under SOP 05-1, modifications that result in a substantially unchanged contract will be accounted for as a continuation of the replaced contract. A replacement contract that is substantially changed will be accounted for as an extinguishment of the replaced contract resulting in a release of unamortized deferred acquisition costs and unearned inducements associated with the replaced contract. The guidance in SOP 05-1 will be applied prospectively and is effective for internal replacements occurring in fiscal years beginning after December 15, 2006. The Company is currently evaluating the impact of SOP 05-1 and does not expect that the pronouncement will have a material impact on the Company’s consolidated financial statements.

In September 2005, the Emerging Issues Task Force (“EITF”) reached consensus on Issue No. 05-7, “Accounting for Modifications to Conversion Options Embedded in Debt Instruments and Related Issues” (“EITF 05-7”). EITF 05-7 provides guidance on whether a modification of conversion options embedded in debt results in an extinguishment of that debt. In certain situations, companies may change the terms of an embedded conversion option as part of a debt modification. The EITF concluded that the change in the fair value of an embedded conversion option upon modification should be included in the analysis of EITF Issue No. 96-19, “Debtor’s Accounting for a Modification or Exchange of Debt Instrument,” to determine whether a modification or extinguishment has occurred and that a change in the fair value of a conversion option should be recognized upon the modification as a discount (or premium) associated with the debt, and an increase (or decrease) in additional paid-in capital. EITF 05-7 will be applied prospectively and is effective for all debt modifications occurring in periods beginning after December 15, 2005. EITF 05-7 is not expected to have a material impact on the Company’s consolidated financial statements.

In September 2005, the EITF reached consensus on Issue No. 05-8, “Income Tax Consequences of Issuing Convertible Debt with a Beneficial Conversion

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

Feature” (“EITF 05-8”). EITF 05-8 concludes that (i)the issuance of convertible debt with a beneficial conversion feature results in a basis difference that should be accounted for as a temporary difference and (ii) the establishment of the deferred tax liability for the basis difference should result in an adjustment to additional paid in capital. EITF 05-8 will be applied retrospectively for all instruments with a beneficial conversion feature accounted for in accordance with EITF Issue No. 98-5, “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios,” and EITF Issue No. 00-27, “Application of Issue No. 98-5 to Certain Convertible Instruments,” and is effective for periods beginning after December 15, 2005. The Company’s Series A-1 Convertible Preferred Stock has a beneficial conversion feature, and we will implement EITF 05-8 in the first quarter of 2006. The implementation is not expected to have a material impact on the financial position, results of operations or liquidity of the Company.

In December 2004, SFAS No. 153, “Exchanges of Nonmonetary Assets, an amendment of Accounting Principles Board” (“APB”) Opinion No. 29 (“SFAS 153”) was issued. SFAS 153 amended prior guidance to eliminate the exception for nonmonetary exchanges of similar productive assets and replaced it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The provisions of SFAS 153 are required to be applied prospectively for fiscal years beginning after June 30, 2005. SFAS 153 is not expected to have a material impact on the Company’s consolidated financial statements.

Effective July 1, 2005, the Company adopted EITF Issue No. 05-6, “Determining the Amortization Period for Leasehold Improvements” (“EITF 05-6”). EITF 05-6 provides guidance on determining the amortization period for leasehold improvements acquired in a business combination or acquired subsequent to lease inception. As required by EITF 05-6, the Company adopted this guidance on a prospective basis which had no material impact on the Company’s consolidated financial statements.

In June 2005, the Financial Accounting Standards Board (“FASB”) completed its review of EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (“EITF 03-1”). EITF 03-1 provides accounting guidance regarding the determination of when an impairment of debt and marketable equity securities and investments accounted for under the cost method should be considered other-than-temporary and recognized in income. EITF 03-1 also requires certain quantitative and qualitative disclosures for debt and marketable equity securities classified as available-for-sale or held-to-maturity under SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities” (“SFAS 115”), that are impaired at the balance sheet date but for which an other-than-temporary impairment has not been recognized. The FASB decided not to provide

99

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

additional guidance on the meaning of other-than-temporary impairment but has issued FASB Staff Position (“FSP”) 115-1, “The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments” (“FSP 115-1”), which nullifies the accounting guidance on the determination of whether an investment is other-than-temporarily impaired as set forth in EITF 03-1. FSP 115-1 is effective on a prospective basis for other-than-temporary impairments on certain investments in periods beginning after December 15, 2005. The Company does not anticipate that the adoption of FSP 115-1 will have a material impact on its consolidated financial statements.

In June 2005, the EITF reached consensus on Issue No. 04-5, “Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights” (“EITF 04-5”). EITF 04-5 provides a framework for determining whether a general partner controls and should consolidate a limited partnership or a similar entity in light of certain rights held by the limited partners. The consensus also provides additional guidance on substantive rights. EITF 04-5 was effective after June 29, 2005 for all newly formed partnerships and for any pre-existing limited partnerships that modified their partnership agreements after that date. The adoption of this provision of EITF 04-5 did not have a material impact on the Company’s consolidated financial statements. EITF 04-5 must be adopted by January 1, 2006 for all other limited partnerships through a cumulative effect of a change in accounting principle recorded in opening equity or it may be applied retrospectively by adjusting prior period financial statements. The adoption of this provision of EITF 04-5 is not expected to have a material impact on the Company’s consolidated financial statements.

In June 2005, the FASB cleared SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”), Implementation Issue No. B38, “Embedded Derivatives: Evaluation of Net Settlement with Respect to the Settlement of a Debt Instrument through Exercise of an Embedded Put Option or Call Option” (“Issue B38”) and Implementation Issue No. B39, “Embedded Derivatives: Application of Paragraph 13(b) to Call Options That Are Exercisable Only by the Debtor” (“Issue B39”). Issue B38 clarifies that the potential settlement of a debtor’s obligation to a creditor that would occur upon exercise of a put or call option meets the net settlement criteria of SFAS No. 133. Issue B39 clarifies that an embedded call option, in which the underlying is an interest rate or interest rate index, that can accelerate the settlement of a debt host financial instrument should not be bifurcated and fair valued if the right to accelerate the settlement can be exercised only by the debtor (issuer/borrower) and the investor will recover substantially all of its initial net investment. Issue Nos. B38 and B39, which must be adopted as of the first day of the first fiscal quarter beginning after December 15, 2005, are not expected to have a material impact on the Company’s consolidated financial statements.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections,” a replacement of APB Opinion No. 20 and FASB Statement No. 3

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

(“SFAS 154”). The statement requires retrospective application to prior periods’ financial statements for a voluntary change in accounting principle unless it is deemed impracticable. It also requires that a change in the method of depreciation, amortization, or depletion for long-lived, non-financial assets be accounted for as a change in accounting estimate rather than a change in accounting principle. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. SFAS 154 is not expected to have any impact on the Company’s consolidated financial statements.

In December 2004, the FASB issued SFAS 123 (revised 2004) “Share-Based Payments” (“SFAS 123(R)”), which revised SFAS No. 123, “Accounting for Stock-Based Compensation and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees.” SFAS 123(R) provides additional guidance on determining whether certain financial instruments awarded in share-based payment transactions are liabilities. SFAS 123(R) also requires that the cost of all share-based transactions be measured at fair value and recognized over the period during which an employee is required to provide service in exchange for an award. The SEC issued a final ruling in April 2005 allowing a public company that is not a small business issuer to implement SFAS 123(R) at the beginning of the next fiscal year after June 15, 2005. The Company does not expect the adoption of the revision of SFAS No. 123 to have a material impact on the consolidated financial statements.

In December 2004, the FASB issued FSP 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004” (“FSP 109-2”). The American Jobs Creation Act of 2004 (“AJCA”) introduced a one-time dividend received deduction on the repatriation of certain earnings to a U.S. taxpayer. FSP 109-2 provides companies additional time beyond the financial reporting period of enactment to evaluate the effects of the AJCA on their plans to repatriate foreign earnings for purposes of applying SFAS No. 109, “Accounting for Income Taxes.” The Company does not have any foreign subsidiaries.

At the September 2004 meeting, the EITF reached a consensus with respect to Issue No. 04-8, “Accounting Issues Related to Certain Features of Contingently Convertible Debt and the Effect on Diluted Earnings per Share.” This Issue addresses when the dilutive effect of contingently convertible debt with a market price trigger should be included in diluted earnings per share (EPS). The adoption of Issue No. 04-8 did not have a material effect on our diluted EPS.

(l) Cash Equivalents

The Company considers as cash equivalents all securities whose duration does not exceed 90 days at the date of acquisition.

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

(m) Depreciation

Depreciation is calculated on a straight-line basis using estimated useful lives ranging from 3 to 10 years. Building improvements are depreciated over the estimated life of 30 years.

(n) Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

(o) Reclassifications

Certain reclassifications have been made to the 2003 and 2004 amounts to conform to the 2005 presentation.

(2) Investments

The cost, gross unrealized gains and losses and fair value of investments of fixed maturities and equity securities available-for-sale, as of December 31, 2005 and 2004, are as follows:

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

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

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

	December 31, 2004
			Gross		Gross
			unrealized		unrealized			Fair
	Cost		gains		(losses)			value
Fixed maturities held-to-maturity:
U.S. treasury securities	$	5,526,171		853,829		—			6,380,000
U.S. government-sponsored enterprises		1,988,053		458,897		—			2,446,950
Total fixed maturities held-to-maturity	$	7,514,224		1,312,726		—			8,826,950
Fixed maturities available-for-sale:
US treasury securities and obligations of U.S. government corporations and agencies	$	16,693,290		300,262		(54,666	)		16,938,886
U.S. government-sponsored enterprises		205,962,439		489,462		(2,322,955	)		204,128,946
Public utilities		3,265,725		45,440		(10,283	)		3,300,882
Debt securities issued by States of the United States and political subdivisions of the States		31,921,003		287,562		(62,684	)		32,145,881
Corporate debt securities		124,753,714		903,773		(400,670	)		125,256,817
Securities not due at a single maturity date		58,932,166		354,423		(1,005,303	)		58,281,286
Total fixed maturities available-for-sale	$	441,528,337		2,380,922		(3,856,561	)		440,052,698
Total equity securities available-for-sale	$	723,428		343,579		(3,090	)		1,063,917

For investments of fixed maturities and equity securities available-for-sale that have unrealized losses as of December 31, 2005, the cost, gross unrealized losses that have been in a continuous unrealized loss position for less than 12 months, gross unrealized losses that have been in a continuous unrealized loss position for 12 months or longer and fair value are as follows:

104

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

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

The fixed maturities available-for-sale in a gross unrealized loss situation for more than 12 months are primarily investments in callable instruments issued by U.S. government agencies and current loss position primarily relates to the interest rate environment. It is remote that unrealized losses on these instruments will result in realized losses, because the Company has the intent and believes it has the ability to hold these securities to the call date or maturity date. These securities are being

105

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

monitored by the Company to determine if the unrealized loss as of December 31, 2005 indicates that there is a loss which is other-than-temporary. As of December 31, 2005, the Company has determined that there is no need to establish a new cost basis for these securities for the reasons stated above.

The majority of the fixed maturities available-for-sale that have been in a continuous loss situation for less than 12 months are from investments owned by SPLIC. The losses are due to the coupon interest rate being less than the prevailing market interest rates at December 31, 2005. The Company has determined that there is no need to establish a new cost basis for these securities for the reasons stated above.

Gross unrealized losses on equity securities available-for-sale were $21,468 as of December 31, 2005. Of this amount, $3,098 at December 31, 2005 have been in a continuous loss situation for more than 12 months. As of December 31, 2005, the Company has determined that there is no need to establish a new cost basis.

The amortized cost and fair value of fixed maturities at December 31, 2005 by contractual maturity are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

Fixed maturities held-to-maturity

	Amortized
	cost		Fair value
Due after ten years	$	7,639,505		9,143,212

Fixed maturities available-for-sale

	Amortized
	cost		Fair value
Due in one year or less	$	15,130,057		14,944,322
Due after one year through five years		39,676,838		38,641,376
Due after five years through ten years		31,692,412		30,939,025
Due after ten years		316,534,810		313,828,531
		403,034,117		398,353,254
Securities not due at a single maturity date		54,352,226		51,577,913
Totals	$	457,386,343		449,931,167

The securities not due at a single maturity date are obligations of the U.S. government corporations and agencies.

106

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

The Company had no investments in any one entity that exceeded 10% of stockholders’ equity at December 31, 2005 other than investments guaranteed by the U.S. government.

The Company’s investment in mortgage loans is concentrated 63% in Texas, 8% in Colorado and 29% in Louisiana as of December 31, 2005.

Major categories of net investment income are summarized as follows:

	Year ended December 31,
	2005			2004			2003
Investment income on:
Fixed maturities	$	21,571,720			15,442,537			12,713,559
Equity securities		15,586			35,770			34,582
Mortgage loans on real estate		330,156			36,510			50,215
Policy loans		1,494,196			1,392,498			1,541,237
Long-term investments		1,325,513			1,303,747			916,346
Other		578,766			292,680			122,365
		25,315,937			18,503,742			15,378,304
Investment expenses		(1,747,753	)		(1,499,070	)		(1,056,029	)
Net investment income	$	23,568,184			17,004,672			14,322,275

Proceeds and gross realized gains (losses) from sales and maturities of fixed maturities available-for-sale, and fixed maturities held to maturity for 2005, 2004 and 2003 are summarized as follows:

	Year ended December 31,
	2005			2004			2003
Proceeds	$	108,314,217			132,438,693			162,273,703
Gross realized gains	$	324,257			1,714,888			1,543,954
Gross realized (losses)	$	(121,377	)		(1,350,862	)		(311,801	)

Proceeds and gross realized gains (losses) from sales of equity securities available-for-sale for 2005, 2004 and 2003 are summarized as follows:

	Year ended December 31,
	2005			2004			2003
Proceeds	$	615,945			62,500			838,416
Gross realized gains	$	321,693			—			18,344
Gross realized (losses)	$	(3	)		(98	)		(676	)

107

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

Realized gains (losses) are as follows:

	Year ended December 31,
	2005			2004			2003
Realized gains (losses):
Fixed maturities & held to maturity	$	202,880			364,026			1,232,153
Equity securities		321,690			(98	)		17,668
Loss from early extinguishment of a liability		—			—			563,055
Gain from the sale of property, plant and equipment		505,329			45,064			70,229
Loss on other invested assets		(610,626	)		(19,964	)		—
Net realized gains	$	419,273			389,028			1,883,105

As a result of the coinsurance agreement discussed in note 5, a subsidiary sold held to maturity securities in 2004 to enable the subsidiary to settle its obligations under the coinsurance agreement.

(3)	Cost of Customer Relationships Acquired and Excess of Cost Over Net Assets Acquired
	Cost of customer relationships acquired is summarized as follows:

	Year ended December 31,
	2005			2004			2003
Balance at beginning of period	$	44,904,581			16,884,456			14,191,172
Increase (decrease) related to:
Acquisitions		—			33,942,464			8,835,099
Amortization (1)		(5,645,305	)		(5,922,339	)		(6,141,815	)
Balance at end of period	$	39,259,276			44,904,581			16,884,456

(1) See note 5 below regarding the coinsurance agreements entered into effective January 1, 2004.

Estimated amortization of cost of customer relationships acquired in each of the next five years is as follows. Actual future amortization will differ from these estimates due to variances from estimated future withdrawal assumptions.

Year	Amount
2006	$	5,007,670
2007		4,756,330
2008		4,504,990
2009		4,253,651
2010		4,148,654
Thereafter		16,587,981

108

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

Excess of cost over net assets acquired is summarized as follows:

	Year ended December 31,
				Accumulated
	Gross			amortization			Net
Balance at December 31, 2002	$	12,851,704			(5,068,299	)		7,783,405
Acquisition		5,155,457			—			5,155,457
Balance at December 31, 2003	$	18,007,161			(5,068,299	)		12,938,862
Adjustment of purchase accounting on acquisition		(536,872	)		—			(536,872	)
Balance at December 31, 2004 and 2005	$	17,470,289			(5,068,299	)		12,401,990

(4)	Policy Liabilities
	Various assumptions used to determine the future policy benefit reserves include the following: a) valuation interest rates from 4 to 9%, b) mortality assumptions are from the 1955 to 1960, 1965 to 1970, and 1975 to 1980 Select and Ultimate mortality tables and c) withdrawals are based primarily on actual historical termination rates.
	The following table presents information on changes in the liability for life and accident and health policy and contract claims for the years ended December 31, 2005, 2004 and 2003.

109

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

	2005			2004			2003
Policies and contract claims payable at January 1	$	8,282,508			5,648,288			4,794,096
Less: reinsurance recoverable		2,713,719			1,143,562			266,841
Net balance at January 1		5,568,789			4,504,726			4,527,255
Acquisitions of First Alliance, Mid-American and Security Plan					3,714,520			21,339
Less: reinsurance recoverable		—			—			—
Net acquired balance		—			3,714,520			21,339
Add: claims incurred, related to:
Current year		27,927,866			12,744,274			16,305,954
Prior years		(1,212,110	)		(1,832,821	)		(489,130	)
		26,715,756			10,911,453			15,816,824
Deduct: claims paid, related to:
Current year		21,037,205			11,513,517			12,599,343
Prior years		4,356,679			2,048,393			3,261,349
		25,393,884			13,561,910			15,860,692
Net balance December 31		6,890,661			5,568,789			4,504,726
Plus: reinsurance recoverable		4,336,246			2,713,719			1,143,562
Policy and contracts payable, December 31	$	11,226,907			8,282,508			5,648,288

The development of prior year claim reserves reflects claims settling at amounts less than actuarial estimates. These settlements, predominantly on accident and health policies, can vary significantly from the actuarially computed expected experience, particularly on a “closed block” of business, where policies may lapse resulting in a lower incurred claim amount than would otherwise be expected.

(5)

Reinsurance

In the normal course of business, the Company reinsures portions of certain policies that it underwrites to limit disproportionate risks. During 2005 and 2004, the Company retained varying amounts of individual insurance up to a maximum retention of $100,000 on any life. Our health insurance policies are substantially all reinsured on a 100% coinsurance basis. The Company remains contingently liable to the extent that the reinsuring companies cannot meet their obligations under these reinsurance treaties.

110

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

Assumed and ceded reinsurance activity as of December 31, 2005 and 2004 is summarized as follows:

	2005			2004
Aggregate assumed life insurance in force	$	592,636,000			488,312,000
Aggregate ceded life insurance in force	$	(221,793,000	)		(265,001,000	)
Net life insurance in force	$	4,058,072,000			3,736,355,000

Premiums and claims and surrenders assumed and ceded for the years ended December 31, 2005, 2004 and 2003 are summarized as follows:

	2005			2004			2003
Premiums assumed	$	571,007			636,361			463,629
Premiums ceded	$	(13,867,350	)		(15,388,824	)		(1,793,912	)
Claims and surrenders assumed	$	561,177			626,592			457,899
Claims and surrenders ceded	$	(20,432,902	)		(12,217,456	)		(1,809,188	)

Amounts paid or deemed to have been paid for reinsurance contracts are recorded as reinsurance receivables. The cost of reinsurance related to long duration contracts is accounted for over the life of the underlying reinsured policies using assumptions consistent with those used to account for the underlying policies.

On March 9, 2004, the Company entered into coinsurance agreements, effective January 1, 2004, and ceded approximately $15 million of its annual accident and health premium and corresponding benefits and claims. In consideration for these cessions, the Company made a closing settlement payment of $10,439,830 to the reinsurer in June 2004. Due to this cession, the Company reduced its January 1, 2004 deferred policy acquisition costs, cost of customer relationships acquired and policy benefit reserve of $2,197,434, $2,886,060 and $14,960,408, respectively, and recorded an amount payable to the reinsurer of $10,439,830, resulting in a loss of $562,916. The coinsurance agreement provides that this ceded business will revert to the reinsurer when a parallel assumption reinsurance agreement is approved by the various state insurance departments holding jurisdiction. The Company also participates in future profits on the accident and health business subject to the coinsurance agreements over a 10-year period. During 2004, the Company recognized approximately $809,000 as profit under the agreements. No amounts were recognized in 2005. Negotiations were underway as of December 31, 2005, with the assuming party to sell CNLIC, which represents approximately 70% of the ceded business. A formal contract was signed in the first quarter of 2006, and is expected to close by mid-year. The remaining 30% of the business will continue to be ceded under the existing coinsurance agreements.

111

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

SPFIC had reinsurance agreements in place to protect it from catastrophic events such as Hurricanes Katrina and Rita that struck Louisiana in 2005. The agreements in place during 2005 provided that SPFIC bore responsibility for the first $250,000 of incurred claims. Reinsurers indemnified SPFIC for losses in excess of $250,000 up to $7.1 million per event. Any amount over that was SPFIC’s responsibility. The Company incurred claims of approximately $750,000 in excess of $7.1 million on Hurricane Katrina. Once the cap was met, SPFIC had an opportunity to pay for “2^nd event” coverage, upon payment of approximately $400,000 in premium. SPFIC elected to do so and the claims for Hurricane Rita were covered under this second event reinsurance. Through December 31, 2005, claims related to Hurricane Rita were approximately $3.7 million and were 100% reinsured. For calendar year 2006, SPFIC elected to increase the amount of 1^st event catastrophe reinsurance to $10 million and raise the deductible to $500,000 by paying an annual premium of $798,750.

(6)	Stockholders’ Equity and Restrictions
	The two classes of common stock of the Company are equal in all respects, except (a) each Class A share receives twice the cash dividends paid on a per share basis to the Class B common stock; and (b) the Class B common stock elects a simple majority of the Board of Directors of Citizens and the Class A common stock elects the remaining directors.
	Generally, the net assets of the insurance subsidiaries available for transfer to the Company are limited to the greater of the subsidiary net gain from operations during the preceding year or 10% of the subsidiary net statutory surplus as of the end of the preceding year as determined in accordance with accounting practices prescribed or permitted by insurance regulatory authorities. Total insurance surplus at December 31, 2005 was $100,737,573. Payments of dividends in excess of such amounts would generally require approval by the regulatory authorities. Based upon statutory net gain from operations and surplus of the individual insurance companies as of and for the year ended December 31, 2005 approximately $12,614,934 of dividends could be paid to the Company without prior regulatory approval in 2006.
	CICA, CUSA, CNLIC, SAIC and SPLIC have calculated their risk based capital (RBC) in accordance with the National Association of Insurance Commissioners’ Model Rule and the RBC rules as adopted by their respective state of domicile. The RBC as calculated for CICA, CUSA, CNLIC, SAIC and SPLIC as of December 31, 2005 exceeded levels requiring company or regulatory action.

(7)	Revolving Line of Credit and Term Loan
	On March 22, 2004, the Company entered into a revolving loan agreement with Regions Bank establishing a commitment for a line of credit of $30,000,000 that matured on March 22, 2005. It was extended at maturity until September 21, 2005.

112

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

	On October 1, 2004, the Company entered into a Second Amendment to the Loan Agreement that converted into a term loan a $30 million advance against the line of credit made for the purpose of acquiring Security Plan. Under the term loan, the Company was required to repay the principal portion of the loan in ten semi-annual installments of $3,000,000 beginning on May 1, 2005. In April 2005, the term loan was paid off.
	Documents to renew the line of credit through October 2006, and to increase the borrowing capacity to $75 million were executed in November 2005. The line of credit provides for a maximum of $5,000,000 for general corporate purposes not related to acquisition of insurance companies. Although the line of credit was increased, additional borrowing above the $30 million amount will require the prior written approval of the holders of the Company’s preferred stock. No amount was outstanding on this line at December 31, 2005.
(8) Convertible Preferred Stock
	On July 12, 2004, the Company completed a private placement of $12.5 million of Series A-1 Convertible Preferred Stock (“Series A-1 Preferred”) to four unaffiliated institutional investors. The Company used the net proceeds from the sale of the Series A-1 Preferred as part of the purchase price for the acquisition of SPLIC discussed above. Along with the Series A-1 Preferred, the Company also issued warrants to purchase 543,790 shares of Class A common stock, at an exercise price of $6.95 per share, and unit warrants to purchase Series A-2 Convertible Preferred Stock (“Series A-2 Preferred”).
	The conversion, exercise and redemption prices set forth in this Note 8, along with the numbers of shares and warrants (except for the 25,000 Series A-1 Preferred shares referenced above), have been adjusted for the respective stock dividends paid December 31, 2004 and December 30, 2005.
	The Company may, at its option, subject to certain conditions, increase the issue by $12.5 million to $25 million by requiring the investors to make additional payments for their shares of Series A-1 Preferred. To the extent the Company increases the issue from $12.5 million, the number of Class A common shares that may be purchased pursuant to the seven-year warrants would increase proportionately.
	The 25,000 shares of Series A-1 Preferred carry a 4% per annum dividend, payable in cash or, if certain conditions are met, shares of the Company’s Class A common stock.
	The Series A-1 Preferred is convertible at the option of the investors at any time into shares of Class A common stock at a conversion price of $6.33 per share and are mandatorily redeemable five years after their issuance if not converted prior to the redemption date. The Series A-1 Preferred can be converted into an aggregate of

113

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

1,974,723 Class A common shares. In addition, the Company may, if certain conditions have been met, redeem the Series A-1 Preferred by issuing shares of its Class A common stock to the Series A-1 Preferred holders at a minimum price of $6.11 per common share. This redemption would result in the issuance of 2,045,826 Class A common shares.

The Company could be required to redeem the Series A-1 Preferred if the average market price (for a consecutive 42-day trading period) is $5.50 per share or less. The Company can choose to redeem for cash or Class A common stock. If the average price is less than $3.50 per common share, the redemption must be in cash. Redemption rights terminate if the price per share of Class A common stock exceeds 130% ($8.23) of the conversion price of the Series A-1 Preferred for any 25 consecutive trading days.

The unit warrants, which were also issued on July 12, 2004, entitled the investors to purchase from the Company up to $5 million of Series A-2 Preferred. Three of the four investors exercised their unit warrants, for an exercise price of approximately $3.75 million, before the unit warrants expired in October 2005. The three issuances of Series A-2 Preferred are convertible into Class A common stock at conversion prices equal to 110% of the average market closing prices of the Class A common stock for the 30 trading days before the respective dates of issuance of the Series A-2 Preferred to the three investors. The redemption period for the Series A-2 Preferred expires on July 12, 2009.

On July 7, 2005, the first of the three investors to do so exercised its unit warrant and purchased 1,338 shares of Series A-2 Preferred for $1,250,468, convertible into Class A common stock at $6.11 per common share, and seven year warrants to purchase 56,219 shares of Class A common stock at an exercise price of $6.72 per share.

On September 30, 2005, the second investor exercised its unit warrant, purchasing 1,338 shares of Series A-2 Preferred for $1,250,468, convertible into Class A common stock at $7.26 per common share, and seven year warrants to purchase 47,351 shares of Class A common stock at an exercise price of $7.99 per share.

In early October 2005, the third investor exercised its unit warrant, purchasing 1,338 shares of Series A-2 Preferred for $1,250,468, convertible into Class A common stock at $7.20 per common share, and seven year warrants to purchase 47,779 shares of Class A common stock at an exercise price of $7.92 per share.

In connection with the issuance of Series A-1 Preferred and associated warrants in July 2004, the finders with respect to these transactions received, as part of the finders’ compensation, warrants to purchase 98,835 shares of Series A common stock at an exercise price of $6.95 per share. In connection with the issuances of Series A-2 Preferred and associated warrants in 2005, the finders received, as part of the finders’

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

compensation, warrants to purchase 27,525 shares of Class A common stock at exercise prices ranging from $6.72 to $7.99. In October 2005, the remaining series A-2 Preferred Stock and associated warrants expired without the fourth investor exercising their option.

At July 12, 2004, the Company initially recognized deferred issuance costs of $1,485,846, a discount on the beneficial conversion feature of $3,073,204 and discounts on fair values of options and warrants of $2,718,959, respectively, as offsets against the $12.5 million issuance of the Series A-1 Preferred. The beneficial conversion feature represents the difference at July 12, 2004 between the $6.33 redemption price per share of the Series A-1 Preferred and the effective conversion price, taking into account embedded warrants and options based upon the number of shares to be converted at inception. This intrinsic value of the beneficial conversion feature at July 12, 2004 reduced the carrying value of the Series A-1 Preferred on the statement of financial position with an equal amount credited to the Class A common stock. This discount for the beneficial conversion feature is reduced and amortized to retained earnings over the five-year redemption period of the Series A-1 Preferred using the effective interest method. These deferred issuance and discount costs are being amortized to retained deficit over the period until redemption using the effective interest method. On July 7, 2005, September 30, 2005 and October 6, 2005, three of the four unaffiliated investors exercised their right to purchase the Series A-2 Convertible Preferred Stock. The Company recognized deferred issuance costs of $247,301 and a premium of $720,630 related to the liability for the option recorded at the date of the respective exercises. At December 31, 2005 and 2004, there was $1,026,067 and $1,097,660 in unaccreted deferred issuance costs and $3,679,794 and $5,501,689 in unaccreted net discount costs, respectively.

The initial July 12, 2004 recognition of the beneficial conversion feature and discounts on fair values of options and warrants resulted in $3,073,204 of additional paid-in capital for the Class A common stock and $2,944,150 of liabilities for options and warrants. Changes in the fair value of options and warrants are recognized in the statement of operations with a corresponding change in the liabilities for options and warrants.

On September 30, 2004, the Company declared its initial 4% dividend to the Series A-1 Preferred shareholders. The Company paid the dividend by issuing 19,396 shares of its Class A common stock valued at $115,794. On December 31, 2004, the Company declared the second quarterly dividend, consisting of 20,948 shares of its Class A common Stock valued at $133,439. On March 31, 2005, the Company paid the third quarterly dividend, consisting of 23,536 shares of its Class A common stock valued at $130,860. On June 30, 2005, the Company paid the fourth quarterly dividend, consisting of 21,712 shares of its Class A common stock valued at $132,443. On September 30, 2005, the Company paid the fifth quarterly dividend, consisting of 20,328 shares of its Class A common stock valued at $130,506. Of this, 1,740 shares of Class A common stock valued at $11,280 were paid because of the unit warrant exercise and issuance of Series A-2 Preferred on July 7, 2005. On

115

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

	December 31, 2005, the Company paid the sixth quarterly dividend resulting in the issuance of 30,170 shares of its Class A common stock valued at $164,427. Of this, 6,866 shares of Class A common stock valued at $37,420 were paid to holders of the Series A-2 Preferred.
(9)	Mergers and Acquisitions
	On February 18, 2003, the Company acquired First Alliance in exchange for 2,560,994 shares of its Class A common stock.
	On November 18, 2003, the Company acquired Mid-American in exchange for 774,229 shares of its Class A common stock.
	On October 1, 2004, CICA acquired 100% of the outstanding common stock of SPLIC. The results of SPLIC (and its subsidiary, SPFIC) have been included in the consolidated financial statements since that date. SPLIC is a provider of home service life insurance products, primarily in Louisiana.
	The aggregate purchase price was $85 million of cash, plus $1,012,790 of related expenses. To fund the acquisition, Citizens borrowed $30 million from Regions Bank under a line of credit it had established earlier in 2004, and loaned the money to CICA in exchange for a surplus debenture, plus made an $11 million capital contribution.
	The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition.

	At October 31, 2004
Investments	$	251,720,773
Cash and cash equivalents		3,780,567
Accrued investment income		2,642,203
Other intangible assets		70,000
Cost of customer relationships acquired		33,942,464
Federal income tax recoverable		22,095
Property, plant an equipment		612,922
Other assets		363,428
Total assets acquired		293,154,452
Future policy benefit reserves		192,444,931
Policy claims payable		3,714,520
Other policyholders’ funds		1,474,993
Commissions payable		509,801
Deferred federal income taxes		4,851,162
Other liabilities		4,146,255
Total liabilities assumed		207,141,662
Net assets acquired	$	86,012,790

116

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

Of the acquired intangible assets, $70,000 was assigned to state insurance department licenses that are not subject to amortization and $33,942,464 was assigned to cost of customer relationships acquired that will be amortized over the anticipated premium paying period of the related policies. No goodwill was recognized.

The unaudited pro forma results from operations for the years ending December 31, 2004 and 2003, as if SPLIC had been owned since January 1 of each year, are shown below.

	Year Ended December 31, 2004
	As Reported		Pro Forma
Revenue	$	102,825,678		144,254,188
Net Income		7,731,739		12,552,165
Net Income Per Share		0.17		0.28

	Year Ended December 31, 2003
	As Reported		Pro Forma
Revenue	$	95,102,763		149,692,761
Net Income		3,126,265		9,023,982
Net Income Per Share		0.08		0.23

	The per share amounts have been adjusted retroactively for all periods presented to reflect the change in capital structure resulting from 7% stock dividends paid in 2005, 2004 and 2003.
(10)	Contingencies

Cause Number 03-0505; Citizens Insurance Company of America, Citizens, Inc., Harold E. Riley and Mark A. Oliver, Petitioners v. Fernando Hakim Daccach, Respondent, in the Supreme Court of Texas. This lawsuit has been certified by the Texas District Court, Austin, Texas, and affirmed by the Court of Appeals for the Third District of Texas. The Company appealed the grant of class status to the Texas Supreme Court, with oral arguments occurring on October 21, 2004. No decision has yet been rendered by the Texas Supreme Court.

The suit names as a class all non-U.S. residents who purchased insurance policies or made premium payments since August 1996 and assigned policy dividends to two non-U.S. trusts for the purchase of the Company’s Class A common stock. It alleges that the life insurance policies which the Company made available to these non-U.S. residents, when combined with a policy feature which allows policy dividends to be assigned to non-U.S. trusts for the purpose of accumulating ownership of the Company’s 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 Texas securities laws. The remedy sought is rescission and return of the insurance premium payments and other amounts.

The Company asserts, among other things, that U.S. law, including Texas law, does not apply to the operations of the trusts, and therefore, no securities registration provisions apply, nor do U.S. laws relating to broker-dealer registration apply. Further, it is the Company’s position that the securities claims, based on Texas securities laws, are not valid, that no broker-dealer registration is required of the Company or its marketing consultants, and the class as defined is not appropriate for class certification because it does not meet the legal requirements for class action treatment under Texas law.

117

The Company intends to continue to defend vigorously against class certification, as well as against the other claims in the case. However, the Company is unable to determine the potential financial magnitude of the claims if the class certification were to become final and the plaintiff was able to prevail on the substantive claims, although the Company would expect a significant adverse financial impact from an adverse final class action judgment.

The Company is also a party to various legal proceedings incidental to its business. The Company has been named as a defendant in various legal actions seeking payments for claims denied by the Company and other monetary damages. In the opinion of management, the ultimate liability, if any, resulting from any contingent liabilities that might arise from such litigation, is not material in relation to the financial position or results of operations of the Company. Reserves for claims payable are based on the expected claim amounts to be paid after a case-by-case review of the facts and circumstances relating to each claim. A contingency exists with regard to these reserves until the claims are adjudicated and paid.

(11)	Segment Information
	Historically, the Company has had three reportable segments: International Life Business, Domestic Health Business and Domestic Life Business. During 2004, following the acquisition of Security Plan, a new segment, Home Service Business, was established.
	International Life Business, consisting of ordinary whole-life business, is sold primarily throughout Central and South America. The Company has no assets, offices or employees outside of the United States of America (U.S.) and requires that all transactions be in U.S. dollars paid in the U.S. The Company’s Domestic Health Business, consisting of accident and health, specified disease, hospital indemnity and accidental death policies, is sold throughout the southern U.S. The Company’s Domestic Life Business, consisting of traditional life, burial insurance and pre-need policies, is sold throughout the southern U.S. The accounting policies of the segments are in accordance with U.S. GAAP and are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on U.S. GAAP net income before federal income taxes for its three reportable segments.

118

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

The acquisition of SPLIC and SPFIC created a new segment. SPLIC focuses on writing ordinary whole life insurance utilizing the home service marketing distribution method, whereby employee/agents working “routes” make regular collections of premiums from clients. SPFIC also uses the home service method to write small fire policies on Louisiana residents. This marketing method dates back to the creation of the life insurance industry in the United States and SPLIC utilizes approximately 350 field representatives (approximately 300 of whom also represent SPFIC) to write and collect premiums.

Geographic Areas - The following summary represents financial data of the Company’s continuing operations based on their location.

	2005		2004		2003
Revenues
U.S.	$	64,640,672		29,939,769		31,756,796
Non-U.S.		79,674,651		72,885,909		63,345,967
Total Revenues	$	144,315,323		102,825,678		95,102,763

The following summary, representing revenues and pre-tax income from continuing operations and identifiable assets for the Company’s reportable segments as of and for the years ended December 31, 2005, 2004 and 2003, is as follows:

Year Ended December 31	2005		2004		2003
Revenue
International Life	$	79,674,651		72,885,909		63,345,967
Home Service Business		49,692,366		12,345,741		—
Domestic Life		14,048,666		16,806,481		18,020,466
Domestic Health		899,640		787,547		13,736,330
Total consolidated revenue	$	144,315,323		102,825,678		95,102,763
Premiums and Annuity and Universal Life Consideration
International Life	$	68,444,072		59,213,856		51,972,432
Home Service Business		37,719,751		9,587,052		—
Domestic Life		11,603,183		13,579,045		11,270,023
Domestic Health		899,640		787,547		14,784,958
Total consolidated premium income	$	118,666,646		83,167,500		78,027,413
Net Investment Income
International Life	$	10,142,576		11,414,138		9,539,769
Home Service Business		11,572,842		2,875,368		—
Domestic Life		1,852,766		2,715,166		4,594,403
Domestic Health		—		—		188,103
Total consolidated net investment income	$	23,568,184		17,004,672		14,322,275

119

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

Amortization expense:
International Life	$	8,272,807	7,473,167		9,035,478
Home Service Business		4,770,155	848,572		—
Domestic Life		3,151,317	4,253,083		4,216,119
Domestic Health		—	—		5,665,479
Total consolidated amortization expense	$	16,194,279	12,574,822		18,917,076
Realized gains (losses)
International Life	$	96,750	635,492		1,254,297
Home Service Business		304,849	(397,633	)	—
Domestic Life		17,674	151,169		628,808
Domestic Health		—	—		—
Total consolidated realized gains (losses)	$	419,273	389,028		1,883,105
Income (loss) before federal income tax:
International Life	$	5,761,991	8,840,612		4,959,621
Home Service Business		5,902,227	2,510,941		—
Domestic Life		33,820	(2,946,087	)	(302,259	)
Domestic Health		97,883	(317,706	)	(1,369,040	)
Total consolidated income before Federal income taxes	$	11,795,921	8,087,760		3,288,322

	2005		2004
Assets as of December 31:
International Life	$	233,529,849		225,359,680
Home Service Business		300,946,232		298,396,206
Domestic Life		115,320,962		123,160,286
Domestic Health		12,091,768		14,295,390
Total	$	661,888,811		661,211,562

Major categories of premiums are summarized as follows:

	Year ended December 31,
	2005		2004		2003
Premiums and annuity and universal life considerations:
Ordinary life	$	109,890,939		77,110,880		60,395,058
Annuity and universal life		3,021,299		3,519,523		2,383,768
Group life		567,463		636,361		463,629
Accident and health		1,560,136		787,547		14,784,958
Casualty		3,626,809		1,113,189		—
Total premiums and annuity and universal life considerations	$	118,666,646		83,167,500		78,027,413

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

The following table sets forth the Company’s total yearly percentage of direct premiums by geographic area for the years indicated:

Area	2005			2004		2003
Colombia		15.6	%		14.4		19.6
Argentina		6.4			6.7		11.4
Venezuela		5.4			5.1		6.7
Taiwan		5.3			2.9		2.5
Uruguay		2.4			2.6		5.0
Other Foreign		17.4			14.8		18.9
Louisiana		30.4			15.4		1.7
Texas		6.9			8.0		12.8
Kentucky		2.2			3.4		6.8
Oklahoma		2.6			3.3		5.7
Other States		5.4			23.4		8.9
Total		100.0	%		100.0		100.0

(12)	Income Taxes
	A reconciliation of Federal income tax expense computed by applying the Federal income tax rate of 34% to income before Federal income tax expense is as follows:

	2005			2004			2003
Expected tax expense	$	4,010,613			2,749,838			1,118,029
Change in valuation allowance		1,102,538			(1,318,931	)		—
Tax-exempt interest		(229,606	)		(9,680	)		(49,130	)
Small life insurance company deduction		—			(103,167	)		(320,324	)
Adjustment of prior year taxes		(143,945	)		(590,489	)		(658,980	)
Basis difference in investments		—			(314,234	)		—
Other		(246,171	)		(57,316	)		72,462
Federal income tax expense	$	4,493,429			356,021			162,057

Income tax expense (benefit) for the years ended December 31, 2005, 2004 and 2003 consists of:

	2005		2004			2003
Current	$	1,590,567		1,473,469			249,869
Deferred		2,902,862		(1,117,448	)		(87,812	)
	$	4,493,429		356,021			162,057

121

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

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2005 and 2004 are presented below.

	2005			2004
Deferred tax assets:
Future policy benefit reserves	$	21,126,115			20,309,812
Net operating loss carryforwards		5,022,328			4,162,646
Due and accrued dividends and expenses		561,852			1,356,726
Investments available-for-sale		2,473,361			385,951
Other		1,208,794			449,528
Total gross deferred tax assets		30,392,450			26,664,663
Valuation allowance		(1,102,538	)		—
Total gross deferred tax assets net of valuation allowance		29,289,912			26,664,663
Deferred tax liabilities:
Deferred policy acquisition costs, cost of customer relationships acquired and intangible assets		(28,127,247	)		(24,506,530	)
Investments amortization		(2,769,760	)		(2,860,059	)
Other		(13,744	)		(103,461	)
Total gross deferred tax liabilities		(30,910,751	)		(27,470,050	)
Net deferred tax (liability) asset	$	(1,620,839	)		(805,387	)

In addition, the acquisition of SPLIC resulted in the recognition of deferred tax liabilities of $4,851,162 in accordance with SFAS No. 141, “Business Combinations.” A summary of the changes in the components of deferred federal income taxes for 2005 and 2004 is as follows:

	2005			2004
Deferred tax assets (liabilities):
Balance January 1	$	(805,387	)		1,887,048
Deferred tax benefit (expense)		(2,902,862	)		1,117,448
Acquisition of Security Plan		—			(4,851,162	)
Investments available-for-sale		2,087,410			1,041,279
Balance December 31	$	(1,620,839	)		(805,387	)

122

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

	The Company and its subsidiaries had net operating losses at December 31, 2005 available to offset future taxable income of approximately $14,908,000 for Federal income tax, substantially all of which expire through 2024. A portion of the net operating loss carryforward is subject to limitations under Section 382 of the Internal Revenue Code. At December 31, 2005, the Company determined that as a result of the Company’s income, projected future income, tax planning strategies, and the nature of the items from which its deferred tax assets are derived, it is more likely than not that its deferred tax assets, net of the established valuation allowance, would be realized. The Company established a valuation allowance for the net deferred tax asset, in the amount of $1,102,538, related to CNLIC as a result of the proposed sale of that company. At December 31, 2004, the Company, based on its estimates of projected future income, determined that no valuation allowance was appropriate and released the allowance previously established in the amount of $1,318,931.
	At December 31, 2005, the Company had accumulated approximately $3,291,000 in its “policyholders’ surplus account.” This is a special memorandum tax account into which certain amounts not previously taxed, under prior tax laws, were accumulated. No new additions will be made to this account. Federal income taxes will become payable thereon at the then current tax rate (a) when and if distributions to the shareholder, other than stock dividends and other limited exceptions, are made in excess of the accumulated previously taxed income; or (b) when a company ceases to be a life insurance company as defined by the Internal Revenue Code and such termination is not due to another life insurance company acquiring its assets in a nontaxable transaction. The Company does not anticipate any transactions that would cause any part of this amount to become taxable. However, should the balance at December 31, 2005 become taxable, the tax computed at present rates would be approximately $1,119,000.
(13)	Fair Value of Financial Instruments
	Estimates of fair values are made at a specific point in time, based on relevant market prices and information about the financial instrument. The estimated fair values of financial instruments presented below are not necessarily indicative of the amounts the Company might realize in actual market transactions. The carrying amount and fair value for the financial assets and liabilities on the consolidated balance sheets at each year-end were as follows:

123

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

	2005				2004
	Carrying		Fair		Carrying		Fair
	amount		value		amount		value
Financial assets:
Fixed maturities	$	457,570,672		459,074,379		447,566,922		448,879,648
Equity securities		609,760		609,760		1,063,917		1,063,917
Cash and cash equivalents		18,311,105		18,311,105		31,720,787		31,720,787
Mortgage Loans		833,464		929,453		349,611		471,091
Financial liabilities:
Annuities		19,440,486		19,440,486		16,913,432		16,913,432

Fair values for fixed income securities and equity securities are based on quoted market prices. In cases where quoted market prices are not available, fair values are based on estimates using present value or other assumptions, including the discount rate and estimates of future cash flows.

Mortgage loans are secured principally by residential properties. Weighted average interest rates for these loans as of December 31, 2005 and 2004, were approximately 8.9%, with maturities ranging from one to fifteen years. Management estimated the fair value using an interest rate of 6.25% at December 31, 2005 and 2004.

The carrying value and fair values for the Company’s liabilities under annuity contract policies are the same as the interest rates credited to these products and are periodically adjusted by the Company to reflect market conditions. The fair value of liabilities under all insurance contracts are taken into consideration in the overall management of interest rate risk, which minimizes exposure to changing interest rates through the matching of investment maturities with amounts due under insurance contracts.

Policy loans have a weighted average interest rate of 7.5% as of December 31, 2005 and 7.4% as of December 31, 2004, and have no specified maturity dates. The aggregate fair value of policy loans approximates the carrying value reflected on the consolidated balance sheet. These loans typically carry an interest rate that is tied to the crediting rate applied to the related policy and contract reserves. Policy loans are an integral part of the life insurance policies that the Company has in force and cannot be valued separately.

For cash and cash equivalents, accrued investment income, amounts recoverable from reinsurers, other assets, federal income tax payable and receivable, dividend accumulations, commissions payable, amounts held on deposit, and other liabilities,

124

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

	the carrying amounts approximate fair value because of the short maturity of such financial instruments.
(14)	Other Comprehensive Loss
	The changes in the components of other comprehensive loss are reported net of income taxes of 34% for the periods indicated as follows:

	Year ended December 31, 2005
	Pre-tax			Tax		Net
	Amount			Effect		Amount
Unrealized loss on securities:
Unrealized holding loss arising during the period	$	(5,614,872	)		1,909,056		(3,705,816	)
Add: reclassification adjustment for gains included in net income		(524,570	)		178,354		(346,216	)
Other comprehensive loss	$	(6,139,442	)		2,087,410		(4,052,032	)

	Year ended December 31, 2004
	Pre-tax			Tax		Net
	Amount			Effect		Amount
Unrealized loss on securities:
Unrealized holding loss arising during the period	$	(2,698,657	)		917,543		(1,781,114	)
Add: reclassification adjustment for gains included in net income		(363,928	)		123,736		(240,192	)
Other comprehensive loss	$	(3,062,585	)		1,041,279		(2,021,306	)

	Year ended December 31, 2003
	Pre-tax			Tax		Net
	Amount			Effect		Amount
Unrealized loss on securities:
Unrealized holding loss arising during the period	$	(2,250,059	)		765,021		(1,485,038	)
Add: reclassification adjustment for gains included in net income		(1,249,821	)		424,941		(824,880	)
Other comprehensive loss	$	(3,499,880	)		1,189,962		(2,309,918	)

125

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

(15) Quarterly Financial Information (Unaudited)

The following table contains selected unaudited consolidated financial data for each calendar quarter.

	2005
	Fourth		Third		Second		First
	Quarter		Quarter		Quarter		Quarter
Revenues	$	38,535,621		36,188,161		34,194,864		35,396,677
Expenses		33,062,386		33,942,286		33,470,275		32,044,455
Federal income tax expense		2,379,429		759,000		362,264		992,736
Net income		3,093,806		1,486,875		362,325		2,359,486
Basic and diluted earnings per share		.06		.02		.00		.05

	2004
	Fourth			Third		Second		First
	Quarter			Quarter		Quarter		Quarter
Revenues	$	37,301,076			23,533,953		21,885,686		20,104,963
Expenses		33,370,899			21,285,627		20,453,023		19,628,369
Federal income tax expense		(1,051,886	)		755,341		547,715		104,851
Net income		4,982,063			1,492,985		884,948		371,743
Basic and diluted earnings per share		.11			.03		.02		.01

(16) Subsequent Events

The Company has entered into an agreement to sell 100% of the common stock of CNLIC to Texas International Life Insurance Company (TILIC) in 2006. Approval of the sale by the Texas Department of Insurance (TDI) is expected in mid 2006. The Company has also asked the TDI to approve an extraordinary dividend from CNLIC in the amount of $3.2 million, to be paid prior to the closing of the sale. The Company and TILIC will also enter into a coinsurance agreement prior to the closing of the sale, whereby the Company will assume 100% of CNLIC’s life insurance business. The sale agreement would produce a loss, net of tax, of less than $350,000, based on information at December 31, 2005; however, the actual loss will differ due to the results of operations in 2006 prior to the sale.

126

Schedule II

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Condensed Financial Information of Registrant
CITIZENS, INC. (Parent Company)
Statements of Financial Position
December 31, 2005 and 2004

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

(1) Eliminates in consolidation.

     See accompanying report of independent registered public accounting firm.

127

Schedule II, Continued

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Condensed Financial Information of Registrant
CITIZENS, INC. (Parent Company)
Statements of Operations
Years ended December 31, 2005 and 2004 and 2003

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

(1) Eliminates in consolidation.

     See accompanying report of independent registered public accounting firm.

128

Schedule II, Continued

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Condensed Financial Information of Registrant
CITIZENS, INC. (Parent Company)
Statements of Cash Flows
Years ended December 31, 2005, 2004 and 2003

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

     See accompanying report of independent registered public accounting firm.

129

Schedule III

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Supplementary Insurance Information
As of December 31, 2005 and 2004

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

     See accompanying report of independent registered public accounting firm.

130

Schedule III, continued

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Supplementary Insurance Information, continued
Years Ended December 31, 2005, 2004 and 2003

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

     See accompanying report of independent registered public accounting firm.

131

Schedule IV

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Reinsurance
Years Ended December 31, 2005, 2004 and 2003

									Percentage
			Ceded		Assumed				of amount
	Gross		to other		from other		Net		assumed to
	amount		companies		companies		amount		net
Year ended December 31, 2005
Life insurance in force	$	3,687,229,000		221,793,000		592,636,000		4,058,072,000		14.6	%
Premiums:
Life insurance		111,794,398		1,907,003		571,007		110,458,402		.5
Accident and health insurance		12,389,786		10,829,650		—		1,560,136		—
Casualty		4,757,506		1,130,697		—		3,626,809		—
Total premiums	$	128,941,690	$	13,867,350	$	571,007	$	115,645,347		.5
Year ended December 31, 2004
Life insurance in force	$	3,513,044,000		265,001,000		488,312,000		3,736,355,000		13.1
Premiums:
Life insurance		78,111,801		1,000,921		636,361		77,747,241		.8
Accident and health insurance		15,085,957		14,298,410		—		787,547		—
Total premiums		1,202,682		89,493		—		1,113,189
	$	94,400,440		15,388,824		636,361		79,647,977		.8
Year ended December 31, 2003
Life insurance in force	$	2,435,495,000		301,366,000		485,038,000		2,619,167,000		18.5
Premiums:
Life insurance		61,777,374		1,382,316		463,629		60,858,687		.8
Accident and health insurance		15,196,554		411,596		—		14,784,958		—
Total premiums	$	76,973,928		1,793,912		463,629		75,643,645		.6

     See accompanying report of independent registered public accounting firm.

132

Signatures

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized.

		CITIZENS, INC.
Date: March 16, 2006	By:	/s/ Mark A. Oliver
		Mark A. Oliver
		Chief Executive Officer and President
	By:	/s/ Larry E. Carson
		Larry E. Carson
		Vice President, Chief Financial Officer
		and Treasurer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Rick D. Riley and Mark A. Oliver or any one of them, as his or her attorney-in-fact and agent, with full power of substitution, for him or her in any and all capacities, hereby giving and granting to said attorney-in-fact and agent full power and authority to do and perform all and every act and thing whatsoever requisite and necessary to be done in and about the premises as fully, to all intents and purposes, as he might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorney-in-fact and agent may or shall lawfully do, or cause to be done, in connection with the proposed filing by Citizens, Inc., with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, of an annual report on Form 10-K for the fiscal year ended December 31, 2005, including but not limited to, such full power and authority to do the following: (i) execute and file such annual report; (ii) execute and file any amendment or amendments thereto; (iii) receive and respond to comments from the Securities and Exchange Commission related in any way to such annual report or any amendment or amendments thereto; and (iv) execute and deliver any and all certificates, instruments or other documents related to the matters enumerated above, as the attorney-in-fact in his sole discretion deems appropriate.

Dated: March 16, 2006

/s/ Mark A. Oliver	/s/ Harold E. Riley
Mark A. Oliver, Director	Harold E. Riley, Chairman of the
	Board and Director
/s/ Richard C. Scott	/s/ Timothy T. Timmerman
Dr. Richard C. Scott, Director	Timothy T. Timmerman, Director
/s/ Rick D. Riley	/s/ Steven F. Shelton
Rick D. Riley, Director	Steven F. Shelton, Director
/s/ E. Dean Gage	/s/ Grant G. Teaff
Dr. E. Dean Gage, Director	Grant G. Teaff, Director

133

EXHIBITS

Exhibit Number	The following exhibits are filed herewith:
2.1	Stock Purchase Agreement between Citizens Insurance Company of American and Mayflower National Life Insurance Company dated June 17, 2004 (a)
3.1	Restated and Amended Articles of Incorporation (b)
3.2	Bylaws (c)
4.1	Amendment to State Series A-1 and A-2 Senior Convertible Preferred Stock (d)
10.1	Self-Administered Automatic Reinsurance Agreement — Citizens Insurance Company of America and Riunione Adriatica di Sicurta, S.p.A. (e)
10.2	Bulk Accidental Death Benefit Reinsurance Agreement between Connecticut General Life Insurance Company and Citizens Insurance Company of America, as amended (f)
10.3	Plan and Agreement of Exchange between Citizens, Inc. and Combined Underwriters Life Insurance Company (g)
10.4	Plan and Agreement of Exchange between Citizens, Inc. and Lifeline Underwriters Life Insurance Company (h)
10.5	Plan and Agreement of Merger by and among Citizens, Inc., Citizens Acquisition, Inc. and First Alliance Corporation (i)
10.6	Plan and Agreement of Merger by and among Citizens, Inc., Citizens Acquisition, Inc. and Mid-American Alliance Corporation. (j)
10.7	Coinsurance Reinsurance Agreement, Assumption Reinsurance Agreement, Administrative Services Agreement dated March 9, 2004, between Citizens Insurance Company of America and Texas International Life Insurance Company, Reinsurance Trust Agreement dated March 9, 2004, by and among Citizens Insurance Company of America, Texas International Life Insurance Company and Wells Fargo Bank, N.A. (k)
10.8	Coinsurance Reinsurance Agreement, Assumption Reinsurance Agreement, Administrative Services Agreement dated March 9, 2004, between Combined Underwriters Life Insurance Company and Texas International Life Insurance Company, Reinsurance Trust Agreement dated March 9, 2004, by and among Combined Underwriters Life Insurance Company, Texas International Life Insurance Company and Wells Fargo Bank, N.A. (l)
10.9	Loan Agreement, Security Agreement and Note dated March 22, 2004 between Citizens, Inc. and Regions Bank (m)
10.9(a)	Second Amendment to Loan Agreement between Citizens, Inc. and Regions Bank dated October 1, 2004 (o)
10.9(b)	Security Agreement between Citizens Insurance Company of America and Regions Bank dated October 1, 2004 (o)
10.9(c)	Subordinated Debenture dated October 1, 2004, issued by Citizens Insurance Company of America to Citizens, Inc. (o)
10.10(a)	Securities Purchase Agreement dated July 12, 2004 among Citizens, Inc., Mainfield Enterprises, Inc., Steelhead Investments Ltd., Portside Growth and Opportunity Fund, and Smithfield Fiduciary LLC (m)
10.10(b)	Registration Rights Agreement dated July 12, 2004 among Citizens, Inc., Mainfield Enterprises, Inc., Steelhead Investments Ltd., Portside Growth and Opportunity Fund, and Smithfield Fiduciary LLC (n)

Exhibit Number	The following exhibits are filed herewith:
10.10(c)	Unit Warrant dated July 12, 2004, to Mainfield Enterprises, Inc. (n)
10.10(d)	Unit Warrant dated July 12, 2004, to Steelhead Investments Ltd. (n)
10.10(e)	Unit Warrant dated July 12, 2004, to Portside Growth and Opportunity Fund (n)
10.10(f)	Unit Warrant dated July 12, 2004, to Smithfield Fiduciary LLC (n)
10.10(g)	Warrant to Purchase Class A Common Stock to Mainfield Enterprises, Inc. (n)
10.10(h)	Warrant to Purchase Class A Common Stock to Steelhead Investments Ltd. (n)
10.10(i)	Warrant to Purchase Class A Common Stock to Portside Growth and Opportunity Fund (n)
10.10(j)	Warrant to Purchase Class A Common Stock to Smithfield Fiduciary LLC (n)
10.10(k)	Subordination Agreement among Regions Bank, the Purchasers and Citizens, Inc. dated July 12, 2004 (n)
10.10(l)	Non-Exclusive Finder’s Agreement dated September 29, 2003, between Citizens, Inc. and the Shemano Group, Inc. (n)
10.10(m)	Self-Administered Automatic Reinsurance Agreement between Citizens Insurance Company of America and Converium Reinsurance (Germany) Ltd. (p)
10.10(n)	Self-Administered Automatic Reinsurance Agreement between Citizens Insurance Company of America and Scottish Re Worldwide (England). (q)
10.10(o)	First Amended and Restated Loan Agreement — Regions Bank, dated December 5, 2005*
11	Statement re: Computation of per share earnings (see financial statements)
21	Subsidiaries of Registrant*
23	Consent of Independent Registered Public Accounting Firm*
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act*
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act*
32.1	Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act*
32.2	Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act*

                                        *      Filed herewith.

(a)	Filed on June 21, 2004, with the Registrant’s Current Report on Form 8-K and incorporated herein by reference.
(b)	Filed with the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2003, and incorporated herein by reference.
(c)	Filed with the Registrant’s Registration Statement on Form S-4, Registration No. 33-59039, on May 2, 1995, and incorporated herein by reference.
(d)	Filed on July 15, 2004, with the Registrant’s Current Report on Form 8-K and incorporated herein by reference.
(e)	Filed as Exhibit 10.8 with the Registration Statement on Form S-4, SEC File No. 333-16163, filed on or about November 14, 1996.
(f)	Filed as Exhibit 10.9 with the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference.
(g)	Filed as Appendix A with the Registrant’s Registration Statement on Form S-4, Registration No. 333-76926 dated January 18, 2002 and incorporated herein by reference.

(h)	Filed as Appendix B with the Registrant’s Registration Statement on Form S-4, Registration No. 333-76926 dated January 18, 2002, and incorporated herein by reference.
(i)	Filed as Appendix A with the Registrant’s Registration Statement on Form S-4, Registration No. 333-102016 dated December 19, 2002, and incorporated herein by reference.
(j)	Filed as Appendix A with the Registrant’s Registration Statement on Form S-4, Registration No. 333-106128 dated June 13, 2003, and incorporated herein by reference.
(k)	Filed on March 22, 2004 as Exhibit 10.8 with the Registrant’s Current Report on Form 8-K and incorporated herein by reference.
(l)	Filed on March 22, 2004 as Exhibit 10.9 with the Registrant’s Current Report on Form 8-K as incorporated herein by reference.
(m)	Filed on March 26, 2004 as Exhibit 10.10 with the Registrant’s Current Report on Form 8-K as incorporated herein by reference.
(n)	Filed on July 15, 2004 under Exhibit 10.12 with the Registrant’s Current Report on Form 8-K as incorporated herein by reference.
(o)	Filed on October 1, 2004 as Exhibit 10.11 with the Registrant’s Current Report on Form 8-K as incorporated herein by reference.
(p)	Filed on March 31, 2005, as Exhibit 10.10(m) with the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2004 and incorporated herein by reference.
(q)	Filed on March 31, 2005 as Exhibit 10.10(n) with the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2004 and incorporated herein by reference.

EX-10.10(O)

FIRST AMENDED AND RESTATED

LOAN AGREEMENT

dated as of December 2, 2005

among

CITIZENS, INC.

and

REGIONS BANK,
as Administrative Agent

and

THE OTHER BANKS PARTY HERETO

TABLE OF CONTENTS

		Page
ARTICLE I	DEFINITIONS AND USE OF TERMS		1
Section 1.1	Defined Terms		1
Section 1.2	Heading		16
Section 1.3	Number and Gender of Words		16
Section 1.4	Money		16
Section 1.5	Accounting Terms		16
Section 1.6	Articles, Sections, and Exhibits		17
Section 1.7	Construction		17
ARTICLE II	REVOLVING LOAN		17
Section 2.1	Revolving Advances		17
Section 2.2	Procedures for Requesting Revolving Advances		17
Section 2.3	Voluntary Prepayments		20
Section 2.4	Mandatory Prepayments		20
Section 2.5	Repayment of the Revolving Loan		20
Section 2.6	Interest		21
Section 2.7	Computation of Interest		21
Section 2.8	Payments Generally		21
Section 2.9	Termination of Revolving Commitment		22
ARTICLE III	COLLATERAL		22
Section 3.1	Collateral		22
ARTICLE IV	REPRESENTATIONS AND WARRANTIES		23
Section 4.1	Existence and Authority		23
Section 4.2	Corporate Authorization		23
Section 4.3	Compliance with Laws and Documents		23
Section 4.4	Litigation		24
Section 4.5	Taxes		24
Section 4.6	Financial Statements		24
Section 4.7	Purpose of Loan		24
Section 4.8	Investment Company Act		24
Section 4.9	Properties		24
Section 4.10	Subsidiaries		24
Section 4.11	Compliance with Law		25
Section 4.12	Capital Stock		25
Section 4.13	Existing Indebtedness		25
Section 4.14	Material Agreements		25
Section 4.15	Insiders		25

i 

TABLE OF CONTENTS

		Page
Section 4.16	ERISA		25
Section 4.17	Full Disclosure		26
Section 4.18	No Default		26
Section 4.19	Principal Office		26
Section 4.20	Licenses, Patents and Trademarks		26
Section 4.21	Insurance Licenses		26
Section 4.22	No Assumed Names		27
Section 4.23	Sufficiency of Capital		27
ARTICLE V	CONDITIONS PRECEDENT		27
Section 5.1	Conditions Precedent to Revolving Advances on the Closing Date		27
Section 5.2	Conditions Precedent to All Revolving Advances		29
Section 5.3	Conditions Precedent to All Acquisition Advances		29
Section 5.4	Conditions Precedent to All Revolving Advances in Excess of $5,000,000		30
Section 5.5	Conditions Precedent to Revolving Advances Resulting in the Aggregate Amount
	of Revolving Advances Exceeding $30,000,000		30
ARTICLE VI	AFFIRMATIVE COVENANTS		30
Section 6.1	Proceeds		30
Section 6.2	Reporting Requirements		30
Section 6.3	Insurance Matters		32
Section 6.4	Notice of Litigation or Changes in Fact		32
Section 6.5	Taxes		32
Section 6.6	Payment of Debts		32
Section 6.7	Insurance		32
Section 6.8	Maintenance of Existence		33
Section 6.9	Maintenance of Assets		33
Section 6.10	Expenses of Administrative Agent and Banks		33
Section 6.11	Compliance with Material Agreements		33
Section 6.12	Books and Records: Access		33
Section 6.13	Compliance with Law		33
Section 6.14	Authorization and Approvals		33
Section 6.15	Information and Other Documents		34
Section 6.16	Environmental Law Compliance		34
Section 6.17	Acquisitions and Subsidiaries		34
Section 6.18	Preferred Stock		34
Section 6.19	Subordination Agreement		34

ii 

TABLE OF CONTENTS

		Page
ARTICLE VII	NEGATIVE COVENANTS		34
Section 7.1	Indebtedness		34
Section 7.2	Negative Pledge		35
Section 7.3	Restrictions on Dividends		35
Section 7.4	Limitation on Liquidation, Merger, Consolidation, and Disposition of Assets		35
Section 7.5	No Assignment		35
Section 7.6	Prepayments		35
Section 7.7	Loans, Advances and Investments		36
Section 7.8	Surplus Debenture		36
Section 7.9	Leverage Ratio		36
Section 7.10	Fixed Charge Coverage Ratio		36
Section 7.11	Funded Debt to Tangible Net Worth Ratio		36
Section 7.12	Debenture Coverage Ratio		36
Section 7.13	Reinsurance		36
Section 7.14	Transactions With Affiliates		36
Section 7.15	Business		36
Section 7.16	Limitation on Issuance of Capital Stock		36
Section 7.17	Limitation on Leases		37
Section 7.18	Capital Expenditures		37
Section 7.19	Employee Plans		37
Section 7.20	Subsidiaries		37
Section 7.21	Use of Proceeds		38
Section 7.22	Composition of Corporate Group		38
Section 7.23	Preferred Stock		38
ARTICLE VIII	DEFAULT		38
Section 8.1	Payment of Obligations		38
Section 8.2	Certain Covenants		38
Section 8.3	Default under Loan Documents		38
Section 8.4	Other Covenants		38
Section 8.5	Voluntary Debtor Relief		39
Section 8.6	Involuntary Proceedings		39
Section 8.7	Judgments		39
Section 8.8	Attachment		39
Section 8.9	Material Agreements		39
Section 8.10	Other Indebtedness		39
Section 8.11	Misrepresentation		39
Section 8.12	Surplus Debenture Payments		40
Section 8.13	Action by Governmental Authority		40
Section 8.14	Full Force and Effect		40

iii 

TABLE OF CONTENTS

		Page
Section 8.15	Stock Ownership		40
Section 8.16	Change of Control		40
Section 8.17	Liquidation or Dissolution		40
Section 8.18	Preferred Stock		40
ARTICLE IX	RIGHTS OF ADMINISTRATIVE AGENT AND BANKS		40
Section 9.1	Remedies Upon Default		40
Section 9.2	Cumulative Rights		41
Section 9.3	Reimbursement of Expenses		41
Section 9.4	Performance by Administrative Agent		41
Section 9.5	Administrative Agent and Banks Not in Control		42
Section 9.6	Waivers		42
Section 9.7	Application of Proceeds		42
ARTICLE X	ADMINISTRATIVE AGENT		42
Section 10.1	Appointment and Authorization of Administrative Agent		42
Section 10.2	Delegation of Duties		43
Section 10.3	Liability of Administrative Agent		43
Section 10.4	Reliance by Administrative Agent		43
Section 10.5	Notice of Default		44
Section 10.6	Credit Decision; Disclosure of Information by Administrative Agent		44
Section 10.7	INDEMNIFICATION OF ADMINISTRATIVE AGENT		45
Section 10.8	Administrative Agent in its Individual Capacity		45
Section 10.9	Successor Administrative Agent		45
ARTICLE XI	MISCELLANEOUS		46
Section 11.1	Notices		46
Section 11.2	GOVERNING LAW		47
Section 11.3	Choice of Forum: Service of Process and Jurisdiction		47
Section 11.4	Expenses; Indemnification		48
Section 11.5	Right of Set-off		49
Section 11.6	Severability		49
Section 11.7	Survival		49
Section 11.8	Further Assurances		50
Section 11.9	Counterparts		50
Section 11.10	Parties Bound		50
Section 11.11	Amendments, Etc		52
Section 11.12	Form of Documents		52
Section 11.13	Confidentiality		53
Section 11.14	Exception to Covenants		53

iv 

TABLE OF CONTENTS

		Page
Section 11.15	No Usury Intended; Usury Savings Clause		53
Section 11.16	Restatement of Existing Loan Agreements/No Novation		53
Section 11.17	WAIVER OF JURY TRIAL		54
Section 11.18	ENTIRE AGREEMENT		54

v 

SCHEDULES AND EXHIBITS

Schedules

2.1	Revolving Commitments and Pro Rata Shares
4.4	Litigation
4.9	Permitted Liens
4.10	Subsidiaries
4.12	Corporate Structure and Stock Ownership
4.13	Existing Indebtedness
4.14	Material Agreements
4.19	Principal Office, Chief Executive Office, Principal Place of Business
4.21	Insurance Licenses
4.22	Assumed Names
7.7	Permitted Investments

Exhibits

A	Note
B	Assignment and Acceptance
C	Compliance Certificate

vi 

FIRST AMENDED AND RESTATED LOAN AGREEMENT

     FIRST AMENDED AND RESTATED LOAN AGREEMENT (this “Agreement”) dated as of December 2, 2005 among CITIZENS, INC., a Colorado corporation (“Borrower”), each Bank from time to time a party hereto (collectively, the “Banks” and individually a “Bank”), and REGIONS BANK, an Alabama banking association, as administrative agent for the Banks (in such capacity, the “Administrative Agent”), recites and provides as follows:

R E C I T A L S:

     A. Borrower and Regions Bank are parties to that certain Loan Agreement, dated as of March 22, 2004 (as amended through the date hereof, the “Existing Loan Agreement”), pursuant to which Regions Bank extended credit to Borrower.

     B. The parties hereto desire to amend, modify, renew and restate the Existing Loan Agreement.

     C. Upon and subject to the terms and conditions of this Agreement, the parties hereto are willing to amend, restate and renew the Existing Loan Agreement.

     NOW, THEREFORE, in consideration of the premises and the mutual covenants, representations, warranties and agreements herein set forth and for other valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto covenant and agree as follows:

ARTICLE I

DEFINITIONS AND USE OF TERMS

     Section 1.1 Defined Terms. As used herein, the following terms shall have the meanings indicated, unless the context otherwise requires:

“Acquisition” means the acquisition by any Person of (a) a majority of the capital stock or other equity interests of another Person, (b) all or substantially all of the assets of another Person or (c) all or substantially all of a line of business of another Person, in each case (i) whether or not involving a merger or consolidation with such other Person and (ii) whether in one transaction or a series of related transactions.

“Acquisition Advance” means a Revolving Advance to be used for an Acquisition by Borrower or CICA of an operating insurance company or a holding company engaged solely in the business of insurance through one or more subsidiaries.

“Acquisition Consideration” means the consideration given by Borrower or CICA for an Acquisition, including but not limited to the sum of (without duplication) (a) the fair market value of any cash, property (including capital stock) or services given, plus (b) consideration paid with proceeds of Indebtedness permitted pursuant to this

Loan Agreement — Page 1

Agreement, plus (c) the amount of any Indebtedness assumed, incurred or guaranteed (to the extent not otherwise included) in connection with such Acquisition by Borrower or CICA.

“Administrative Agent” means Regions Bank in its capacity as administrative agent under any of the Loan Documents, or any successor agent.

“Administrative Agent’s Principal Office” means the principal office of Administrative Agent, located at 4314 West Braker Lane, Suite 100, Austin, Texas 78759.

“Affiliate” means with respect to any Person (a) each Person that, directly or indirectly, owns or controls, whether beneficially, or as a trustee, guardian or other fiduciary, 10% or more of the securities having ordinary voting power in the election of directors of such Person, (b) each Person that controls, is controlled by or is under common control with such Person or any Affiliate of such Person, or (c) each of such Person’s officers, directors, joint venturers and partners. For the purpose of this definition, “control” of a Person shall mean the possession, directly or indirectly, of the power to direct or cause the direction of its management or policies, whether through the ownership of voting securities, by contract or otherwise.

“Agent-Related Person” means with respect to the Administrative Agent, its Affiliates and the partners, directors, officers, employees, agents and advisors of the Administrative Agent and its Affiliates.

“Aggregate Permitted Exceptions” means the aggregate amount of the baskets utilized by Borrower and its Subsidiaries with respect to the exceptions to those certain covenants set forth in Sections 7.1(f), 7.1(g), 7.17, 7.18 and clause (l) of the definition of Permitted Investments.

“Aggregate Permitted Exceptions Amount” means, during any fiscal year of Borrower, $5,000,000.

“Annual Statement” means the annual financial statement of any Subsidiary of Borrower as required to be filed with the insurance commissioner (or similar authority) of respective state of domicile, together with all exhibits or schedules filed therewith, prepared in accordance with SAP.

“Applicable Environmental Laws” means and includes the collective aggregate of the following: any law, statute, ordinance, rule, regulation, order or determination of any governmental authority or any board of fire underwriters (or other body exercising similar functions), or any restrictive covenants or deed restrictions (recorded or otherwise) affecting Borrower or any Subsidiary pertaining to health, safety or the environment, including, without limitation, all applicable flood disaster laws and health, safety and environmental laws and regulations pertaining to health, safety or the environment, including without limitation, the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, the Resource Conservation and Recovery Act of 1976, the Superfund Amendments and Reauthorization Act of 1986, the Occupational

Loan Agreement — Page 2

Safety and Health Act, the Texas Water Code, the Texas Solid Waste Disposal Act, the Texas Workers’ Compensation Laws, and any federal, state or municipal laws, ordinances, regulations or law which may now or hereafter require removal of asbestos or other hazardous wastes from any property of Borrower or any Subsidiary or impose any liability on Administrative Agent or any Bank related to asbestos or other hazardous wastes in any property of Borrower or any Subsidiary.

“Assignment and Acceptance” means any assignment and acceptance entered into by a Bank and an Eligible Assignee (with the consent of any party whose consent is required by Section 11.10), and accepted by Administrative Agent, in substantially the form of Exhibit B hereto or any other form approved by Administrative Agent.

“Audited Financial Statements” means the audited consolidated balance sheet of Borrower and its Subsidiaries for the fiscal year ended December 31, 2004 and the related consolidated statements of income or operations, shareholders’ equity and cash flows for such fiscal year of Borrower and its Subsidiaries, including the notes thereto, prepared in accordance with GAAP.

“Authorized Representative” means any of Mark Oliver, Harold Riley, Rick Riley or any other person designated in a writing sent to Administrative Agent by Borrower notifying Administrative Agent that such person is authorized and empowered to act on behalf of Borrower.

“Business Day” means every day on which banks in Texas are required by Law to be open for banking business.

“Capital Leases” means capital leases and subleases, properly classifiable in relevant financial statements as a capitalized cost.

“Change of Control” means, with respect to Borrower, an event or series of events by which:

     (a) any “person” or “group” (as such terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, but excluding any employee benefit plan of such person or its subsidiaries, and any person or entity acting in its capacity as trustee, agent or other fiduciary or administrator of any such plan) becomes the “beneficial owner” (as defined in Rules 13d-3 and 13d-5 under the Securities Exchange Act of 1934, except that a person or group shall be deemed to have “beneficial ownership” of all securities that such person or group has the right to acquire (such right, an “option right”), whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of 25% or more of the equity securities of Borrower entitled to vote for members of the board of directors of Borrower on a fully-diluted basis (and taking into account all such securities that such person or group has the right to acquire pursuant to any option right); or

     (b) during any period of 12 consecutive months, a majority of the members of the board of directors of Borrower cease to be composed of individuals (i) who were

Loan Agreement — Page 3

members of that board on the first day of such period, (ii) whose election or nomination to that board was approved by individuals referred to in clause (i) above constituting at the time of such election or nomination at least a majority of that board or (iii) whose election or nomination to that board was approved by individuals referred to in clauses (i) and (ii) above constituting at the time of such election or nomination at least a majority of that board (excluding, in the case of both clause (ii) and clause (iii), any individual whose initial nomination for, or assumption of office as, a member of that board occurs as a result of an actual or threatened solicitation of proxies or consents for the election or removal of one or more directors by any person or group other than a solicitation for the election of one or more directors by or on behalf of the board of directors); or

     (c) any of Rick Riley, Harold Riley, or Mark Oliver shall cease to actively manage Borrower’s day-to-day business activities.

“CICA” means CICA Life Insurance Company of America, a Colorado insurance company.

“CICA Security Agreement” means that certain First Amended and Restated Security Agreement, dated as of December 2, 2005, executed by CICA whereby CICA pledges 100% of the issued and outstanding capital stock of any Person acquired by CICA with proceeds of a Revolving Advance as collateral security for payment of the Obligations, as the same may be amended, modified, supplemented or restated from time to time.

“Citizens Equity Agreements” has the meaning given to such term in the Subordination Agreement.

“Closing Date” means the first date all the conditions set forth in Section 5.1 are satisfied

“Code” means the United States Internal Revenue Code of 1986, as amended, and regulations promulgated thereunder.

“Collateral” has the meaning set forth in Section 3.1.

“Compensation Period” has the meaning set forth in Section 2.2(c)(ii)(B).

“Compliance Certificate” means a certificate substantially in the form of Exhibit C attached hereto.

“Controlled Group” has the meaning set forth in Section 7.18(a).

“Corporate Advances” means Revolving Advances to be used for general corporate purposes not related to the Acquisition of operating insurance companies by Borrower.

“Current Financials” means the Financial Statements of each of Borrower and its Subsidiaries as of September 30, 2005.

“Current Date” means a date within 15 days of the Closing Date.

Loan Agreement — Page 4

“Debenture Coverage Ratio” means, as of any date of determination, the ratio of (a) an amount equal to the sum of (i) the pro-forma Total Adjusted Capital of CICA plus (ii) the aggregate outstanding principal amount of Surplus Debentures minus (iii) the product of (A) three and (B) the Risk Based Capital of CICA to (b) Funded Debt, in each case as of such date of determination.

“Debtor Relief Laws” means any applicable liquidation, conservatorship, bankruptcy, moratorium, rearrangement, insolvency, reorganization, or similar Laws affecting the rights of creditors generally from time to time in effect.

“Default” has the meaning set forth in Article VIII.

“Default Rate” means an interest rate per annum equal to the lesser of (a) the Highest Lawful Rate and (b) the Rate plus 2% per annum.

“Dividends,” in respect of any corporation, means:

(a)	cash distributions or any other distributions on, or in respect of, any class of capital stock of such corporation, except for distributions made solely in shares of stock of the same class or for the Preferred Stock, distributions made solely in shares of stock of the same class or common stock; and
(b)	any and all funds, cash or other payments made in respect of the redemption, repurchase or acquisition of such stock by the issuer thereof, unless such stock is redeemed or acquired through the exchange of such stock with stock of the same class.

“Dollar” and “$” each mean lawful money of the United States.

“EBITDA” means, with respect to any period, (a) Net Income for such period, plus (b) without duplication and to the extent deducted in determining Net Income for such period, (i) Interest Expense for such period, (ii) federal, state, local and foreign income and franchise taxes of Borrower and its Subsidiaries for such period, (iii) depreciation and amortization expenses of Borrower and its Subsidiaries for such period and (iv) any extraordinary losses of Borrower and its Subsidiaries for such period, minus (c) without duplication and to the extent included in determining Net Income for such period, any extraordinary gains of Borrower and its Subsidiaries for such period.

“Employee Plan” means at any time an employee benefit plan as defined in Section 3(3) of ERISA that is now or was previously maintained, sponsored or contributed to by Borrower or any of its Subsidiaries or by any Person that at such time is or was an ERISA Affiliate of Borrower or any Subsidiary.

“Equity” means, as of any date of determination, shareholders’ equity of Borrower and its Subsidiaries as of such date determined in accordance with GAAP.

Loan Agreement — Page 5

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended from time to time, together with all regulations issued pursuant thereto.

“ERISA Affiliate” means any Person that is treated as a single employer with Borrower or any Subsidiary under Section 414 of the Code.

“ERISA Event” means, with respect to Borrower and its Subsidiaries, (a) a Reportable Event (other than a Reportable Event not subject to the provision for 30-day notice to the PBGC under regulations issued under Section 4043 of ERISA), (b) the withdrawal of any such Person or any member of its Controlled Group from an Employee Plan subject to Title IV of ERISA during a plan year in which it was a “substantial employer” as defined in Section 4001(a)(2) of ERISA, (c) the filing of a notice of intent to terminate under Section 4041(c) of ERISA, (d) the institution of proceedings to terminate an Employee Plan by the PBGC, (e) the failure to make required contributions which could result in the imposition of a lien under Section 412 of the Code or Section 302 of ERISA, or (f) any other event or condition which might reasonably be expected to constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Employee Plan or the imposition of any liability under Title IV of ERISA other than PBGC premiums due but not delinquent under Section 4007 of ERISA.

“Federal Funds Rate” means, for any date, the rate per annum (rounded upwards to the nearest 1/100 of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such date, as published by the Federal Reserve Bank on the Business Day next succeeding such day; provided that (a) if such day is not a Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Business Day as so published on the next succeeding Business Day, and (b) if no such rate is so published on such next succeeding Business Day, the Federal Funds Rate for such day shall be the average rate charged to Regions Bank on such day on such transactions as determined by Administrative Agent.

“Financial Statements” includes (where applicable), but is not necessarily limited to, balance sheets, statements of operations, reconciliations of capital and surplus, and schedules of sources and applications of funds.

“Fixed Charge Coverage Ratio” means, for any fiscal period, the ratio of (a) EBITDA to (b) the sum of (i) Interest Expense, plus (ii) all scheduled payments on obligations in respect of Funded Debt of Borrower and its Subsidiaries, in each case for the period of four consecutive fiscal quarters ending on such date.

“Funded Debt” means, as to Borrower and its Subsidiaries at a particular time, all of the following (without duplication):

(a) all obligations for borrowed money and all obligations evidenced by bonds, debentures, notes, loan agreements or other similar instruments;

Loan Agreement — Page 6

(b)	any direct or contingent obligations arising under letters of credit, bankers’ acceptances, bank guaranties, surety bonds and similar instruments;
(c)	accrued obligations in respect of earnout or similar payments payable in cash or which may be payable in cash at the seller’s or obligee’s option;
(d)	obligations in respect of Capital Leases;
(e)	obligations to pay the deferred purchase price of property or services (excluding trade accounts payable that are not more than 30 days past due); and
(f)	all Guaranty Obligations with respect to obligations of any other Person of the type described in clauses (a) through (e) above.

Provided however, there shall be excluded for purposes of calculating Funded Debt obligations of Borrower or its Subsidiaries with respect to (a) claims liabilities under insurance policies in the ordinary course of business of Borrower or such Subsidiary and (b) the Preferred Stock.

“Funded Debt to Tangible Net Worth Ratio” means, as of any date of determination, the ratio of (a) Funded Debt as of such date to (b) Tangible Net Worth as of such date.

“GAAP” means generally accepted accounting principles applied on a consistent basis, set forth in the Opinions of the Accounting Principles Board of the American Institute of Certified Public Accountants and/or in statements of the Financial Accounting Standards Board, which are applicable in the circumstances as of the date in question, and the requisite that such principles be applied on a consistent basis shall mean that the accounting principles observed in a current period are comparable in all material respects to those applied in a preceding period.

“Governmental Authority” means any government, any state or other political subdivision thereof, or any Person exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, including but not limited to any commonwealth, federal, foreign, territorial, or other court or governmental department, commission, board, bureau, agency, central bank, or instrumentality, including, without limitation, any board of insurance, insurance department or insurance commissioner.

“Guaranty Obligations” means, as to any Person, (a) any obligation, contingent or otherwise, of such Person guarantying or having the economic effect of guarantying any Indebtedness or other obligation payable or performable by another Person (the “primary obligor”) in any manner, whether directly or indirectly, and including any obligation of such Person, direct or indirect, (i) to purchase or pay (or loan or supply funds for the purchase or payment of) such Indebtedness or other obligation, (ii) to purchase or lease property, securities or services for the purpose of assuring the obligee in respect of such Indebtedness or other obligation of the payment or performance of such Indebtedness or other obligation, (iii) to maintain working capital, equity capital or any other financial statement condition or liquidity of the primary obligor so as to enable the primary obligor

Loan Agreement — Page 7

to pay such Indebtedness or other obligation, or (iv) entered into for the purpose of assuring in any other manner the obligees in respect of such Indebtedness or other obligation of the payment or performance thereof or to protect such obligees against loss in respect thereof (in whole or in part), or (b) any Lien on any assets of such Person securing any Indebtedness or other obligation of any other Person, whether or not such Indebtedness or other obligation is assumed by such Person; provided, however, that the term “Guaranty Obligation” shall not include endorsements of instruments for deposit or collection in the ordinary course of business. The amount of any Guaranty Obligation shall be deemed to be an amount equal to the stated or determinable amount of the related primary obligation, or portion thereof, in respect of which such Guaranty Obligation is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof as determined by the guarantying Person in good faith.

“Highest Lawful Rate” means at the particular time in question the maximum rate of interest which, under applicable Law, any Bank is then permitted to charge on the Obligations. If the maximum rate of interest which, under applicable Law, any Bank is permitted to charge on the Obligations shall change after the date hereof, the Highest Lawful Rate shall be automatically increased or decreased, as the case may be, from time to time as of the effective time of each change in the Highest Lawful Rate without notice to Borrower. For purposes of determining the Highest Lawful Rate under applicable Law, the indicated rate ceiling shall be the lesser of (a)(i) the “weekly ceiling”, as that expression is defined in Section 303.003 of the Texas Finance Code, as amended, or (ii) if available in accordance with the terms thereof and at Banks’ option after notice to Borrower and otherwise in accordance with the terms of Section 303.103 of the Texas Finance Code, as amended, the “annualized ceiling” and (b)(i) if the amount outstanding under this Agreement is less than $250,000, twenty-four percent (24%), or (ii) if the amount under this Agreement is equal to or greater than $250,000, twenty-eight percent (28%) per annum.

“Indebtedness” means and includes for any Person, as of any date as of which the amount thereof is to be determined (a) all indebtedness for borrowed money, and all obligations evidenced by bonds, notes, debentures, loan agreements or similar instruments, (b) all obligations which are secured by any Lien existing on property owned by such Person whether or not the obligations secured thereby shall have been assumed by such Person, (c) all obligations of such Person to purchase any materials, supplies or other property, or to obtain the services of any other Person, if the relevant contract or other related document requires that payment for such materials, supplies, or other property, or for such services, shall be made regardless of whether delivery of such materials, supplies, or other property is ever made or tendered or such services are ever performed or tendered, (d) all obligations in respect of Capital Leases, (e) Synthetic Lease Obligations; (f) obligations under any Swap Contracts; (g) obligations in respect of capital stock which prior to December 31, 2006 is (i) mandatory redeemable (by sinking fund or similar payment or otherwise), (ii) redeemable at the option of the holder or (iii) convertible into Indebtedness; (h) any direct or contingent obligations arising under letters of credit, bankers’ acceptances, bank guaranties, surety bonds, and similar instruments; (i) “withdrawal liability” of such Person as defined under Part 1 of Subtitle E

Loan Agreement — Page 8

of Title IV of ERISA; (j) any direct or contingent obligations under insurance policies and reinsurance agreements, and (k) Guaranty Obligations for the payment, discharge, or satisfaction of Indebtedness of others of the character described in clauses (a) through (j) above.

“Indemnified Party” has the meaning set forth in Section 11.14(b).

“Insurance Regulatory Authority” means each Governmental Authority which regulates CICA or any other Material Subsidiary which is an Insurance Subsidiary.

“Insurance Subsidiary” means any direct or indirect Material Subsidiary of Borrower or any of its Material Subsidiaries that is an operating insurance company.

“Intangible Assets” means the amount of all assets that would be considered intangible assets of the Borrower and its Subsidiaries pursuant to GAAP, but excluding in any event (whether or not considered intangible assets in accordance with GAAP) deferred policy acquisition costs and costs of customer relationships acquired.

“Interest Expense” means, with respect to any period, total interest expense, whether paid or accrued (including the interest component of Capital Leases), of Borrower and its Subsidiaries, including, without limitation, all commissions, discounts and other fees and charges owed with respect to letters of credit and net costs under interest rate contracts and foreign exchange contracts, but excluding, however, interest expense not payable in cash (including amortization of discount), all as determined in conformity with GAAP.

“Interest Payment Date” means (a) each June 5 and December 5 during the term of this Agreement and (b) the Maturity Date.

“Internal Control Event” means a material weakness in, or fraud that involves management or other employees who have a significant role in, Borrower’s internal controls over financial reporting, in each case as described in the Securities Laws.

“Investment” in any Person means any investment, whether by means of share purchase, loan, advance, extension of credit, capital contribution or otherwise, in or to such Person, the guaranty of any Indebtedness of such Person, or the subordination of any claim against such Person to other Indebtedness of such Person.

“Junior Liabilities” has the meaning given to such term in the Subordination Agreement.

“Law” or “Laws” means all statutes, laws, ordinances, regulations, orders, writs, injunctions; or decrees of the United States, any state or commonwealth, any county, any municipality, any foreign country, any territory or possession, or any Governmental Authority.

“Leverage Ratio” means, as of any date of determination, the ratio of (a) Funded Debt as of such date to (b) EBITDA for the period of the four consecutive fiscal quarters ending on such date.

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“LIBOR Rate” means:

(a)

the rate per annum equal to the rate determined by Administrative Agent to be the offered rate that appears on Page 3750 of the Telerate screen (or any successor thereto) that displays an average British Bankers Association Interest Settlement Rate for deposits in Dollars with a term equivalent to an interest period of 30 days, determined as of approximately 11:00 a.m. (London time) on the first day of such 30-day period, or

(b)

if the rate referenced in the preceding subsection (a) does not appear on such page or service or such page or service shall cease to be available, the rate per annum equal to the rate determined by Administrative Agent to be the offered rate on such other page or such other service that displays an average British Bankers Association Interest Settlement Rate for deposits in Dollars with a term equivalent of 30 days, determined as of approximately 11:00 a.m. (London time) on the first day of such 30-day period, provided such offered rate on such other page or such other service is substantially comparable to the rate if determined by subsection (a) above.

“License” has the meaning set forth in Section 4.21.

“Lien” means any lien, security interest, Tax lien, mechanic’s lien, materialmen’s lien, or similar encumbrance, whether arising by contract or under Law.

“Litigation” means any proceeding, claim, lawsuit, investigation and/or arbitration by or before any Governmental Authority, including, but not limited to, proceedings, claims, and/or lawsuits under or pursuant to any environmental, occupational safety and health, antitrust, unfair competition, securities, Tax or other Law, or under or pursuant to any contract, agreement or other instrument.

“Loan Documents” means this Agreement, the Note, the Security Agreement, the CICA Security Agreement, and any other instruments, documents, and agreements executed and/or delivered pursuant to the terms of this Agreement, and any future amendments, modifications, restatements, renewals, or extensions hereof or thereof.

“Margin Stock” has the meaning given thereto in Regulation U, promulgated by the Board of Governors of the Federal Reserve System, as amended from time to time.

“Material Adverse Effect” means any act or circumstance that (a) causes a Default, (b) otherwise could reasonably be expected to be material and adverse to the business, assets, liabilities (actual or contingent), condition (financial or otherwise), results of operations, or business prospects of Borrower or any of its Subsidiaries) or (c) in any manner whatsoever does or would reasonably be expected to materially and adversely affect the validity or enforceability of any Loan Document.

“Material Agreements” has the meaning set forth in Section 4.14.

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“Material Subsidiary” means (a) CICA, and (b) at any time, any Subsidiary having at such time either (i) total (gross) revenues for the preceding four fiscal quarter periods in excess of 20% of the total (gross) revenues of Borrower and its Subsidiaries on a consolidated basis determined in accordance with GAAP for such period or (ii) a shareholder’s equity, as of the last day of the preceding fiscal quarter, having a book value in excess of 20% of Equity, based upon Borrower’s most recent annual or quarterly financial statements delivered to Banks in accordance with Section 6.2.

“Maturity Date” means the first to occur of (a) November 30, 2006, (b) the date the Revolving Commitment is terminated pursuant to Section 2.9 or 9.1, or (c) the date the Obligations are accelerated.

“NAIC” means the National Association of Insurance Commissioners.

“Net Income” means, with respect to any period for Borrower and its Subsidiaries, the net income or loss determined in accordance with GAAP.

“Note” means a promissory note issued by Borrower in favor of a Bank pursuant to this Agreement to evidence the portion of the Revolving Loan made by such Bank, in substantially the same form as Exhibit A attached hereto.

“Obligations” means all present and future indebtedness, obligations, and liabilities, and all renewals and extensions thereof, or any part thereof, of Borrower to Administrative Agent and Banks arising pursuant to this Agreement, the Note or any of the other Loan Documents, and all interest accruing thereon and costs, expenses, and reasonable attorney’s fees incurred in the enforcement or collection thereof, regardless of whether such indebtedness, obligations, and liabilities are direct, indirect, fixed, contingent, liquidated, unliquidated, joint, several, or joint and several, including, but not limited to, the indebtedness, obligations, and liabilities evidenced, secured, or arising pursuant to any of the Loan Documents, and all renewals and extensions thereof, or any part thereof, and all present and future amendments thereto, and including all amounts that would be owed by Borrower or any other Person under any Loan Document but for the fact that they are unenforceable or not allowable due to the existence of a proceeding pursuant to Debtor Relief Laws involving Borrower or any other Person (including all such amounts that would become due or would be secured but for the filing of any petition, or the commencement of any proceeding, under any Debtor Relief Laws).

“Outstanding Amount” means with respect to the Revolving Loan on any date, the aggregate outstanding principal amount thereof after giving effect to any borrowings and prepayments or repayments of the Revolving Loan occurring on such date.

“PBGC” means the Pension Benefit Guaranty Corporation, and any successor to all or any of the Pension Benefit Guaranty Corporation’s functions under ERISA.

“Pension Plan” means any Employee Plan that is now or was previously covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code.

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“Permitted Investments” means (a) marketable direct obligations of the United States of America or any agency controlled or supervised by or acting as an instrumentality thereof, and in any event shall also include marketable direct obligations of the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association and the Government National Mortgage Corporation, and obligations fully guaranteed as to principal and interest by the United States of America, (b) bank repurchase agreements and certificates of deposit issued by, and money market fund or other accounts placed with, commercial banks organized under the Laws of the United States of America or any state thereof, and having combined capital, surplus and undivided profits of not less than $500,000,000.00, (c) certificates of deposit issued by, and accounts placed with, financial institutions insured by the Federal Deposit Insurance Corporation, the amount of which are fully insured by the Federal Deposit Insurance Corporation, (d) investments by Borrower in the capital stock of its Subsidiaries provided Administrative Agent, for the benefit of Banks, has a perfected first priority Lien in such capital stock and the proceeds of the Surplus Debenture related thereto, (e) accounts receivable, chattel paper, instruments, and contract rights arising in the ordinary course of business, (f) investments in corporate commercial paper maturing no more than one year from the date of creation thereof and at the time of acquisition having the highest rating obtainable from either Moody’s Investors Service, Inc. (“Moody’s”) or Standard and Poor’s Corporation (“S&P”), (g) Investments in corporate or municipal debt instruments rated investment grade or better by either Moody’s or S&P, (h) Investments in preferred stock by issuers whose debt instruments have one of the three highest ratings obtainable by Moody’s or S&P, (i) investments by Subsidiaries in loans made to insureds pursuant to insurance policies issued by such Subsidiaries, (j) investments existing on the Closing Date that are set forth in Schedule 7.7, (k) mortgage loans to the extent not prohibited by any Insurance Regulatory Authority or applicable Law, and (l) other investments as authorized by the applicable insurance codes in the State of Colorado and any other state in which a Subsidiary of Borrower may be organized, not otherwise provided for herewith in clauses (a) through (k) in an amount not to exceed the lesser of (i) $3,000,000 in the aggregate during any fiscal year of Borrower or (ii) an amount that would cause the Aggregate Permitted Exceptions during any fiscal year to be equal to the Aggregate Permitted Exceptions Amount.

“Permitted Liens” means:

(a)

Liens in existence as of the date hereof as set forth on Schedule 4.9;

(b)

Liens created in the ordinary course of business resulting from (i) pledges or deposits under workmen’s compensation laws, unemployment insurance laws or similar legislation, (ii) good faith deposits in connection with bids, tenders, contracts (other than for the purpose of borrowing money or obtaining credit) or leases to which Borrower or any Subsidiary is a party, including security deposits, (iii) deposits of any Subsidiary required to be maintained with Insurance Regulatory Authorities in the ordinary course of business, (iv) deposits of any Subsidiary required by reinsurance agreements permitted by the terms hereof entered into in the ordinary course of business, and (v) deposits to secure public

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	or statutory obligations of Borrower or any Subsidiary, or surety, custom or appeal bonds to which Borrower or any Subsidiary is a party, or the payment of contested Taxes or import duties of Borrower or any Subsidiary;
(c)	any Lien (i) which is imposed by law, such as those of carriers, warehousemen and mechanics, if payment of the obligation secured thereby is not yet due, or the validity or amount of which is being contested by appropriate legal proceedings and with respect to which adequate reserves have been set up, (ii) which arises out of a judgment or award against Borrower or any Subsidiary with respect to which Borrower or such Subsidiary at the time shall currently be prosecuting an appeal or proceedings for review and with respect to which it shall have secured a stay of execution pending such appeal or proceedings for review, and with respect to which adequate reserves have been set up, and (iii) for taxes, assessments or other governmental charges or levies not yet subject to penalties for nonpayment or the validity or amount of which is being contested by appropriate legal proceedings and with respect to which adequate reserves have been established;
(d)	minor survey exceptions, minor encumbrances, easements or reservations of, or rights of others for, rights of way, sewers, electric lines, telegraph lines and other similar purposes, or zoning or other restrictions as to the use of real property, provided, that all of the foregoing, in the aggregate, do not at any time materially detract from the value of said properties or materially impair their use in the operation of the businesses of Borrower or any Subsidiary;
(e)	the Security Interests; and
(f)	Liens related to Indebtedness permitted pursuant to Section 7.1(g) and (h).

“Person” means any individual, firm, corporation, association, partnership, joint venture, trust, other entity, or a Governmental Authority.

“Plan Asset Regulation” means a regulation promulgated by the Department of Labor at 29 C.F.R. § 25110.3-101, as amended from time to time.

“Preferred Stock” means any preferred securities which may be issued in series under Borrower’s Restated and Amended Articles of Incorporation, received by the Colorado Secretary of State on March 8, 2004 which contain terms providing for the conversion of the preferred securities into common stock of Borrower and warrants and common stock related thereto.

“Pro Rata Share” means, with respect to each Bank, the percentage (carried out to the ninth decimal place) of the Aggregate Revolving Commitments set forth opposite the name of such Bank on Schedule 2.1, as such share may be adjusted as contemplated herein.

“Rate” shall mean a rate of interest per annum equal to the 30-day LIBOR Rate plus 1.80%.

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“Register” has the meaning given in Section 11.11(c).

“Registered Public Accounting Firm” has the meaning specified in the Securities Laws and shall be independent of Borrower as prescribed by the Securities Laws.

“Reportable Event” has the meaning assigned to such term in Title IV of ERISA.

“Request” means a written Request and Receipt form supplied by Administrative Agent and signed by any two of Borrower’s Authorized Representatives requesting a Revolving Advance under this Agreement.

“Required Banks” means, as of any date of determination, two or more Banks whose Voting Percentages aggregate at least 66%.

“Revolving Advances” has the meaning given in Section 2.1 and which may refer to either an Acquisition Advance or a Corporate Advance, as the case may be.

“Revolving Loan” has the meaning given in Section 2.1.

“Revolving Commitment” means the obligation of each Bank to make the Revolving Advances, pursuant to Section 2.1, in an aggregate principal amount set forth opposite such Bank’s name on Schedule 2.1, as such amount may be reduced, increased or adjusted from time to time in accordance with this Agreement (collectively, the “Aggregate Revolving Commitment”), which on the Closing Date is the aggregate principal amount of $75,000,000.

“Rights” means any remedies, powers, and privileges exercisable under the Loan Documents, at Law, equity, or otherwise.

“Risk Based Capital” means “Risk Based Capital” as defined by the NAIC, and as applied in the context of the Risk Based Guidelines promulgated by the NAIC.

“SAP” means, when used with respect to an insurance company, statutory accounting practices prescribed or permitted by the insurance laws or regulations or insurance commissioner (or other similar authority) in the jurisdiction of the incorporation of such insurance company for the preparation of financial statements and other financial reports by insurance corporations of the type of such insurance company applied on a basis consistent with those reflected in the Current Financials. If SAP is changed in any jurisdiction, the appropriate company affected thereby may change its practices in accordance with such change.

“SEC” means the Securities and Exchange Commission, or any Governmental Authority succeeding to any of its principal functions.

“Securities Laws” means the Securities Act of 1933, the Securities Exchange Act of 1934, Sarbanes-Oxley and the applicable accounting and auditing principles, rules, standards and practices promulgated, approved or incorporated by the SEC or the Public

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Company Accounting Oversight Board, as each of the foregoing may be amended and in effect on any applicable date hereunder.

“Security Agreement” means the First Amended and Restated Security Agreement, dated as of December 2, 2005, whereby Borrower grants to Administrative Agent, for the benefit of Banks, a security interest in the proceeds of the Surplus Debentures and the equity interests in any Subsidiary acquired as part of an Acquisition or formed by Borrower after the date of this Agreement as collateral security for the payment of the Obligations, as the same may be amended, modified, supplemented or restated from time to time.

“Security Interests” has the meaning set forth in Section 4.1.

“Shemano/Stonegate Warrants” means those certain warrants that may be issued pursuant to (a) the Non-Exclusive Finder’s Agreement, dated as of September 29, 2003, between Borrower and The Shemano Group, Inc. and (b) the Placement Agency Agreement, dated as of March 7, 2003, between Borrower and Stonegate Securities, Inc.

“Subordination Agreement” means that certain Subordination Agreement, dated as of July 12, 2004, among Regions Bank, the purchaser party thereto and Borrower, as amended to and as of the date hereof.

“Subsidiary” means every firm, corporation, association, partnership, joint venture, trust, or other entity of which an aggregate of 50% or more of the equity interests or the issued and outstanding stock having ordinary voting power (except directors’ qualifying shares) is, at the time the determination is being made, owned, either directly or indirectly, or controlled by Borrower or one or more Subsidiaries of Borrower.

“Surplus Debentures” means any subordinated surplus debentures payable by CICA to Borrower issued after the date of this Agreement in connection with an Acquisition Advance in the original principal amount of such Acquisition Advance.

“Swap Contract” means (a) any and all rate swap transactions, basis swaps, credit derivative transactions, forward rate transactions, commodity swaps, commodity options, forward commodity contracts, equity or equity index swaps or options, bond or bond price or bond index swaps or options or forward bond or forward bond price or forward bond index transactions, interest rate options, forward foreign exchange transactions, cap transactions, floor transactions, collar transactions, currency swap transactions, cross-currency rate swap transactions, currency options, spot contracts, any cancellations, buy backs or reversals, of any of the foregoing, or any other similar transactions or any combination of any of the foregoing (including any options to enter into any of the foregoing), whether or not any such transaction is governed by or subject to any master agreement, and (b) any and all transactions of any kind, and the related confirmations, which are subject to the terms and conditions of, or governed by, any form of master agreement published by the International Swaps and Derivatives Association, Inc., any International Foreign Exchange Master Agreement, or any other master agreement,

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together with any related schedules, including any such obligations or liabilities under any master agreement.

“Synthetic Lease Obligation” means the monetary obligation of a Person under (a) a so-called synthetic, off-balance sheet or tax retention lease, or (b) an agreement for the use or possession of property creating obligations that do not appear on the balance sheet of such Person but which, upon the insolvency or bankruptcy of such Person, would be characterized as the indebtedness of such Person (without regard to accounting treatment).

“Tangible Net Worth” means, as of any date of determination, shareholders’ equity of the Borrower and its Subsidiaries, less Intangible Assets, in each case determined in accordance with GAAP.

“Taxes” means all taxes, assessments, fees, or other charges from time to time or at any time imposed by any Laws or by any Governmental Authority.

“Total Adjusted Capital” means “Total Adjusted Capital” as defined by the NAIC, and as applied in the context of the Risk Based Capital Guidelines promulgated by the NAIC.

“Voting Percentage” means, as to any Bank, (a) at any time when the Revolving Commitments are in effect, such Bank’s Pro Rata Share and (b) at any time after the termination of the Revolving Commitments, the percentage (carried out to the ninth decimal place) which (i) the Outstanding Amount of such Bank’s portion of the Revolving Loan then constitutes of (ii) the Outstanding Amount of the Revolving Loan; provided, however, that if any Bank has failed to fund any portion of the Revolving Loan, such Bank’s Voting Percentage shall be deemed to be zero, and the respective Pro Rata Shares and Voting Percentages of the other Banks shall be recomputed for purposes of this definition and the definition of “Required Banks” without regard to such Bank’s Revolving Commitment or the outstanding amount of its portion of the Revolving Loan.

     Section 1.2 Heading. The headings, captions, and arrangements used in any of the Loan Documents are, unless specified otherwise, for convenience only and shall not be deemed to limit, amplify, or modify the terms of the Loan Documents, nor affect the meaning thereof.

     Section 1.3 Number and Gender of Words. Whenever herein the singular number is used, the same shall include the plural, and the plural shall include the singular, where appropriate; and words of any gender shall include each other gender where appropriate.

     Section 1.4 Money. Unless stipulated otherwise, all references herein to “dollars,” “money,” “payments,” or other similar financial or monetary terms, are references to currency of the United States of America.

     Section 1.5 Accounting Terms. All accounting and financial terms used herein, and the compliance with each covenant contained herein which relates to financial matters, shall be determined in accordance with GAAP in the case of Borrower or, in the case of an Insurance Subsidiary, with SAP.

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     Section 1.6 Articles, Sections, and Exhibits. All references to Articles and Sections contained herein are, unless specifically indicated otherwise, references to articles and sections of this Agreement. All references to “Exhibits” contained herein are references to exhibits attached hereto, all of which are made a part hereof for all purposes, the same as if set forth herein verbatim, it being understood that if any exhibit attached hereto, which is to be executed and delivered, contains blanks, the same shall be completed correctly and in accordance with the terms and provisions contained and as contemplated herein prior to or at the time of the execution and delivery thereof.

     Section 1.7 Construction. Unless otherwise expressly provided in this Agreement or the context requires otherwise, (a) all references to time are Austin, Texas time, (b) all references to “Articles”, “Sections”, “Exhibits”, and “Schedules” are to the Articles, Sections, Exhibits, and Schedules of and to this Agreement, (c) headings used in this Agreement and each other Loan Document are for convenience only and shall not be used in connection with the interpretation of any provision hereof or thereof, (d) references to any Person include that Person’s heirs, personal representatives, successors, and permitted assigns, that Person as a debtor-in-possession, and any receiver, trustee, liquidator, conservator, custodian, or similar party appointed for such Person or all or substantially all of its assets, (e) references to any Law include every amendment or restatement to it, rule and regulation adopted under it, and successor or replacement for it, and (f) references to a particular Loan Document include each amendment, modification, extension, or supplement to or restatement of it made in accordance with this Agreement and such other Loan Document.

ARTICLE II

REVOLVING LOAN

     Section 2.1 Revolving Advances. Subject to the terms and conditions herein set forth, each Bank severally agrees to make advances to Borrower from time to time on any Business Day during the period from the Closing Date to the Maturity Date (the “Revolving Advances”), in an aggregate amount not to exceed at any time outstanding the amount of such Bank’s Revolving Commitment (such outstanding Revolving Advances collectively referred to herein as the “Revolving Loan”). Banks shall have no obligation to make a Revolving Advance (a) to the extent the amount of the requested Revolving Advance plus all outstanding Revolving Advances exceeds the Aggregate Revolving Commitment, (b) to the extent the amount of a requested Acquisition Advance exceeds 90% of the Acquisition Consideration for such Acquisition, and (c) to the extent the amount of a requested Corporate Advance plus all outstanding Corporate Advances exceeds $5,000,000 in the aggregate. Borrower’s obligation to pay the Revolving Advances shall be evidenced by the Notes and, except for the Corporate Advances, shall be secured by the Collateral. Within the limits set forth in this Section 2.1, Borrower may borrow, prepay pursuant to Section 2.3 and reborrow.

     Section 2.2 Procedures for Requesting Revolving Advances. Borrower shall comply with the following procedures in requesting Revolving Advances:

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     (a) Time for Requests. Borrower shall submit a Request to Administrative Agent for each (i) Revolving Advance of less than $5,000,000 not later than 11:00 a.m. on the Business Day which is the date such Revolving Advance is to be made, and (ii) Revolving Advance equal to or in excess of $5,000,000, not later than at least twenty (20) days before the date such requested Revolving Advance is to be made. Each such Request shall be effective upon receipt by Administrative Agent, shall be in writing signed by two (2) Authorized Representatives of Borrower or persons whom Administrative Agent reasonably believes to be an Authorized Representative of Borrower, and shall specify whether the requested Revolving Advance shall be an Acquisition Advance or a Corporate Advance. Administrative Agent may, in its sole discretion, accept and honor telephonic or electronic (including facsimile) requests for Revolving Advances, and if Administrative Agent does accept and honor any telephonic or electronic request, it may require written confirmation thereof from Borrower. Following receipt of a Request, Administrative Agent shall promptly notify each Bank of its Pro Rata Share of the Revolving Advances. Borrower shall repay all Revolving Advances even if Administrative Agent does not receive such confirmation and even if the person requesting a Revolving Advance was not in fact authorized to do so. Any request for a Revolving Advance, whether written or telephonic, shall be deemed to be a representation by Borrower that the applicable conditions set forth in Article V have been satisfied as of the time of the request.

     (b) Disbursement. Upon fulfillment of the applicable conditions set forth in Article V, Administrative Agent shall disburse the proceeds of the requested Revolving Advance by crediting the same to Borrower’s demand deposit account maintained with Administrative Agent unless Administrative Agent and Borrower shall agree in writing to another manner of disbursement.

     (c) Funding and Payments Generally.

     (i) If at any time insufficient funds are received by and available to Administrative Agent to pay fully all amounts of principal, interest and fees then due hereunder, such funds shall be applied (i) first, toward costs and expenses incurred by Administrative Agent and each Bank, (ii) second, toward repayment of interest and fees then due hereunder, ratably among the parties entitled thereto in accordance with the amounts of interest and fees then due to such parties, and (iii) third, toward repayment of principal then due hereunder, ratably among the parties entitled thereto in accordance with the amounts of principal then due to such parties.

     (ii) Unless Borrower or any Bank has notified Administrative Agent prior to the date any payment is required to be made by it to Administrative Agent hereunder that Borrower or such Bank as the case may be, will not make such payment, Administrative Agent may assume that Borrower or such Bank, as the case may be, has timely made such payment and may (but shall not be so required to), in reliance thereon, make available a corresponding amount to the Person entitled thereto. If and to the extent that such payment was not in fact made to Administrative Agent in immediately available funds, then:

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     (A) if Borrower failed to make such payment, each Bank shall forthwith on demand repay to Administrative Agent the portion of such assumed payment that was made available to such Bank in immediately available funds, together with interest thereon in respect of each day from and including the date such amount was made available by Administrative Agent to such Bank to the date such amount is repaid to Administrative Agent in immediately available funds, at the Federal Funds Rate from time to time in effect; and

     (B) if any Bank failed to make such payment, such Bank shall forthwith on demand pay to Administrative Agent the amount thereof in immediately available funds, together with interest thereon for the period from the date such amount was made available by Administrative Agent to Borrower to the date such amount is recovered by Administrative Agent (the “Compensation Period”) at a rate per annum equal to the Federal Funds Rate from time to time in effect. If such Bank pays such amount to Administrative Agent, then such amount shall constitute such Bank’s Revolving Advance included in the applicable borrowing. If such Bank does not pay such amount forthwith upon Administrative Agent’s demand therefor, Administrative Agent may make a demand therefor upon Borrower, and Borrower shall pay such amount to Administrative Agent, together with interest thereon for the Compensation Period at a rate per annum equal to the rate of interest applicable to the applicable borrowing. Nothing herein shall be deemed to relieve any Bank from its obligation to fulfill its Revolving Commitment or to prejudice any rights which Administrative Agent or Borrower may have against any Bank as a result of any default by such Bank hereunder.

     A notice of Administrative Agent to any Bank with respect to any amount owing under this subsection (ii) shall be conclusive, absent manifest error.

     (iii) If any Bank makes available to Administrative Agent funds for any Revolving Advance to be made by such Bank as provided in the foregoing provisions of this Article II, and the conditions to the applicable Request set forth in Article V are not satisfied or waived in accordance with the terms hereof, Administrative Agent shall promptly return such funds (in like funds as received from such Bank) to such Bank, without interest.

     (iv) The obligations of the Banks hereunder to make Revolving Advances are several and not joint. The failure of any Bank to make any Revolving Advance on any date required hereunder shall not relieve any other Bank of its corresponding obligation to do so on such date, and no Bank shall be responsible for the failure of any other Bank to so make its Revolving Advance.

     (v) If, other than as expressly provided elsewhere herein, any Bank shall obtain on account of any Revolving Advances made by it, any payment (whether voluntary, involuntary, through the exercise of any right of set-off, or otherwise) in excess of its ratable share (or other share contemplated hereunder) thereof, such Bank

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shall immediately (a) notify Administrative Agent of such fact, and (b) purchase from the other Banks such participations in the Revolving Advances made by them as shall be necessary to cause such purchasing Bank to share the excess payment in respect of such Revolving Advance, pro rata with each of them; provided, however, that if all or any portion of such excess payment is thereafter recovered from the purchasing Bank, such purchase shall to that extent be rescinded and each other Bank shall repay to the purchasing Bank the purchase price paid therefor, together with an amount equal to such paying Bank’s ratable share (according to the proportion of (i) the amount of such paying Bank’s required repayment to (ii) the total amount so recovered from the purchasing Bank) of any interest or other amount paid or payable by the purchasing Bank in respect of the total amount so recovered. Borrower agrees that any Bank so purchasing a participation from another Bank may, to the fullest extent permitted by law, exercise all its rights of payment (including the right of set-off), but subject to Section 11.10 with respect to such participation as fully as if such Bank were the direct creditor of Borrower in the amount of such participation. Administrative Agent will keep records (which shall be conclusive and binding in the absence of manifest error) of participations purchased under this Section and will in each case notify the Banks following any such purchases or repayments. Each Bank that purchases a participation pursuant to this Section shall from and after such purchase have the right to give all notices, requests, demands, directions and other communications under this Agreement with respect to the portion of the Obligations purchased to the same extent as though the purchasing Bank were the original owner of the Obligations purchased.

     Section 2.3 Voluntary Prepayments. Borrower may, upon notice to Administrative Agent, at any time or from time to time voluntarily prepay the Revolving Loan in whole or in part without premium or penalty; provided that (i) such notice must be received by Administrative Agent not later than 11:00 a.m. of the date of prepayment; (ii) any prepayment of the Revolving Loan shall be in a principal amount of $100,000 or a whole multiple thereof (or, in each case if less, the entire principal amount thereof then outstanding). Each such notice shall specify the date and amount of such prepayment. If such notice is given by Borrower, Borrower shall make such prepayment and the payment amount specified in such notice shall be due and payable on the date specified therein.

     Section 2.4 Mandatory Prepayments. On or before any date of any reduction of the Revolving Commitment, Borrower shall prepay the Revolving Loan in an amount necessary to reduce the sum of the Revolving Loan to an amount less than or equal to the Aggregate Revolving Commitment as so reduced.

     Section 2.5 Repayment of the Revolving Loan. To the extent not otherwise required to be paid earlier as provided herein, Borrower shall repay the Revolving Loan on the Maturity Date.

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     Section 2.6 Interest.

     (a) Subject to the provisions of subsection (b) below, each Revolving Advance shall bear interest on the outstanding principal amount thereof at a rate per annum equal to the lesser of (x) the Highest Lawful Rate or (y) the Rate.

     (b) If any amount payable by Borrower under any Loan Document is not paid when due (giving effect, however, to any applicable grace periods), whether at stated maturity, by acceleration or otherwise, such amount shall thereafter bear interest at a fluctuating interest rate per annum at all times, to the fullest extent permitted by applicable Laws, equal to the lesser of (x) the Default Rate or (y) the Highest Lawful Rate. Furthermore, upon the request of Required Banks, while any Default exists, Borrower shall pay interest on the principal amount of all outstanding Obligations hereunder at a fluctuating interest rate per annum at all times, to the fullest extent permitted by applicable Laws, equal to lesser of (x) the Default Rate or (y) the Highest Lawful Rate. Accrued and unpaid interest on past due amounts (including interest on past due interest) shall be due and payable upon demand.

     (c) Interest on each Revolving Advance shall be due and payable in arrears on each Interest Payment Date applicable thereto and at such other times as may be specified herein. Interest hereunder shall be due and payable in accordance with the terms hereof before and after judgment, and before and after the commencement of any proceeding under any Debtor Relief Law.

     (d) The Rate shall be reset at the end of each 30-day period during the term of the Revolving Loan.

     Section 2.7 Computation of Interest. Subject to Section 11.15, all computations of interest for Revolving Advances shall be made on the basis of a year of 360 days and the actual number of days elapsed.

     Section 2.8 Payments Generally.

     (a) All payments to be made by Borrower shall be made without condition or deduction for any counterclaim, defense, recoupment, setoff or Taxes. Except as otherwise expressly provided herein, all payments by Borrower hereunder shall be made to Administrative Agent, at the Administrative Agent’s Principal Office in Dollars and in immediately available funds not later than 11:00 a.m. on the date specified herein. All payments received by Administrative Agent after 2:00 p.m. shall be deemed received on the next succeeding Business Day and any applicable interest or fee shall continue to accrue. Administrative Agent will promptly distribute to each Bank its Pro Rata Share (or other applicable share as provided herein) of payment with respect to principal and interest on the Revolving Loan and fees related thereto in like funds as received by Administrative Agent.

     (b) If any payment to be made by Borrower shall come due on a day other than a Business Day, payment shall be made on the next following Business Day, and such extension of time shall be reflected in computing interest or fees, as the case may be.

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     (c) Nothing herein shall be deemed to obligate any Bank to obtain the funds for any Revolving Advance in any particular place or manner or to constitute a representation by any Bank that it has obtained or will obtain the funds for any Revolving Advance in any particular place or manner.

     (d) Borrower agrees to pay any and all present or future stamp, court or documentary taxes and any other excise or property taxes or charges or similar levies which arise from any payment made under any Loan Document or from the execution, delivery, performance, enforcement or registration of, or otherwise with respect to, any Loan Document.

     Section 2.9 Termination of Revolving Commitment. (a) Borrower shall have the right to terminate the Aggregate Revolving Commitment at any time.

     (a) On the Maturity Date, the Aggregate Revolving Commitment shall automatically reduce to zero.

     (b) Upon any termination of the Aggregate Revolving Commitment pursuant to this Section 2.9, Borrower shall immediately make a prepayment of the Revolving Loan in accordance with Section 2.4 unless otherwise mutually agreed upon by Borrower and Banks. Borrower shall not have any right to rescind any termination. Once terminated, the Aggregate Revolving Commitment may not be reinstated.

ARTICLE III

COLLATERAL

     Section 3.1 Collateral. As collateral security for the prompt payment and performance of the Obligations, Administrative Agent, for the pro rata benefit of Banks, shall be granted Liens and security interests (collectively, the “Security Interests”) on, in, and to the following described Collateral (herein so called):

(a)	any and all shares of capital stock of any Subsidiary hereafter acquired or formed by Borrower or CICA using all or a portion of proceeds from any Revolving Advance, which shall be not less than 100% of issued and outstanding capital stock or other equity interests of such entity;
(b)	proceeds of assignment of proceeds of the Surplus Debentures; and
(c)	any and all interest, dividends and distributions with respect to, and any and all proceeds arising from or by virtue of the sale or other disposition of, or from the collection of, the Collateral described in paragraphs (a) through (b) above.

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ARTICLE IV

REPRESENTATIONS AND WARRANTIES

     Borrower hereby represents and warrants to Administrative Agent and Banks as follows:

     Section 4.1 Existence and Authority. Each of Borrower and its Material Subsidiaries (a) is duly organized, validly existing, and in good standing under the Laws of its state of organization recited herein, (b) is duly qualified to transact business and is in good standing in each jurisdiction where the nature and extent of its assets, properties, business, and operations require the same and where the failure to so qualify and/or be in good standing could have a Material Adverse Effect, and (c) possesses all requisite authority and power, and all licenses, permits, and franchises, to conduct its business as presently conducted and to own its properties and assets. Each of Borrower and its Subsidiaries possesses all requisite corporate authority and power to execute, deliver, and comply with the terms of this Agreement and the other Loan Documents to which it is a party.

     Section 4.2 Corporate Authorization. All requisite corporate action to authorize the execution and delivery of the Loan Documents to be executed by Borrower and its Subsidiaries, the consummation of all transactions contemplated thereby, and the performance and discharge by Borrower and its Subsidiaries of their respective obligations thereunder has been duly taken by Borrower and its Subsidiaries; no authorization, approval, consent, or notice under the provisions of the articles of incorporation or bylaws, or any amendments thereof, of Borrower or its Subsidiaries, or under any other relevant agreements, documents, instruments or applicable Law or by any additional party or Governmental Authority is required with respect to the execution and delivery of such Loan Documents, the consummation of all transactions contemplated thereby or the performance and discharge by Borrower and its Subsidiaries of their respective obligations thereunder, except such consents as have been obtained; and all of such Loan Documents will, upon execution and delivery, constitute, legal, valid and binding obligations of Borrower and its Subsidiaries, as the case may be, enforceable against each of them in accordance with their respective terms. Each Surplus Debenture hereafter executed and delivered in connection with an Acquisition Advance, will, when so executed, constitute the legal, valid and binding of obligation of CICA under such Surplus Debenture.

     Section 4.3 Compliance with Laws and Documents. Neither Borrower nor any Subsidiary is, nor will the execution, delivery, or performance of or compliance with the terms of, the Loan Documents cause Borrower or any Subsidiary to be, in violation of any Laws or provisions of their respective articles of incorporation or bylaws, as amended, in any respect which could have any effect whatsoever upon the validity, performance, or enforceability of any of the terms of the Loan Documents or which could have a Material Adverse Effect. The performance by Borrower or any Subsidiary of any or all of the terms and provisions contained herein or in any of the other Loan Documents will not violate the provisions of any agreement to which Borrower or any Subsidiary is a party the effect of which could have a Material Adverse Effect.

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     Section 4.4 Litigation. Except as set forth on Schedule 4.4, there is no Litigation pending or, to the knowledge of Borrower, threatened against Borrower or any Subsidiary, and there are no outstanding or unpaid judgments, penalties or assessments against Borrower or any Subsidiary, which in either event could have a Material Adverse Effect.

     Section 4.5 Taxes. Each of Borrower and the Subsidiaries has filed all required material Tax returns and reports and has paid, or adequately provided for the payment of, all material Taxes imposed on any of them or upon any of their respective assets, income, or franchises, other than (a) any such charges which are currently payable without penalty or interest, and (b) Taxes being contested in good faith and by appropriate proceedings diligently conducted.

     Section 4.6 Financial Statements. The Current Financials, heretofore furnished to Banks, were prepared on a basis consistent with preceding periods and fairly present the financial condition and results of operations of each of Borrower and its Subsidiaries as of, and for the portion of the fiscal year ending on, the date thereof. There were no material liabilities, direct or indirect, fixed or contingent, of Borrower and its Subsidiaries as of the date of the Current Financials which are not reflected therein or in the notes thereto. Except for transactions directly related to, or specifically contemplated by, this Agreement and transactions heretofore disclosed in writing to Banks, there have been no material adverse changes in the financial condition or operation of Borrower and its Subsidiaries from those shown in the Current Financials since the date thereof, nor has Borrower and its Subsidiaries incurred any material liability, direct or indirect, fixed, or contingent (except contingent liabilities with respect to insurance policies issued in the ordinary course of business). Since the date of the Current Financials, no Internal Control Event has occurred which could reasonably be expected to have a Material Adverse Effect.

     Section 4.7 Purpose of Loan. The proceeds of the Revolving Loan will be used by Borrower only for the purposes described in the Recitals hereto.

     Section 4.8 Investment Company Act. Neither Borrower nor any Material Subsidiary is an “investment company” or “controlled” by an “investment company” within the meaning of the Investment Company Act of 1940, as amended.

     Section 4.9 Properties. Borrower and the Material Subsidiaries have good and marketable title to all their respective properties reflected on the Current Financials, and except for the Permitted Liens, there is no Lien on any asset of Borrower or any Material Subsidiary. There are no presently effective financing statements of record in any jurisdiction covering any tangible or intangible assets of Borrower or any Material Subsidiary. Borrower and the Material Subsidiaries have in effect with respect to their properties and assets insurance in such amounts and against such casualties and contingencies as is customary in the case of businesses engaged in the same or a similar business or having similar properties similarly situated.

     Section 4.10 Subsidiaries. As of the Closing Date, Borrower has no Subsidiaries other than as set forth on Schedule 4.10 and the corporate structure and stock ownership of Borrower and its Subsidiaries is as set forth on Schedule 4.12.

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     Section 4.11 Compliance with Law. The business and operations of each of Borrower and its Subsidiaries have been and are being conducted in accordance with all applicable laws, rules and regulations of all Governmental Authorities and Insurance Regulatory Authorities.

     Section 4.12 Capital Stock. As of the Closing Date, the authorized capital stock and the issued and outstanding capital stock of Borrower and each of its Material Subsidiaries is as designated on Schedule 4.12. All of the issued and outstanding shares of capital stock of each such corporation are duly authorized, validly issued, fully paid and nonassessable. Neither Borrower nor any Subsidiary has granted or issued, or agreed to grant or issue, or reserved for issuance, any options, warrants or similar rights to any Person to acquire any shares or other securities convertible into capital stock other than (a) the Shemano/Stonegate Warrants and (b) the Preferred Stock.

     Section 4.13 Existing Indebtedness. Except as disclosed in the Current Financials or the notes thereto or on Schedule 4.13, neither Borrower nor any Material Subsidiary is directly, indirectly, or contingently obligated with respect to any Indebtedness.

     Section 4.14 Material Agreements. As of the Closing Date, Schedule 4.14 contains a true and complete description of all material written contracts, agreements, commitments, and understandings to which Borrower or any Material Subsidiary is a party, by which Borrower or any Material Subsidiary is directly or indirectly bound, or to which any of the assets of Borrower or any Material Subsidiary may be subject, except insurance policies or contracts issued, or reinsurance contracts entered into, by any Material Subsidiary in the ordinary course of business (“Material Agreements”).

     Section 4.15 Insiders. Neither Borrower nor any Subsidiary nor any Person having “control” (as that term is defined in 12 U.S.C. § 375(b)(5) or in regulations promulgated pursuant thereto) of Borrower or any Subsidiary is, an “executive officer”, “director” or “principal shareholder” (as those terms are defined in 12 U.S.C. § 375(b) or in regulations promulgated pursuant thereto) of any Bank, of a bank holding company of which any Bank is a subsidiary, or of any subsidiary of a bank holding company of which any Bank is a subsidiary.

     Section 4.16 ERISA.

     (a) Each Employee Plan has been maintained and administered in substantial compliance with the applicable requirements of the Code and ERISA. No circumstances exists with respect to any Employee Plan that could have a Material Adverse Effect.

     (b) With respect to each Pension Plan, (i) no accumulated funding deficiency (within the meaning of Section 412(a) of the Code), whether waived or unwaived, exists; (ii) the present value of accrued benefits (based on the most recent actuarial valuation prepared for each such plan, if any, in accordance with ongoing assumptions) does not exceed the current value of plan assets allocable to such benefits by a material amount; (iii) no reportable event (within the meaning of Section 4043 of ERISA) has occurred other than a reportable event with respect to which the 30-day notice requirement has been waived by regulation; (iv) no uncorrected prohibited transactions (within the meaning of Section 4975 of the Code) exist which could have

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a Material Adverse Effect and for which there exists no statutory or regulatory exception; (v) to the extent such plan is covered by PBGC, no material liability to the PBGC exists and no circumstances exist that could reasonably be expected to result in any such liability; and (vi) no material withdrawal liability (within the meaning of Section 4201(a) of ERISA) exists and no circumstances exist that could reasonably be expected to result in any such liability.

     (c) As of the Closing Date, neither Borrower nor any Subsidiary has any obligation under any Employee Plan to provide post-employment health care benefits to any of its current or former employees, except as may be required by Section 4980B of the Code or otherwise required by law.

     Section 4.17 Full Disclosure. There is no material fact that Borrower has not disclosed to Bank which could have a Material Adverse Effect. Neither the Financial Statements referenced in Section 4.6 hereof, nor any certificate or statement delivered herewith or heretofore by Borrower or any Subsidiary to Administrative Agent or any Bank in connection with negotiation of this Agreement, contains any untrue statement of a material fact or omits to state any material fact necessary to keep the statements contained herein or therein from being misleading.

     Section 4.18 No Default. No Default and no event which, with the lapse of time or notice or both could become a Default, has occurred and is continuing, and neither Borrower nor any Subsidiary is in default under any partnership agreement, indenture, indebtedness, promissory note, mortgage, deed of trust, security agreement, lease, license, permit, franchise or other obligation to which it is a party or by which it or its property is bound, which default could have a Material Adverse Effect or result in any cancellation, loss or forfeiture of any material right granted thereby or result in any material penalty to Borrower or any Subsidiary.

     Section 4.19 Principal Office. The addresses of the principal office, chief executive office, and principal place of business of Borrower and each Material Subsidiary is as set forth on Schedule 4.19.

     Section 4.20 Licenses, Patents and Trademarks. Borrower and its Material Subsidiaries own or possess all patents, trademarks, copyrights and other industrial or intellectual property rights (whether granted by Law or contract) and all Licenses and franchises which are necessary for the present and planned future conduct of their respective businesses, without any known conflict with, or violation of, the rights of others.

     Section 4.21 Insurance Licenses. Schedule 4.21 attached hereto lists, as of the Closing Date, all of the jurisdictions in which any Material Subsidiary holds active licenses (including, without limitation, licenses or certificates of authority from applicable insurance departments), permits or authorizations to transact insurance business (collectively, the “Licenses”). No such License is the subject of a proceeding for suspension or revocation or any similar proceedings, there is no sustainable basis known to Borrower or its Material Subsidiaries for such a suspension or revocation, and to Borrower’s or such Material Subsidiary’s knowledge no such suspension or revocation has been threatened by any licensing authority. Schedule 4.21 indicates the line or lines of insurance which each Material Subsidiary is permitted to engage in with

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respect to each License therein listed. No Material Subsidiary transacts any insurance business, directly or indirectly, in any state in a manner or to an extent which would require it to be licensed in such state under the Laws of such state, other than as specified on Schedule 4.21 hereto.

     Section 4.22 No Assumed Names. Except as set forth on Schedule 4.22, neither Borrower nor any Material Subsidiary does business under any name other than its corporate name shown herein.

     Section 4.23 Sufficiency of Capital. Borrower and its Subsidiaries on a consolidated basis are, and Borrower and each Material Subsidiary on an individual basis is, and after consummation of the transactions contemplated by this Agreement and after giving effect to the Obligations incurred and Security Interests created by such companies in connection herewith will be, Solvent. As used in this Section 4.23, “Solvent” means, with respect to a particular date, that on such date (i) the fair value of the property of such company is greater than the total amount of the fair value of liabilities, including, without limitation, contingent liabilities, of such company, (ii) the present fair salable value of the assets of such company is not less than the amount that will be required to pay the probable liability of such company on its debts as they become absolute and matured, (iii) such company is able to realize upon its assets and pay its debts and other liabilities, contingent obligations and other commitments as they mature in the normal course of business, (iv) such company does not intend to, nor believes that it will, incur debts or liabilities beyond such company’s ability to pay as such debts and liabilities mature, and (v) such company is not engaged in business or a transaction, and is not about to engage in business or a transaction, for which such company’s property would constitute unreasonably small capital after giving due consideration to the prevailing practice in the industry in which such company is engaged. In computing the amount of contingent liabilities at any time, it is intended that such liabilities will be computed at the amount which, in light of all the facts and circumstances existing at such time, represents the amount that can reasonably be expected to become an actual or material liability.

ARTICLE V

CONDITIONS PRECEDENT

     Section 5.1 Conditions Precedent to Revolving Advances on the Closing Date. Banks will not be obligated to make the initial Revolving Advance until Borrower has delivered, or has caused to be delivered, to Administrative Agent, or Administrative Agent otherwise receives, on or prior to the Closing Date, the following described documents, certificates, evidences, opinions, and other instruments in form and substance satisfactory to Administrative Agent and Banks:

(a) Articles of Incorporation. A copy of the articles of incorporation or organization, and all amendments thereto, of each of Borrower and its Material Subsidiaries, accompanied by certificates that such copy is correct and complete issued by (i) the appropriate governmental official of the state of its organization bearing a

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	Current Date and (ii) the secretary of each such corporation or organization dated as of the Closing Date.
(b)	Bylaws. A copy of the bylaws, and all amendments thereto, of each of Borrower and its Material Subsidiaries, accompanied by a certificate that each such copy is correct and complete, dated the Closing Date, executed by the secretary of such corporation.
(c)	Good Standing and Authority. Certificates of the appropriate governmental officials of such jurisdictions as Administrative Agent may request, each bearing a Current Date, to the effect that Borrower and its Material Subsidiaries are in good standing with respect to payment of franchise and similar Taxes and are duly qualified to transact business therein, accompanied by the certificate of the secretary of each such corporation, dated the Closing Date, that such certificates are true and correct.
(d)	Incumbency. A certificate of incumbency of all officers of Borrower and its Material Subsidiaries who will be authorized to execute or attest any of the Loan Documents to which Borrower or such Subsidiary is a party on behalf of such companies, dated the Closing Date, executed by their respective presidents and secretaries.
(e)	Resolutions. A copy of resolutions approving the Loan Documents and authorizing the transactions contemplated in this Agreement, duly adopted by the boards of directors of Borrower, accompanied by a certificate of the secretary of each such company dated the Closing Date, that such copy is a true and correct copy of resolutions duly adopted at a meeting of, or by unanimous written consent of, the board of directors of such company and that such resolutions have not been amended, modified, or revoked in any respect, and are in full force and effect as of the Closing Date.
(f)	Assumed Name Certificate. If Borrower or any Material Subsidiary is engaged in business using an assumed name, a certified copy of the certificate of assumed name, with evidence that such certificate was properly filed in the appropriate public office of the applicable jurisdiction in which Borrower or such Material Subsidiary is engaged in business using the assumed name.
(g)	Opinion of Counsel. The opinion of counsel to Borrower and its Material Subsidiaries satisfactory in form and substance to Administrative Agent.
(h)	Notes. The Notes in the amount of each Bank’s Revolving Commitment, duly executed by Borrower, properly completed, dated the Closing Date.
(i)	Security Agreement. The Security Agreement, properly executed by Borrower, and related UCC financing statements.

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(j)	CICA Security Agreement. The CICA Security Agreement, properly executed by CICA, and related financing statements.
(k)	UCC Searches. Searches of the Uniform Commercial Code, tax lien and other records as Administrative Agent may require.
(l)	Financing Statements. Evidence that Uniform Commercial Code financing statements in proper form executed by all proper parties have been filed in all necessary filing offices.
(m)	Priority. Evidence that the Security Interests are of first priority.
(n)	Regulatory Approvals. Evidence that all consents, licenses and approvals of Governmental Authorities required in connection with the execution, delivery, performance, validity and enforceability of this Agreement and, each of the other Loan Documents have been obtained, including, without limitation, any necessary approvals for the issuance of the Surplus Debenture.
(o)	Other Documents. Such other documents, opinions, certificates, agreements, instruments, and evidences as Administrative Agent or Bank may reasonably request.
(p)	Origination Fee. Administrative Agent shall have received for the pro rata account of each Bank, an origination fee equal to 0.375% of each Bank’s Revolving Commitment.

     Section 5.2 Conditions Precedent to All Revolving Advances. In addition to the conditions precedent in Section 5.1, the obligation of Banks to make each Revolving Advance shall be subject to the conditions precedent that:

(a)	the representations and warranties contained in Article IV are correct on and as of the date of such Revolving Advance as though made on and as of such date, except to the extent that such representations and warranties relate solely to an earlier date; and
(b)	no event has occurred and is continuing, or would result from such Revolving Advance which constitutes a Default or which, with the lapse of time or notice or both, could become a Default.

     Section 5.3 Conditions Precedent to All Acquisition Advances. In addition to the conditions precedent in Sections 5.1 and 5.2, the obligations of Banks to make each Acquisition Advance shall be subject to the conditions precedent that Administrative Agent shall receive prior to or on the date of such Acquisition Advance, an assignment of proceeds of a Surplus Debenture in at least the amount of such Acquisition Advance, any amendments or supplements to the Security Agreement required by Administrative Agent, and evidence that the Acquisition to which such requested Acquisition Advance relates has been approved by the board of directors or other governing body of the Person being acquired.

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     Section 5.4 Conditions Precedent to All Revolving Advances in Excess of $5,000,000. In addition to the conditions precedent in Sections 5.1, 5.2 and 5.3, the obligation of Banks to make each Revolving Advance equal to or in excess of $5,000,000 shall be subject to the following conditions precedent:

     (a) Banks shall have given its prior written consent to such Revolving Advance;

     (b) if such Revolving Advance is an Acquisition Advance, at least twenty (20) days prior to the requested Acquisition Advance, Banks shall have received copies of the acquisition documents; and

     (c) if such Revolving Advance is an Acquisition Advance, Banks shall have received pro forma Financial Statements of Borrower (prepared in accordance with GAAP) which take into account the effects of the applicable Acquisition, and which demonstrate to the satisfaction of Banks that no Default shall exist after giving effect thereto.

     Section 5.5 Conditions Precedent to Revolving Advances Resulting in the Aggregate Amount of Revolving Advances Exceeding $30,000,000. In addition to the conditions precedent in Sections 5.1, 5.2, 5.3 and 5.4, the obligation of Banks to make any Revolving Advance which would result in the aggregate amount of outstanding Revolving Advances to be in an amount in excess of $30,000,000, shall be subject to the execution of an amendment to the Subordination Agreement which will provide that such excess amount will be included as Senior Liabilities (as defined in the Subordination Agreement).

ARTICLE VI

AFFIRMATIVE COVENANTS

     Unless Banks shall otherwise consent in writing, until payment and performance in full of the Obligations and termination of the Aggregate Revolving Commitment, Borrower covenants and agrees with Banks that it will and will cause each Subsidiary to, directly or indirectly:

     Section 6.1 Proceeds. Use the proceeds of the Revolving Loan for proper corporate purposes and as represented and warranted herein.

     Section 6.2 Reporting Requirements. Deliver or cause to be delivered to each Bank:

(a) as soon as available, but in any event within 120 days after the end of each fiscal year of Borrower, a consolidated and consolidating balance sheet of Borrower and its Subsidiaries as at the end of such fiscal year, and the related consolidated and consolidating statements of profit and loss, and reconciliation of surplus, and cash flows for such fiscal year, audited and accompanied by a report and opinion of a Registered Public Accounting Firm of nationally recognized standing reasonably acceptable to Banks, which report and opinion shall be prepared in accordance with GAAP and Securities Laws and shall not be subject to any qualifications or exceptions, and accompanied by (i) an attestation report of such Registered Public Accounting Firm as to Borrower’s internal controls pursuant to Section 404 of

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	Sarbanes-Oxley and (ii) a certificate of such accountants that, in the course of their examination necessary for their certification of the foregoing (other than with respect to consolidating statements), they have not obtained knowledge of any Default or unmatured Default, or, if in the opinion of such accountants any Default or unmatured Default shall exist, stating the nature and status thereof; and
(b)	as soon as available, but in any event within 60 days after the end of each fiscal quarter (other than the fourth fiscal quarter) of each fiscal year of Borrower, a consolidated and consolidating balance sheet of Borrower and its Subsidiaries as at the end of each such fiscal quarter and the related consolidated and consolidating statements of profit and loss, and reconciliation of surplus, and cash flows for each such fiscal quarter and for the portion of Borrower’s fiscal year then ended, all in reasonable detail and certified by the chief financial officer or chief accounting officer of Borrower as fairly presenting the financial condition, results of operations and cash flows of Borrower and its Subsidiaries in accordance with GAAP, subject only to normal year-end audit adjustments and the absence of footnotes;
(c)	as soon as available, but in any event on or before April 1 following the end of each fiscal year of each Material Subsidiary that is an Insurance Subsidiary, copies of each Annual Statement that such companies have filed with or submitted to their respective domiciliary Insurance Regulatory Authorities, all such statements to be prepared in accordance with SAP consistently applied throughout the periods reflected therein, and accompanied by a certificate of a responsible financial official of the appropriate company to the effect that such Annual Statements present fairly the financial condition and results of operations of each such company;
(d)	as soon as available, but in any event on or before June 1 following the end of each fiscal year of each of Borrower and its Material Subsidiaries that are Insurance Subsidiaries, copies of reports certified by an independent certified public accountant reasonably acceptable to Banks on a SAP basis of any certifications required by any Governmental Authority;
(e)	promptly after the same are available, copies of each annual report, proxy or financial statement or other report or communication sent to the stockholders of Borrower or any of its Material Subsidiaries, and copies of all annual, regular, periodic and special reports and registration statements which Borrower or any of its Material Subsidiaries may file or be required to file with the Securities and Exchange Commission under Section 13 or 15(d) of the Securities Exchange Act of 1934, and not otherwise required to be delivered to Banks pursuant hereto;
(f)	promptly, notice of any material change in accounting policies or financial reporting practices by Borrower or any Material Subsidiary;
(g)	promptly, notice of the occurrence of any ERISA Event;

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(h)	as soon as available, and in any event within 60 days after the end of each fiscal year of Borrower, updated Schedule 4.14 and 4.21;
(i)	promptly upon any Acquisition or formation of a new Subsidiary of Borrower, updated Schedules 4.10, 4.12, 4.14;
(j)	promptly, such additional information regarding the business, financial or corporate affairs of Borrower or any Subsidiary as Administrative Agent or any Bank may from time to time request;
(k)	concurrently with the delivery of the financial statements referred to in Sections 6.2(a) and (b), a duly completed Compliance Certificate signed by the chief financial officer or chief accounting officer of Borrower; and
(l)	promptly, notice of the incurrence of any Internal Control Event.

     Section 6.3 Insurance Matters. Upon any Bank’s request, deliver to such Bank, and cause each Material Subsidiary to deliver to such Bank, promptly after receipt and/or becoming available, copies of (a) each material registration, filing or submission made by or on behalf of any Material Subsidiary with any Insurance Regulatory Authority, (b) each material examination and/or audit report or other similar report submitted to any Material Subsidiary by any Insurance Regulatory Authority, (c) all material information which any Bank may from time to time request with respect to the nature or status of any material deficiencies or violations reflected in any examination report or other similar report and (d) each material report, order, direction, instruction, approval, authorization, license or other notice which Borrower or any Material Subsidiary may at any time receive from any Insurance Regulatory Authority.

     Section 6.4 Notice of Litigation or Changes in Fact. Promptly notify each Bank of (a) the existence and status of any Litigation or the occurrence of any event which has resulted in, or could result in, a Material Adverse Effect, and (b) the occurrence of a Default or any event which, with notice or lapse of time or both, could become a Default.

     Section 6.5 Taxes. Duly pay and discharge all its material Taxes, assessments, and governmental charges prior to the date on which penalties will attach thereto, other than Taxes being contested in good faith by appropriate proceedings for which adequate reserves have been established.

     Section 6.6 Payment of Debts. Pay all of its material Indebtedness prior to the date on which penalties attach thereto.

     Section 6.7 Insurance. Maintain or cause to be maintained with financially sound and reputable insurers, insurance with respect to its properties and business against such casualties and contingencies and of such types and in such amounts as is customary in the case of businesses engaged in the same or a similar business or having similar properties similarly situated with such deviations therefrom as may be agreed upon by Banks from time to time.

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     Section 6.8 Maintenance of Existence. At all times maintain its existence and good standing and authority to transact business in all jurisdictions where the same may be necessary, and where the failure to do so could have a Material Adverse Effect.

     Section 6.9 Maintenance of Assets. (a) Maintain in full force and effect all material Rights, leases, franchise agreements, government clearances or certificates and all other licenses or rights necessary to comply with all Laws and other provisions applicable to the business of Borrower and its Subsidiaries where a failure to do so could have a Material Adverse Effect, and (b) maintain the assets used in their respective businesses in good repair, working order, and condition (normal wear and tear excluded) and make such proper repairs, renewals, and replacements as may be reasonably required except where a failure to so maintain could reasonably be expected not to have a Material Adverse Effect.

     Section 6.10 Expenses of Administrative Agent and Banks. Promptly pay all reasonable costs, fees, and expenses paid or incurred by (a) Administrative Agent incident to any of the Loan Documents (including reasonable attorneys’ fees and expenses incurred in connection with the negotiation, preparation, and execution thereof and any amendment thereto and the making of the Revolving Loan, whether or not the transactions contemplated hereby are consummated) and (b) Administrative Agent and each Bank in connection with the valid enforcement of the obligations of Borrower, or the valid exercise of any Rights (including, but not limited to, reasonable attorneys’ fees and court costs), all of which shall be and become a part of the Obligations.

     Section 6.11 Compliance with Material Agreements. Comply in all material respects with all material contracts, leases, agreements, indentures, mortgages or documents binding on it or affecting its properties or business where the failure to do so could have a Material Adverse Effect.

     Section 6.12 Books and Records: Access. Give any representative of any Bank access during all reasonable business hours to, and permit such representative to examine, copy or make excerpts from, any and all books, records and documents of Borrower or any Subsidiary in the possession of such corporation and relating to its affairs, and to inspect any of the properties of each such corporation. Borrower and each Subsidiary will maintain complete and accurate books and records of its transactions in accordance with GAAP and SAP, as appropriate

     Section 6.13 Compliance with Law. Comply with all Laws applicable to the conduct of its business or operations except to the extent that the failure to so comply could not have a Material Adverse Effect.

     Section 6.14 Authorization and Approvals. Promptly obtain from time to time at its own expense, all such governmental licenses, authorizations, consents, permits and approvals as may be required to enable it to comply with its obligations hereunder and under the other Loan Documents and to carry on in all material respects such corporation’s business substantially as currently conducted.

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     Section 6.15 Information and Other Documents. Promptly deliver to each Bank such information (not otherwise required to be furnished herein) respecting the business affairs, assets, and liabilities of Borrower and the Subsidiaries, and such opinions, certifications, and documents, in addition to those herein mentioned, as such Bank may reasonably request.

     Section 6.16 Environmental Law Compliance. Promptly pay and discharge when due all debts, claims, liabilities and obligations with respect to any clean-up measures necessary for Borrower and its Subsidiaries to comply with Applicable Environmental Laws affecting Borrower and its Subsidiaries.

     Section 6.17 Acquisitions and Subsidiaries. Upon acquisition of a Subsidiary in an Acquisition or formation of a new Subsidiary, in either case with proceeds of an Acquisition Advance, promptly (a) cause 100% of the outstanding capital stock or equity interests of such acquired or newly-formed Subsidiary to be pledged to Administrative Agent to secure the Obligations, (b) in the case of an Insurance Subsidiary, cause CICA to duly execute and deliver a Surplus Debenture to Borrower in at least the amount of any Acquisition Advance, a portion of the proceeds of which were used to acquire such Insurance Subsidiary, (c) deliver to Administrative Agent an assignment of the proceeds of such Surplus Debenture, (d) deliver to Administrative Agent evidence that the Acquisition to which such requested Acquisition Advance relates has been approved by the board of directors or other governing body of the Person being acquired, (e) deliver to Administrative Agent evidence that the Surplus Debenture has been approved by the appropriate Insurance Regulatory Authorities, and (f) deliver to Administrative Agent or any Bank of such other certificates, documents and opinions as may reasonably be required by Administrative Agent or any Bank with respect thereto.

     Section 6.18 Preferred Stock. Borrower shall deliver to Banks all documents related to any proposed issuance of Preferred Stock by Borrower no less than ten Business Days prior to any such issuance.

     Section 6.19 Subordination Agreement. Borrower shall deliver to (a) the Purchasers (as defined in the Subordination Agreement) an executed copy of this Agreement no less than five Business Days after the date hereof and (b) Administrative Agent evidence of such delivery.

ARTICLE VII

NEGATIVE COVENANTS

     Unless Banks shall otherwise consent in writing, until payment and performance in full of the Obligations and termination of the Aggregate Revolving Commitment, Borrower agrees with Banks that it will not, and will not permit any Material Subsidiary to, directly or indirectly:

     Section 7.1 Indebtedness. Create or suffer to exist any direct, indirect, fixed, or contingent liability for, or incur, any Indebtedness, except (a) the Obligations, (b) Indebtedness set forth and described in the Current Financials or on Schedule 4.13, (c) the Surplus Debentures, (d) current trade payables incurred in the ordinary course of business, (e) liabilities of Insurance Subsidiaries under insurance policies and reinsurance agreements issued in the ordinary course

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of business, (f) purchase money Liens relating to the acquisition of machinery and equipment of Borrower not exceeding the lesser of (i) $3,000,000 in the aggregate during any fiscal year of Borrower or (ii) an amount that would cause the Aggregate Permitted Exceptions during any fiscal year of Borrower to be equal to the Aggregate Permitted Exceptions Amount, and (g) Indebtedness in respect of Capital Leases not exceeding the lesser of (i) $3,000,000 in the aggregate during any fiscal year of Borrower or (ii) an amount that would cause the Aggregate Permitted Exceptions during any fiscal year of Borrower to be equal to the Aggregate Permitted Exceptions Amount.

     Section 7.2 Negative Pledge. Grant, create, incur, permit or suffer to exist any mortgage, pledge, security interest, conditional sale or other title retention agreement, charge, encumbrance or other Lien upon any of its assets or properties, except for Permitted Liens, or agree with any Person (other than in this Agreement and the other Loan Documents) that they will not grant, create, incur, permit or suffer to exist any Lien upon any of such assets.

     Section 7.3 Restrictions on Dividends. Directly or indirectly declare or make, or incur any liability to make, any Dividend (other than (a) Dividends payable solely in capital stock, (b) any Dividend paid by any Subsidiary of Borrower to Borrower or to another Subsidiary of Borrower that is the direct parent company of such Subsidiary, and (c) Dividends pursuant to the Citizens Equity Agreements, so long as no Default exists immediately preceding any Dividend or after giving effect thereto and payment of such Dividend would not be prohibited by the Subordination Agreement), or any purchase or redemption of any outstanding shares of stock or other equity securities issued by Borrower or any Subsidiary.

     Section 7.4 Limitation on Liquidation, Merger, Consolidation, and Disposition of Assets. At any time dissolve or liquidate, or consolidate with or merge into or with any Person or Persons, or enter into or undertake any plan of consolidation or merger with any Person or Persons, or convey, sell, lease (as lessor) or otherwise transfer or dispose of all or, except in the ordinary course of business, any portion of its property or assets (either by or through a single transaction or through a series of separate but related transactions) other than the disposition of obsolete or worn assets. Notwithstanding the foregoing, any Subsidiary of Borrower (a) may be merged or consolidated with or into (i) Borrower, provided that Borrower shall be the continuing or surviving corporation, or (ii) CICA, provided that CICA shall be the continuing or surviving corporation, and (b) may dispose of any or all of its assets (upon voluntary liquidation or otherwise) to Borrower or CICA.

     Section 7.5 No Assignment. Assign or transfer, or attempt to assign or transfer, any of their respective Rights, duties, or obligations under any of the Loan Documents.

     Section 7.6 Prepayments. Pay any of its Indebtedness prior to the date on which such Indebtedness is due and payable in accordance with the terms thereof, except (a) the Obligations, (b) the Surplus Debenture, provided that any prepayment of the Surplus Debenture shall within three (3) Business Days be applied by Borrower as a prepayment of the Obligations, and (c) provided no Default has occurred and is continuing or would result therefrom, other Indebtedness not to exceed $3,000,000 in aggregate amount during the term of this Agreement.

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     Section 7.7 Loans, Advances and Investments. Make any Investment in, or otherwise acquire any interest in, or control of, another company, business or Person, except for Permitted Investments.

     Section 7.8 Surplus Debenture. At any time amend, modify, cancel, terminate or discharge, or waive compliance with, or fail to enforce, the terms of any Surplus Debenture.

     Section 7.9 Leverage Ratio. Permit the Leverage Ratio to be greater than 3.0 to 1.0 as of the end of any fiscal quarter of Borrower.

     Section 7.10 Fixed Charge Coverage Ratio. Permit the Fixed Charges Coverage Ratio to be less than 1.50 to 1.0 as of the end of any fiscal quarter of Borrower.

     Section 7.11 Funded Debt to Tangible Net Worth Ratio. Permit the Funded Debt to Tangible Net Worth Ratio to be greater than 0.75 to 1.0 as of the end of any fiscal quarter of Borrower.

     Section 7.12 Debenture Coverage Ratio. Permit the Debenture Coverage Ratio to be less than 1.50 to 1.0 as of the end of any fiscal quarter of Borrower.

     Section 7.13 Reinsurance. Permit any Material Subsidiary to enter into any reinsurance agreements of any kind except for risk transfer reinsurance agreements entered into in the ordinary course of business by such Subsidiaries in accordance with their historical practice.

     Section 7.14 Transactions With Affiliates. Enter into or be a party to, or permit any Subsidiary to enter into or be a party to, any transaction with any Affiliate of Borrower or any Subsidiary, except (and in any event only if such transactions are effected in accordance with all applicable insurance laws and regulations governing transactions among insurance holding company system affiliates, including obtaining any necessary consents or approvals of such transaction by applicable Insurance Regulatory Authorities) (a) as provided herein, (b) in the ordinary course of and pursuant to the reasonable requirements of Borrower’s or Subsidiary’s business and upon fair and reasonable terms that are no less favorable to Borrower or Subsidiary than would be obtained at the time of such transaction in a comparable arm’s length transaction with a Person not an Affiliate of Borrower or Subsidiary and (c) in respect of transactions with Affiliates of Borrower which do not meet the requirements of clause (b) immediately preceding provided the aggregate amount of such transactions do not exceed $3,000,000.

     Section 7.15 Business. Engage directly or indirectly through other Persons in any material line of business substantially different from those lines of business conducted by Borrower and its Subsidiaries on the date hereof or any business substantially related or incidental thereto.

     Section 7.16 Limitation on Issuance of Capital Stock. Issue, sell or otherwise dispose of any shares of its capital stock or other securities, or rights, warrants or options to purchase or acquire any such shares or securities other than (a) in respect of stock issued by Borrower (i) as stock Dividends, (ii) in connection with the Shemano/Stonegate Warrants, (iii) as consideration for an Acquisition provided that no Default has occurred and is continuing or would result

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therefrom, and (iv) as part of a public offering provided that no Default has occurred and is continuing or would result therefrom, and (b) provided that no Default has occurred or is continuing or would result therefrom, the Preferred Stock.

     Section 7.17 Limitation on Leases. Except in the ordinary course of its business, enter into any agreement, or be or become liable under any agreement, not in existence on the Closing Date, for the lease, hire or use of any real or personal property except for leases or other agreements entered into after the Closing Date for which the amount of liability does not exceed the lesser of (a) $3,000,000 in the aggregate during any fiscal year of Borrower of (b) an amount that would cause the Aggregate Permitted Exceptions during any fiscal year of Borrower to be equal to the Aggregate Permitted Exceptions Amount.

     Section 7.18 Capital Expenditures. Make any capital expenditures (excluding capital expenditures which are a portion of the purchase price of any Acquisitions permitted hereunder) except in the ordinary course of business consistent with past practices not to exceed in aggregate amount the lesser of (a) $3,000,000 in the aggregate during any fiscal year of Borrower or (b) an amount that would cause the Aggregate Permitted Exceptions during any fiscal year of Borrower to be equal to the Aggregate Permitted Exceptions Amount.

     Section 7.19 Employee Plans.

     (a) Permit or suffer to exist any circumstances with respect to any Employee Plan that is likely to have a Material Adverse Effect. Borrower shall use its best efforts to maintain and administer, and to cause each member of its Controlled Group (as that term is defined in the Code) to maintain and administer, any Employee Plan in accordance with the applicable requirements of the Code and ERISA.

     (b) With respect to any Pension Plan (i) permit any accumulated funding deficiency (within the meaning of Section 412(a) of the Code), whether waived or unwaived, to exist; (ii) permit the present value of accrued benefits (based on the most recent actuarial valuation prepared for each such plan, if any, in accordance with ongoing actuarial assumptions) to exceed the current value of plan assets allocable to such benefits by a material amount; (iii) permit any reportable event (within the meaning of Section 4043 of ERISA) to occur, other than a reportable event with respect to which the 30-day notice requirement has been waived by regulation; (iv) permit a prohibited transaction (within the meaning of Section 4975 of the Code) for which there exists no statutory or regulatory exception to occur which has or could have a Material Adverse Effect; (v) incur any material liability to the PBGC; or (vi) incur any material withdrawal liability (within the meaning of Section 4201(a) of ERISA).

     (c) Incur a material obligation to provide post-employment health care benefits to any of its current or former employees, except as may be required by Section 4980B of the Code or otherwise required by law.

     Section 7.20 Subsidiaries. Own or acquire any Material Subsidiary that is not an operating insurance company or a holding company for an operating insurance company.

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     Section 7.21 Use of Proceeds. Use the proceeds of any portion of the Revolving Loan to directly or indirectly purchase or carry Margin Stock.

     Section 7.22 Composition of Corporate Group. Permit at any time (i) the fair value of the assets of Borrower and its Material Subsidiaries, as determined on a consolidated basis in accordance with GAAP, to be less than 75% of the fair value of the assets of Borrower and all of its Subsidiaries, as determined on a consolidated basis in accordance with GAAP, and (ii) the EBITDA, calculated solely with respect to Borrower and its Material Subsidiaries, as determined on a consolidated basis in accordance with GAAP, to be less than 75% of the EBITDA for Borrower and all of its Subsidiaries, as determined on a consolidated basis in accordance with GAAP.

     Section 7.23 Preferred Stock. Pay any obligations in respect of the Preferred Stock other than (a) payments in common stock of Borrower and (b) cash payments, provided that (i) immediately preceding and after giving effect to any such cash payment no Default exists or would result therefrom and (ii) any such cash payment would not be in violation of the Subordination Agreement.

ARTICLE VIII

DEFAULT

     The term “Default,” as used herein, means the occurrence of any one or more of the following events (including the passage of time, if any, specified therefor) provided that if any such event occurs and Banks subsequently agree in writing that they will not exercise any remedies hereunder as a result thereof, the occurrence of such event shall no longer be deemed a “Default” hereunder insofar as the state of facts giving rise to such event is concerned, but the same shall not operate as or be deemed to be a waiver with respect to any identical or similar state of facts which occurs thereafter:

     Section 8.1 Payment of Obligations. The failure or refusal of Borrower to pay (a) principal of the Obligations, or any part thereof, as it becomes due in accordance with the terms of the Loan Documents or (b) interest on the Obligations, or any other amounts due hereunder, upon the earlier of (i) five days after it becomes due in accordance with the terms of the Loan Documents, or (ii) one Business Day after notice of such failure to Borrower by Administrative Agent or any Bank.

     Section 8.2 Certain Covenants. The failure or refusal of Borrower or any Subsidiary to punctually and properly perform, observe, and comply with any covenant, agreement, or condition contained in Sections 6.1, 6.8, 6.12, or any section of Article VII.

     Section 8.3 Default under Loan Documents. The occurrence of an event of default or default as defined in and under any of the Loan Documents.

     Section 8.4 Other Covenants. The failure or refusal of Borrower or any Subsidiary to punctually and properly perform, observe, and comply with any covenant, agreement, or condition contained in any of the Loan Documents (other than covenants to pay the Obligations

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and those referenced in Section 8.2) and such failure shall not have been remedied within the earlier of (a) 30 days after such occurrence or (b) ten (10) days after notice of such failure to Borrower by Administrative Agent or any Bank.

     Section 8.5 Voluntary Debtor Relief. Borrower or any Subsidiary shall (a) execute an assignment for the benefit of creditors, or (b) admit in writing its inability to pay its debts generally as they become due, or (c) voluntarily seek the benefit or benefits of any Debtor Relief Law or become a party to any proceeding provided for by any Debtor Relief Law that could suspend or otherwise affect any of the Rights of Administrative Agent or any Bank granted in the Loan Documents.

     Section 8.6 Involuntary Proceedings. Borrower or any Subsidiary shall involuntarily (a) have an order, judgment, or decree entered against it by any Governmental Authority pursuant to any Debtor Relief Law that could suspend or otherwise affect any of the Rights granted to Administrative Agent or any Bank in any of the Loan Documents, or (b) have a petition filed against it seeking the benefit or benefits provided for by any Debtor Relief Law that would suspend or otherwise affect any of the Rights granted to Administrative Agent or any Bank in any of the Loan Documents.

     Section 8.7 Judgments. The entry of a final judgment or judgments, from which no further appeal can be taken, against Borrower or any Subsidiary for the payment of money in an aggregate amount in excess of $1,000,000 and the same shall remain in effect and unstayed for a period of thirty (30) consecutive days.

     Section 8.8 Attachment. The attachment, sequestration, levy, tax lien, forfeiture or similar proceeding against the Collateral or any of the material assets of Borrower or any Material Subsidiary.

     Section 8.9 Material Agreements. The occurrence of a default by Borrower or any Material Subsidiary under any Material Agreement.

     Section 8.10 Other Indebtedness. Borrower or any Material Subsidiary shall fail to pay when due any principal of or interest on any Indebtedness (other than the Obligations) of having an aggregate principal amount of $500,000, and such failure shall continue beyond any applicable grace period, or the maturity of any such Indebtedness shall have been accelerated, or any such Indebtedness shall have been required to be prepaid, repurchased or redeemed prior to the stated maturity thereof, or any event shall have occurred that (a) permits (or, with the giving of notice or lapse of time or both, would permit) any holder or holders of such Indebtedness or any person acting on behalf of such holder or holders to accelerate the maturity thereof or require any such prepayment, repurchase or redemption, or (b) causes an offer to prepay, repurchase or redeem (automatically or otherwise) to be made.

     Section 8.11 Misrepresentation. The discovery by Administrative Agent or any Bank that any material statement, representation, or warranty in the Loan Documents or in any writing ever delivered to Administrative Agent or any Bank pursuant to the Loan Documents, is false, misleading, or erroneous in any material respect.

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     Section 8.12 Surplus Debenture Payments. Any Subsidiary liable on any Surplus Debenture shall fail to make a scheduled payment on or otherwise comply with the terms of the Surplus Debenture.

     Section 8.13 Action by Governmental Authority. (a) Any Governmental Authority shall issue any order of conservation, supervision or any other order of like effect relating to Borrower or any Subsidiary which could cause a Material Adverse Effect, (b) any License shall be revoked, the revocation of which could cause a Material Adverse Effect, or (c) any insurance commissioner or any other insurance regulator of any state intervenes or takes any steps towards intervening in the management of the business or operations of Borrower or any Subsidiary, or Borrower or any Subsidiary facilitates or takes any affirmative action with the intention of facilitating such intervention.

     Section 8.14 Full Force and Effect. This Agreement, or any other Loan Document shall cease to be in full force and effect or shall be declared null and void or the validity or enforceability thereof shall be contested or challenged by Borrower or any Subsidiary or any of their respective shareholders, or Borrower or any Subsidiary shall deny that it has any further liability or obligation under any of the Loan Documents, or any lien or security interest created by the Loan Documents shall for any reason cease to be a valid, first priority perfected security interest in and lien upon any of the Collateral covered thereby.

     Section 8.15 Stock Ownership. Borrower shall cease to own, legally and beneficially, directly or indirectly (a) 100% of the outstanding capital stock that constitutes Collateral, or (b) at any time 100% of the outstanding capital stock of any Material Subsidiary not constituting Collateral, unless with respect to clause (b) only 100% of the proceeds of such sale or other disposition are promptly to Borrower.

     Section 8.16 Change of Control. The occurrence of a Change of Control.

     Section 8.17 Liquidation or Dissolution. Borrower or any Subsidiary shall liquidate, dissolve, terminate or suspend its business operations or otherwise fail to operate its business in the ordinary course, or sell or attempt to sell all or substantially all of its assets, without Banks’ prior written consent.

     Section 8.18 Preferred Stock. Any Preferred Stock shall be issued in which, or thereafter amended or modified in a manner such that, (a) the obligations of Borrower with respect thereto are not subordinated to the payment by Borrower of the Obligations or (b) the terms thereof affect Administrative Agent’s or any Bank’s rights against Borrower or otherwise as a creditor.

ARTICLE IX

RIGHTS OF ADMINISTRATIVE AGENT AND BANKS

     Section 9.1 Remedies Upon Default. Should a Default occur and be continuing, Administrative Agent shall, at the request of, or may, with the consent of, the Required Banks, do any one or more of the following:

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(a)	Acceleration. Terminate the Aggregate Revolving Commitment and/or declare the entire unpaid balance of the Obligations and all other Indebtedness of Borrower to Banks, or any part thereof, immediately due and payable, whereupon it shall be due and payable without any action by Administrative Agent or any Bank, and without diligence, presentment, demand, protest, notice of default, notice of intention to accelerate, notice of acceleration or other notice of any kind, all of which Borrower hereby expressly waives, anything contained herein or in any other Loan Document to the contrary notwithstanding; provided, however, that upon the occurrence of a Default specified in Sections 8.5 or 8.6 hereof, such Obligations shall become due and payable without declaration, notice, demand or any other action by Administrative Agent or any Bank and the Aggregate Revolving Commitment shall automatically terminate.
(b)	Judgment. Reduce any claim to judgment.
(c)	Foreclosure. Take such steps legally permissible as Administrative Agent may deem appropriate to foreclose or otherwise enforce the Security Interests and all Liens granted to Administrative Agent to secure payment and performance of the Obligations.
(d)	Rights. Exercise any and all Rights afforded by the Laws of the State of Texas or any other jurisdiction as Administrative Agent shall deem appropriate, including, but not limited to, the Uniform Commercial Code of Texas or of such other jurisdiction, or by any of the Loan Documents, or by Law or equity, or otherwise.

     Section 9.2 Cumulative Rights. All Rights available to Administrative Agent and Banks under the Loan Documents shall be cumulative of and in addition to all other Rights granted to Administrative Agent and Banks at Law or in equity, whether or not the Obligations are due and payable and whether or not Administrative Agent or any Bank shall have instituted any suit for collection, foreclosure, or other action in connection with the Loan Documents.

     Section 9.3 Reimbursement of Expenses. Any reasonable expenses incurred by Administrative Agent pursuant to the exercise of any Right provided herein shall become part of the Obligations and shall bear interest at the rate of interest then in effect under the Notes from the date notice of such expense is sent by Administrative Agent until the date repaid by Borrower.

     Section 9.4 Performance by Administrative Agent. Should any covenant, duty, or agreement of Borrower fail to be performed in accordance with the terms of the Loan Documents, Administrative Agent may, at its option, perform, or attempt to perform, such covenant, duty, or agreement on behalf of Borrower. In such event, Borrower shall, at the request of Administrative Agent, promptly pay any reasonable amount expended by Administrative Agent in such performance or attempted performance to Administrative Agent at Administrative Agent’s Administrative Agent’s Principal Office, together with interest thereon at the rate of interest then in effect under the Notes from the date of such expenditure by Administrative Agent until paid. Notwithstanding the foregoing, it is expressly understood that

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Administrative Agent does not assume and shall never have, except by express written consent of Administrative Agent, any liability or responsibility for the performance of any duties of Borrower hereunder, or under, or in connection with all or any part of the Collateral.

     Section 9.5 Administrative Agent and Banks Not in Control. None of the covenants or other provisions contained in this Agreement shall, or shall be deemed to, give Administrative Agent or any Bank the Rights or power to exercise control over the affairs and/or management of Borrower, the power of Administrative Agent or any Bank being limited to the Right to exercise the remedies provided in the other subsections of this Article; provided that, if Administrative Agent and each Bank becomes the owner of any stock of any Person, whether through foreclosure or otherwise, Administrative Agent and each Bank shall be entitled to exercise such legal Rights as it may have by being a shareholder of such Person.

     Section 9.6 Waivers. The acceptance by Administrative Agent or any Bank at any time and from time to time of part payment on the Obligations shall not be deemed to be a waiver of any Default then existing. No waiver by Administrative Agent or any Administrative Agent or any Bank of any Default shall be deemed to be a waiver of any other then existing or subsequent Default. No delay or omission by Administrative Agent or any Bank in exercising any Right under the Loan Documents shall impair such Right or be construed as a waiver thereof or any acquiescence therein, nor shall any single or partial exercise of any such Right preclude other or further exercise thereof, or the exercise of any other Right under the Loan Documents or otherwise.

     Section 9.7 Application of Proceeds. Any and all proceeds ever received by Administrative Agent or any Bank from any disposition of the Collateral, or any part thereof, or the exercise of any other Right pursuant to the Loan Documents shall be applied by Administrative Agent or any Bank to the Obligations in the order and manner set forth herein, notwithstanding any instructions to the contrary by Borrower; provided, that Borrower shall remain liable to Administrative Agent and Banks for any deficiency.

ARTICLE X
ADMINISTRATIVE AGENT

     Section 10.1 Appointment and Authorization of Administrative Agent. Each Bank hereby irrevocably appoints, designates and authorizes Administrative Agent to take such action on its behalf under the provisions of this Agreement and each other Loan Document and to exercise such powers and perform such duties as are expressly delegated to it by the terms of this Agreement or any other Loan Document, together with such powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary contained elsewhere herein or in any other Loan Document, Administrative Agent shall not have any duties or responsibilities, except those expressly set forth herein, nor shall Administrative Agent have or be deemed to have any fiduciary relationship with any Bank or participant, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or any other Loan Document or otherwise exist against Administrative Agent. Without limiting the generality of the foregoing sentence, the use of the term “agent” herein and in the other Loan Documents with reference to Administrative Agent is not intended to connote any fiduciary or

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other implied (or express) obligations arising under agency doctrine of any applicable law. Instead, such term is used merely as a matter of market custom, and is intended to create or reflect only an administrative relationship between independent contracting parties.

     Section 10.2 Delegation of Duties. Administrative Agent may execute any of its duties under this Agreement or any other Loan Document by or through agents, employees or attorneys-in-fact and shall be entitled to advice of counsel (including counsel to Borrower) and other consultants or experts concerning all matters pertaining to such duties. The Administrative Agent shall not be responsible for the negligence or misconduct of any agent or attorney-in-fact that it selects in the absence of negligence or willful misconduct.

     Section 10.3 Liability of Administrative Agent. No Agent-Related Person shall (a) be liable for any action taken or omitted to be taken by any of them under or in connection with this Agreement or any other Loan Document or the transactions contemplated hereby (except for its own gross negligence or willful misconduct in connection with its duties expressly set forth herein), or (b) be responsible in any manner to any Bank or participant for any recital, statement, representation or warranty made by Borrower or any officer thereof, contained herein or in any other Loan Document, or in any certificate, report, statement or other document referred to or provided for in, or received by the Administrative Agent under or in connection with, this Agreement or any other Loan Document, or the validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other Loan Document, or for any failure of Borrower or any other party to any Loan Document to perform its obligations hereunder or thereunder. No Agent-Related Person shall be under any obligation to any Bank or participant to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement or any other Loan Document, or to inspect the properties, books or records of Borrower or any Subsidiary.

     Section 10.4 Reliance by Administrative Agent. (a) Administrative Agent shall be entitled to rely, and shall be fully protected in relying, upon any writing, communication, signature, resolution, representation, notice, consent, certificate, affidavit, letter, telegram, facsimile, telex or telephone message, statement or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons, and upon advice and statements of legal counsel (including counsel to any Borrower), independent accountants and other experts selected by Administrative Agent. Administrative Agent shall be fully justified in failing or refusing to take any action under any Loan Document unless it shall first receive such advice or concurrence of the Required Banks as it deems appropriate and, if it so requests, it shall first be indemnified to its satisfaction by Banks against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. Administrative Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement or any other Loan Document in accordance with a request or consent of the Required Banks or all Banks, if required hereunder, and such request and any action taken or failure to act pursuant thereto shall be binding upon all the Banks and participants. Where this Agreement expressly permits or prohibits an action unless the Required Banks otherwise determine, Administrative Agent shall, and in all other instances, Administrative Agent may, but shall not be required to, initiate any solicitation for the consent or a vote of Banks.

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     (b) For purposes of determining compliance with the conditions specified in Article V (other than Section 5.4(a)), each Bank that has signed this Agreement shall be deemed to have consented to, approved or accepted or to be satisfied with, each document or other matter either sent by Administrative Agent to such Bank for consent, approval, acceptance or satisfaction, or required thereunder to be consented to or approved by or acceptable or satisfactory to a Bank.

     Section 10.5 Notice of Default. Administrative Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default, except with respect to defaults in the payment of principal, interest and fees required to be paid to Administrative Agent for the account of the Banks, unless Administrative Agent shall have received written notice from a Bank or Borrower referring to this Agreement, describing such Default or Event of Default and stating that such notice is a “notice of default.” Administrative Agent will notify the Banks of its receipt of any such notice. Administrative Agent shall take such action with respect to such Default or Event of Default as may be directed by the Required Banks in accordance with Article IX; provided, however, that unless and until Administrative Agent has received any such direction, Administrative Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable or in the best interest of the Banks.

     Section 10.6 Credit Decision; Disclosure of Information by Administrative Agent. Each Bank acknowledges that no Agent-Related Person has made any representation or warranty to it, and that no act by Administrative Agent hereinafter taken, including any consent to and acceptance of any assignment or review of the affairs of Borrower or any Subsidiary thereof, shall be deemed to constitute any representation or warranty by any Agent-Related Person to any Bank as to any matter, including whether Agent-Related Persons have disclosed material information in their possession. Each Bank represents to Administrative Agent that it has, independently and without reliance upon any Agent-Related Person and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, prospects, operations, property, financial and other condition and creditworthiness of Borrower and its respective Subsidiaries, and all applicable bank or other regulatory Laws relating to the transactions contemplated hereby, and made its own decision to enter into this Agreement and to extend credit to Borrower hereunder. Each Bank also represents that it will, independently and without reliance upon any Agent-Related Person and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement and the other Loan Documents, and to make such investigations as it deems necessary to inform itself as to the business, prospects, operations, property, financial and other condition and creditworthiness of Borrower. Except for notices, reports and other documents expressly required to be furnished to Banks by Administrative Agent herein, Administrative Agent shall not have any duty or responsibility to provide any Bank with any credit or other information concerning the business, prospects, operations, property, financial and other condition or creditworthiness of Borrower or any of its Subsidiaries which may come into the possession of any Agent-Related Person.

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     Section 10.7 INDEMNIFICATION OF ADMINISTRATIVE AGENT. WHETHER OR NOT THE TRANSACTIONS CONTEMPLATED HEREBY ARE CONSUMMATED, BANKS SHALL INDEMNIFY UPON DEMAND EACH AGENT-RELATED PERSON (TO THE EXTENT NOT REIMBURSED BY OR ON BEHALF OF BORROWER AND WITHOUT LIMITING THE OBLIGATION OF BORROWER TO DO SO), PRO RATA, AND HOLD HARMLESS EACH AGENT-RELATED PERSON FROM AND AGAINST ANY AND ALL INDEMNIFIED LIABILITIES INCURRED BY IT (WHETHER OR NOT ARISING OUT OF THE NEGLIGENCE OF SUCH AGENT-RELATED PERSON); PROVIDED, HOWEVER, THAT NO BANK SHALL BE LIABLE FOR THE PAYMENT TO ANY AGENT-RELATED PERSON OF ANY PORTION OF SUCH INDEMNIFIED LIABILITIES RESULTING FROM SUCH PERSON’S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT; PROVIDED, HOWEVER, THAT NO ACTION TAKEN IN ACCORDANCE WITH THE DIRECTIONS OF THE REQUIRED BANKS SHALL BE DEEMED TO CONSTITUTE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT FOR PURPOSES OF THIS SECTION. WITHOUT LIMITATION OF THE FOREGOING, EACH BANK SHALL REIMBURSE ADMINISTRATIVE AGENT UPON DEMAND FOR ITS PRO RATA SHARE OF ANY COSTS OR OUT-OF-POCKET EXPENSES (INCLUDING ATTORNEY COSTS) INCURRED BY THE ADMINISTRATIVE AGENT IN CONNECTION WITH THE PREPARATION, EXECUTION, DELIVERY, ADMINISTRATION, MODIFICATION, AMENDMENT OR ENFORCEMENT (WHETHER THROUGH NEGOTIATIONS, LEGAL PROCEEDINGS OR OTHERWISE) OF, OR LEGAL ADVICE IN RESPECT OF RIGHTS OR RESPONSIBILITIES UNDER, THIS AGREEMENT, ANY OTHER LOAN DOCUMENT, OR ANY DOCUMENT CONTEMPLATED BY OR REFERRED TO HEREIN, TO THE EXTENT THAT ADMINISTRATIVE AGENT IS NOT REIMBURSED FOR SUCH EXPENSES BY OR ON BEHALF OF BORROWER. THE UNDERTAKING IN THIS SECTION SHALL SURVIVE TERMINATION OF THE REVOLVING COMMITMENTS, THE PAYMENT OF ALL OBLIGATIONS HEREUNDER AND THE RESIGNATION OR REPLACEMENT OF ADMINISTRATIVE AGENT. THE FOREGOING INDEMNITY SHALL APPLY TO THE NEGLIGENCE OF THE AGENT-RELATED PERSON (BUT NOT THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF THE AGENT-RELATED PERSON).

     Section 10.8 Administrative Agent in its Individual Capacity. Regions Bank and its Affiliates may make loans to, issue letters of credit for the account of, accept deposits from, acquire equity interests in and generally engage in any kind of banking, trust, financial advisory, underwriting or other business with Borrower and its Subsidiaries as though Regions Bank were not Administrative Agent and without notice to or consent of Banks. Banks acknowledge that, pursuant to such activities, Regions Bank or its Affiliates may receive information regarding Borrower or any of its Subsidiaries (including information that may be subject to confidentiality obligations in favor of Borrower or such Subsidiary) and acknowledge that Administrative Agent shall be under no obligation to provide such information to them. With respect to its Revolving Advances, Regions Bank shall have the same rights and powers under this Agreement as any other Bank and may exercise such rights and powers as though it were not Administrative Agent, and the terms “Bank” and “Banks” include Regions Bank in its individual capacity.

     Section 10.9 Successor Administrative Agent. Administrative Agent may resign as Administrative Agent upon 30 days’ notice to Banks and Borrower. If Administrative Agent

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resigns under this Agreement, the Required Banks (excluding any Bank which is also the Administrative Agent from such determination) shall appoint from among Banks a successor administrative agent for Banks which successor administrative agent shall be consented to by Borrower at all times other than during the existence of an Event of Default (which consent of Borrower shall not be unreasonably withheld or delayed). If no successor administrative agent is appointed prior to the effective date of the resignation of Administrative Agent, Administrative Agent may appoint, after consulting with Banks and Borrower, a successor administrative agent from among Banks. Upon the acceptance of its appointment as successor administrative agent hereunder, such successor administrative agent shall succeed to all the rights, powers and duties of the retiring Administrative Agent and the term “Administrative Agent”, shall mean such successor administrative agent, and the retiring Administrative Agent’s appointment, powers and duties as Administrative Agent shall be terminated. After any retiring Administrative Agent’s resignation hereunder as Administrative Agent, the provisions of this Article X and [Section 11.4 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Administrative Agent under this Agreement. If no successor administrative agent has accepted appointment as Administrative Agent by the date which is 30 days following a retiring Administrative Agent’s notice of resignation, the retiring Administrative Agent’s resignation shall nevertheless thereupon become effective and Banks shall perform all of the duties of Administrative Agent hereunder until such time, if any, as the Required Banks appoint a successor agent as provided for above.

ARTICLE XI

MISCELLANEOUS

     Section 11.1 Notices. Except as otherwise permitted herein, whenever this Agreement requires or permits any consent, approval, notice, request, or demand from one party to another, the consent, approval, notice, request, or demand must be in writing to be effective and shall be deemed to have been given or made (a) when personally delivered, (b) if mailed, when sent by registered or certified mail, postage prepaid, (c) if sent by a nationally recognized overnight delivery service, on the next business day after delivery to such service specifying delivery on the next business day or (d) if transmitted by telex, telecopier or facsimile machine, on the day that such notice is transmitted and received. The address of each party for the purposes hereof is as follows:

ADMINISTRATIVE AGENT:	REGIONS BANK
	4134 West Braker Lane, Suite 100
	Austin, Texas 78759
	ABA # 062005690
	Syndicate Services
	Acct. # 02606082119231
	Attn: Robin Ingari
	Telecopy: (512) 373-2301
	Ref: Citizens, Inc.

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	with a copy to:
	Winstead Sechrest & Minick P.C.
	1201 Elm Street, Suite 5400
	Dallas, Texas 75202
	Attn: James R. Littlejohn
	Telecopy: (214) 745-5390
BANKS:	REGIONS BANK
	4314 West Braker Lane, Suite 100
	Austin, Texas 78759
	Attn: Robin Ingari
	Telecopy: (512) 373-2301
	GUARANTY BANK
	301 Congress Avenue, Suite 300
	Austin, Texas 78701
	Attn: Dan Leonard
	Telecopy: (512) 320-1041
BORROWER:	Citizens, Inc.
	400 East Anderson Lane
	Austin, Texas 78752
	Attn: Mark A. Oliver, President
	Telecopy: (512) 836-9334
	with a copy to:
	Jones & Keller, P.C.
	1625 Broadway, 16th Floor
	Denver, Colorado 80202
	Attn: Reid A. Godbolt
	Telecopy: (303) 573-8133

     Section 11.2 GOVERNING LAW. THE LOAN DOCUMENTS ARE BEING EXECUTED AND DELIVERED, AND ARE INTENDED TO BE PERFORMED, IN THE STATE OF TEXAS, AND THE SUBSTANTIVE LAWS OF SUCH STATE AND THE APPLICABLE FEDERAL LAWS OF THE UNITED STATES OF AMERICA SHALL GOVERN THE VALIDITY, CONSTRUCTION, ENFORCEMENT, AND INTERPRETATION OF THE LOAN DOCUMENTS, UNLESS OTHERWISE SPECIFIED THEREIN. IT IS AGREED THAT THE PROVISIONS OF CHAPTER 346 OF THE TEXAS FINANCE CODE SHALL NOT APPLY TO THE REVOLVING LOAN, THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS.

     Section 11.3 Choice of Forum: Service of Process and Jurisdiction. Any suit, action or proceeding against Borrower with respect to the Loan Documents or any judgment entered by

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any court in respect thereof, may be brought in the courts of the State of Texas, County of Travis, or in the United States courts located in the State of Texas as Administrative Agent may elect and Borrower hereby submits to the non-exclusive jurisdiction of such courts for the purpose of any such suit, action or proceeding. Borrower hereby irrevocably consents to the service of process in any suit, action or proceeding in said court by the mailing thereof by Administrative Agent by registered or certified mail, return receipt requested, postage prepaid, to Borrower’s address set forth in this Agreement or any other address provided by Borrower to Administrative Agent in writing. Borrower hereby irrevocably waives any objections which it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to the Loan Documents brought in the courts located in the State of Texas, County of Travis, and hereby further irrevocably waives any claim that any such suit, action or proceeding brought in any such court has been brought in any inconvenient forum.

     Section 11.4 Expenses; Indemnification.

     (a) Borrower agrees to pay on demand all reasonable costs and expenses of Administrative Agent in connection with the preparation, execution, delivery, modification, and amendment of this Agreement, the other Loan Documents, and the other documents to be delivered hereunder, including, without limitation, the reasonable fees and expenses of counsel for Administrative Agent with respect thereto and with respect to advising Administrative Agent as to its rights and responsibilities under the Loan Documents. Borrower further agrees to pay on demand all costs and expenses of Administrative Agent and Banks, if any (including, without limitation, reasonable attorneys’ fees and expenses and the cost of internal counsel), in connection with the enforcement (whether through negotiations, legal proceedings, or otherwise) of the Loan Documents and the other documents to be delivered hereunder.

     (b) BORROWER AGREES TO INDEMNIFY AND HOLD HARMLESS ADMINISTRATIVE AGENT AND EACH BANK AND EACH OF THEIR RESPECTIVE AFFILIATES AND OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, AND ADVISORS (EACH, AN “INDEMNIFIED PARTY”) FROM AND AGAINST ANY AND ALL CLAIMS, DAMAGES, LOSSES, LIABILITIES, COSTS, AND EXPENSES (INCLUDING, WITHOUT LIMITATION, REASONABLE ATTORNEYS’ FEES) THAT MAY BE INCURRED BY OR ASSERTED OR AWARDED AGAINST ANY INDEMNIFIED PARTY, IN EACH CASE ARISING OUT OF OR IN CONNECTION WITH OR BY REASON OF (INCLUDING, WITHOUT LIMITATION, IN CONNECTION WITH ANY INVESTIGATION, LITIGATION, OR PROCEEDING OR PREPARATION OF DEFENSE IN CONNECTION THEREWITH) THE LOAN DOCUMENTS, ANY OF THE TRANSACTIONS CONTEMPLATED HEREIN OR THE ACTUAL OR PROPOSED USE OF THE PROCEEDS OF THE REVOLVING LOAN, EXCEPT TO THE EXTENT SUCH CLAIM, DAMAGE, LOSS, LIABILITY, COST, OR EXPENSE IS FOUND IN A FINAL, NON-APPEALABLE JUDGMENT BY A COURT OF COMPETENT JURISDICTION TO HAVE RESULTED FROM SUCH INDEMNIFIED PARTY’S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT. IN THE CASE OF AN INVESTIGATION, LITIGATION OR OTHER PROCEEDING TO WHICH THE INDEMNITY IN THIS SECTION 11.4 APPLIES, SUCH INDEMNITY SHALL BE EFFECTIVE WHETHER OR NOT SUCH INVESTIGATION, LITIGATION OR PROCEEDING IS BROUGHT BY BORROWER, ITS DIRECTORS, SHAREHOLDERS OR

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CREDITORS OR AN INDEMNIFIED PARTY OR ANY OTHER PERSON OR ANY INDEMNIFIED PARTY IS OTHERWISE A PARTY THERETO AND WHETHER OR NOT THE TRANSACTIONS CONTEMPLATED HEREBY ARE CONSUMMATED. BORROWER AGREES NOT TO ASSERT ANY CLAIM AGAINST ADMINISTRATIVE AGENT OR ANY BANK, ANY ASSIGNEE OF ANY BANK, ANY OF THEIR AFFILIATES, OR ANY OF THEIR RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES, ATTORNEYS, AGENTS, AND ADVISERS, ON ANY THEORY OF LIABILITY, FOR SPECIAL, INDIRECT, CONSEQUENTIAL, OR PUNITIVE DAMAGES ARISING OUT OF OR OTHERWISE RELATING TO THE LOAN DOCUMENTS, ANY OF THE TRANSACTIONS CONTEMPLATED HEREIN OR THE ACTUAL OR PROPOSED USE OF THE PROCEEDS OF THE REVOLVING LOAN.

     (c) Without prejudice to the survival of any other agreement of Borrower hereunder, the agreements and obligations of Borrower contained in this Section 11.4 shall survive the payment in full of the Revolving Loan and all other amounts payable under this Agreement.

     Section 11.5 Right of Set-off. Upon the occurrence and during the continuance of any Default under Sections 7.9, 7.10, 7.11, 7.12 and 8.1, each Bank (and each of its affiliates) is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Bank (or any of its affiliates) to or for the credit or the account of Borrower against any and all of the obligations of Borrower now or hereafter existing under this Agreement and the Notes, irrespective of whether Administrative Agent or any Bank shall have made any demand under this Agreement or the Notes and although such obligations may be unmatured. Each Bank agrees promptly to notify Borrower after any such set-off and application; provided, however, that the failure to give such notice shall not affect the validity of such set-off and application. The rights of each Bank under this Section 11.5 are in addition to other rights and remedies (including, without limitation, other rights of set-off) that Bank may have.

     Section 11.6 Severability. If any provision of any of the Loan Documents is held to be illegal, invalid, or unenforceable under present or future Laws effective during the term thereof, such provision shall be fully severable; the appropriate Loan Document shall be construed and enforced as if such illegal, invalid, or unenforceable provision had never comprised a part thereof; and the remaining provisions thereof shall remain in full force and effect and shall not be affected by the illegal, invalid, or unenforceable provision or by its severance therefrom. Furthermore, in lieu of such illegal, invalid, or unenforceable provision there shall be added automatically as a part of such Loan Documents a provision as similar in terms to such illegal, invalid, or unenforceable provision as may be possible and be legal, valid, and enforceable.

     Section 11.7 Survival. Except as specifically provided herein, all representations, warranties, covenants and agreements of Borrower contained herein shall continue in full force and effect so long as any part of the Obligations remains unpaid and, except as otherwise indicated, shall not be affected by any investigation made by any party.

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     Section 11.8 Further Assurances. Borrower agrees that at any time and from time to time, upon the written request of Administrative Agent, it will, and will cause its Subsidiaries to, execute and deliver such further documents and do such further acts and things as Administrative Agent may reasonably request in order to fully effect the purpose of this Agreement and the other Loan Documents and to provide for the payment of the principal and interest on the Obligations in accordance with the terms and provisions of the Loan Documents.

     Section 11.9 Counterparts. This Agreement has been executed in a number of identical counterparts, each of which, for all purposes, is to be deemed an original, and all of which constitute, collectively, one agreement, but, in making proof of this Agreement, it shall not be necessary to produce or account for more than one such counterpart.

     Section 11.10 Parties Bound. (a) This Agreement shall be binding upon, and shall inure to the benefit of Borrower, Administrative Agent and Bank and their respective successors and assigns; provided that Borrower may not, without the prior written consent of Administrative Agent and Banks, assign any rights, powers, duties, or obligations hereunder.

     (b) Any Bank may assign to one or more Eligible Assignees all or a portion of its rights and obligations under this Agreement (including all or a portion of its Revolving Commitment and the portion of the Revolving Loan at the time owing to it); provided that (i) except in the case of an assignment of the entire remaining amount of the assigning Bank’s Revolving Commitment and the portion of the Revolving Loan at the time owing to it or in the case of an assignment to a Bank or an Affiliate of a Bank, the aggregate amount of the Revolving Commitment (which for this purpose includes its portion of the Revolving Loan outstanding thereunder) subject to each such assignment, determined as of the date the Assignment and Acceptance with respect to such assignment is delivered to the Administrative Agent, shall not be less than $10,000,000 unless each of Administrative Agent, the Banks and, so long as no Event of Default has occurred and is continuing, Borrower otherwise consents (each such consent not to be unreasonably withheld or delayed), (ii) each partial assignment shall be made as an assignment of a proportionate part of all the assigning Bank’s rights and obligations under this Agreement with respect to the portion of the Revolving Loan or the Revolving Commitment assigned, and (ii) the parties to each assignment shall execute and deliver to Administrative Agent an Assignment and Acceptance, together with a processing and recordation fee of $3,500 (provided no such fee shall be required for an assignment to an Affiliate of a Bank). Subject to acceptance and recording thereof by Administrative Agent pursuant to subsection (c) of this Section, from and after the effective date specified in each Assignment and Acceptance, the Eligible Assignee thereunder shall be a party hereto and, to the extent of the interest assigned by such Assignment and Acceptance, have the rights and obligations of a Bank under this Agreement, and the assigning Bank thereunder shall, to the extent of the interest assigned by such Assignment and Acceptance, be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all of the assigning Bank’s rights and obligations under this Agreement, such Bank shall cease to be a party hereto but shall continue to be entitled to the benefits of Sections 11.4. Upon request, Borrower (at its expense) shall execute and deliver new or replacement Notes to the assigning Bank and the assignee Bank. Any assignment or transfer by a Bank of rights or obligations under this Agreement that does not comply with this subsection shall be treated for purposes of this Agreement as a sale by such

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Bank of a participation in such rights and obligations in accordance with subsection (d) of this Section.

     (c) Administrative Agent, acting solely for this purpose as an agent of Borrower, shall maintain at the Administrative Agent’s Principal Office a copy of each Assignment and Acceptance delivered to it and a register for the recordation of the names and addresses of the Bank, and the Revolving Commitment of, and principal amount of the portion of the Revolving Loan owing to, each Bank pursuant to the terms hereof from time to time (the “Register”). The entries in the Register shall be conclusive, and Borrower, Administrative Agent and the Banks may treat each Person whose name is recorded in the Register pursuant to the terms hereof as a Bank hereunder for all purposes of this Agreement, notwithstanding notice to the contrary. The Register shall be available for inspection by Borrower and any Bank, at any reasonable time and from time to time upon reasonable prior notice.

     (d) Any Bank may, without the consent of, or notice to, Borrower or Administrative Agent, sell participations to one or more banks or other entities (a “Participant”) in all or a portion of such Bank’s rights and/or obligations under this Agreement (including all or a portion of its Revolving Commitment and/or its portion of the Revolving Loan provided that (i) such Bank’s obligations under this Agreement shall remain unchanged, (ii) such Bank shall remain solely responsible to the other parties hereto for the performance of such obligations and (iii) Borrower, Administrative Agent and the other Banks shall continue to deal solely and directly with such Bank in connection with such Bank’s rights and obligations under this Agreement. Any agreement or instrument pursuant to which a Bank sells such a participation shall provide that such Bank shall retain the sole right to enforce this Agreement and to approve any amendment, modification or waiver of any provision of this Agreement; provided that such agreement or instrument may provide that such Bank will not, without the consent of the Participant, agree to any amendment, waiver or other modification that would (i) postpone any date upon which any payment of money is scheduled to be paid to such Participant, or (ii) reduce the principal, interest, fees or other amounts payable to such Participant. To the extent permitted by law, each Participant also shall be entitled to the benefits of Section 11.5 as though it were a Bank.

     (e) Any Bank may at any time pledge or assign a security interest in all or any portion of its rights under this Agreement (including under its Notes, if any) to secure obligations of such Bank, including any pledge or assignment to secure obligations to a Federal Reserve Bank, without the requirement for notice to or consent of any Person or the payment of any fee; provided that no such pledge or assignment shall release a Bank from any of its obligations hereunder or substitute any such pledgee or assignee for such Bank as a party hereto.

     (f) As used herein, the following terms have the following meanings:

     “Eligible Assignee” means (a) a Bank; (b) an Affiliate of a Bank and (c) any other Person (other than a natural person) approved by Administrative Agent, and, unless an Event of Default has occurred and is continuing, Borrower (each such approval not to be unreasonably withheld or delayed).

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     Section 11.11 Amendments, Etc. No amendment or waiver of any provision of this Agreement or any other Loan Document, and no consent to any departure by Borrower or any other Person therefrom, shall be effective unless in writing signed by the Required Banks and Borrower or the applicable Person, as the case may be, and acknowledged by the Administrative Agent, and each such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided, however, that no such amendment, waiver or consent shall, unless in writing and signed by each of Banks directly affected thereby and by Borrower, and acknowledged by Administrative Agent, do any of the following:

     (a) extend or increase the Revolving Commitment of any Bank (or reinstate any Revolving Commitment terminated pursuant to Section 9.1) or subject Banks to any additional obligations;

     (b) postpone any date fixed by this Agreement or any other Loan Document for any payment or mandatory prepayment of principal, interest, fees or other amounts due to Banks (or any of them) hereunder or under any other Loan Document or waive any Event of Default occurring pursuant to Section 8.1;

     (c) reduce or subordinate the principal of, or the rate of interest specified herein on, any Revolving Advance, any fees or other amounts payable hereunder or under any other Loan Document;

     (d) change the percentage of the Aggregate Revolving Commitments or of the aggregate unpaid principal amount of the Revolving Loan which is required for Banks or any of them to take any action hereunder;

     (e) change the Pro Rata Share or Voting Percentage of any Bank;

     (f) amend this Section, or any provision herein providing for consent or other action by all Banks; or

     (g) release all of, or any substantial portion of, the Collateral or subordinate any Lien granted pursuant to the Collateral Documents in all of, or any substantial portion of, the Collateral;

and, provided further, that no amendment, waiver or consent shall, unless in writing and signed by Administrative Agent in addition to the Required Banks or all the Banks, as the case may be, affect the rights or duties of Administrative Agent under this Agreement or any other Loan Document. Notwithstanding anything to the contrary herein, any Bank that has failed to fund any portion of the Revolving Advances required to be funded by it hereunder shall not have any right to approve or disapprove any amendment, waiver or consent hereunder, except that the Pro Rata Share of such Bank may not be increased without the consent of such Bank.

     Section 11.12 Form of Documents. Each agreement, document, instrument, or other writing to be furnished to Administrative Agent or any Bank under any provision of this Agreement must be in form and substance satisfactory to Administrative Agent or any Bank and its respective counsel.

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     Section 11.13 Confidentiality. Administrative Agent and each Bank agrees to keep confidential any information furnished or made available to it by Borrower pursuant to this Agreement that is marked confidential; provided that nothing herein shall prevent Administrative Agent or any Bank from disclosing such information (a) to any other Person if reasonably incidental to the administration of the credit facility provided herein, (b) as required by any law, rule, or regulation, (c) upon the order of any court or administrative agency, (d) upon the request or demand of any regulatory agency or authority, (e) that is or becomes available to the public or that is or becomes available to Bank other than as a result of a disclosure by Administrative Agent or any Bank prohibited by this Agreement, (f) in connection with any litigation to which Administrative Agent or any such Bank or any of their respective affiliates may be a party, (g) to the extent necessary in connection with the exercise of any remedy under this Agreement or any other Loan Document, and (h) subject to provisions substantially similar to those contained in this Section, to any actual or proposed participant or assignee.

     Section 11.14 Exception to Covenants. Borrower shall not be deemed to be permitted to take any action or fail to take any action which is permitted as an exception to any of the covenants contained herein or which is within the permissible limits of any of the covenants contained herein if such action or omission would result in the breach of any other covenant contained herein.

     Section 11.15 No Usury Intended; Usury Savings Clause. In no event shall interest contracted for, charged or received under this Agreement, the Notes or any other Loan Document, plus any other charges in connection herewith or therewith which constitute interest exceed the Highest Lawful Rate permitted by applicable Law. If any Bank shall receive interest (including any charges or other amounts which constitute interest) in an amount that exceeds the Highest Lawful Rate, the excess interest shall be applied to the principal of the Revolving Loan or, if it exceeds such unpaid principal, refunded to Borrower. In determining whether the interest contracted for, charged, or received by any Bank exceeds the Highest Lawful Rate, such Bank may, to the extent permitted by applicable Law, (a) characterize any payment that is not principal as an expense, fee, or premium rather than interest, (b) exclude voluntary prepayments and the effects thereof, and (c) amortize, prorate, allocate, and spread in equal or unequal parts the total amount of interest throughout the contemplated term of the Obligations hereunder.

     Section 11.16 Restatement of Existing Loan Agreements/No Novation. The parties hereto agree that, on the Closing Date, after all conditions precedent set forth in Section 5.1 have been satisfied or waived: (a) the Obligations (as defined herein) represents, among other things, the amendment, extension, consolidation, and modification of the “Obligations” (as defined in the Existing Loan Agreement); (b) this Agreement is intended to, and does hereby, restate, consolidate, renew, extend, amend, modify, supersede, and replace the Existing Loan Agreement in its entirety; (c) the Notes executed pursuant to this Agreement amend, renew, extend, modify, replace, substitute for, and supersede in its entirety (but do not extinguish, the Funded Debt arising under) the promissory note issued pursuant to the Existing Loan Agreement, which existing promissory note shall be returned to Administrative Agent promptly after the Closing Date, marked “canceled and replaced,” and, thereafter, delivered by Administrative Agent to Borrower; (d) the CICA Security Agreement and the Security Agreement executed pursuant to this Agreement are intended to, and do hereby, restate, renew, extend, amend, modify, supersede,

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and replace and such security agreements executed and delivered pursuant to the Existing Loan Agreement; and (e) the entering into and performance of their respective obligations under the Loan Documents and the transactions evidenced hereby do not constitute a novation nor shall they be deemed to have terminated, extinguished, or discharged the indebtedness under the Existing Loan Agreement or the collateral security therefor, all of which indebtedness and collateral security shall continue under and be governed by this Agreement and the other Loan Documents, except as expressly provided otherwise herein.

     Section 11.17 WAIVER OF JURY TRIAL. THE PARTIES TO THIS AGREEMENT HEREBY WAIVE TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY ANY OF THE PARTIES HERETO AGAINST THE OTHER TO ENFORCE THIS AGREEMENT, TO COLLECT DAMAGES FOR THE BREACH OF THIS AGREEMENT, OR WHICH IN ANY OTHER WAY ARISE OUT OF, ARE CONNECTED TO OR ARE RELATED TO THIS AGREEMENT OR THE SUBJECT MATTER OF THIS AGREEMENT. ANY SUCH ACTION SHALL BE TRIED BY THE JUDGE WITHOUT A JURY.

     Section 11.18 ENTIRE AGREEMENT. THIS WRITTEN AGREEMENT, TOGETHER WITH THE OTHER LOAN DOCUMENTS, REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES HERETO. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.

REMAINDER OF PAGE LEFT INTENTIONALLY BLANK

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     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered by their duly authorized officers to be effective as of the date first hereinabove written.

BORROWER:
CITIZENS, INC.
By:	/s/ Mark A. Oliver
	Mark A. Oliver
	President

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ADMINISTRATIVE AGENT:
REGIONS BANK
By:	/s/ Robin Ingari
	Robin Ingari Senior Vice President
BANKS:
REGIONS BANK
By:	/s/ Robin Ingari
	Robin Ingari Senior Vice President
GUARANTY BANK
By:	/s/ Joseph N. Peket
	Name:	Joseph N. Peket
	Title	Senior Vice President, Corporate Banking Group

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Schedule 2.1

Revolving Commitments and Pro Rata Shares

Lender	Revolving Commitment		Pro Rata Share
Regions Bank	$	55,000,000		73.333333333	%
Guaranty Bank	$	20,000,000		26.666666667	%
TOTAL:	$	75,000,000		100.000000000	%

Schedule 2.1

EXHIBIT A

FORM OF NOTE

$                                         December 2, 2005

     FOR VALUE RECEIVED, the undersigned, CITIZENS, INC., a Colorado corporation (“Maker”), hereby unconditionally promises to pay to the order of                                         , a                                          (“Bank”), at the Administrative Agent’s Principal Office specified in the hereinafter defined Loan Agreement, the principal amount of                                          AND No/100 DOLLARS ($                                        ) or so much thereof as may be disbursed and outstanding hereunder, under the Loan Agreement or under the other Loan Documents, such amount being due and payable in the amounts and at such times as are specified in the Loan Agreement.

     Maker further agrees to pay interest at the Administrative Agent’s Principal Office on the unpaid principal amount hereof from time to time at the applicable rate per annum and on the dates set forth in the Loan Agreement until such principal amount is paid in full (both before and after judgment).

     This Note evidences Revolving Advances made pursuant to, and has been executed and delivered under, and is subject to the terms and conditions, of, that certain First Amended and Restated Loan Agreement dated effective as of December 2, 2005 (as the same may be amended, modified, supplemented, renewed, extended, restated, substituted, increased, rearranged and/or replaced from time to time, the “Loan Agreement”), among the Maker, Bank, other Banks party thereto and the Administrative Agent, and is one of the Notes referred to therein. Unless otherwise defined herein or unless the context hereof otherwise requires each term used herein with its initial letter capitalized has the meaning given to such term in the Loan Agreement. Reference is made to the Loan Agreement and the other Loan Documents for provisions affecting this Note regarding payments and mandatory and voluntary prepayments, acceleration of maturity, exercise of Rights, payment of attorneys’ fees, court costs, and other costs of collection, certain waivers by Maker and others now or hereafter obligated for payment of any sums due hereunder, and security for the payment hereof.

     All payments due to the Bank hereunder shall be made in Dollars in immediately available funds a the place and in the manner specified in the Loan Agreement.

     This Note is (a) entitled to the benefits of the Loan Documents and (b) secured by the Collateral.

     Upon the occurrence of any one or more Defaults specified in the Loan Agreement, all amounts then remaining unpaid on this Note shall become, or may be declared to be, immediately due and payable, all as provided herein. The Maker hereby waives diligence, presentment, demand, protest, notice of default, notice of intention to accelerate, notice of acceleration and notice of any kind whatsoever.

     THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS.

     THIS NOTE AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.

     EXECUTED and delivered on the first date written above.

CITIZENS, INC.
By:
	Mark A. Oliver
	President

EXHIBIT B

ASSIGNMENT AND ACCEPTANCE

     This Assignment and Acceptance (the “Assignment and Acceptance”) is dated as of the Effective Date set forth below and is entered into by and between [Insert name of Assignor] (the “Assignor”) and [Insert name of Assignee] (the “Assignee”). Capitalized terms used but not defined herein shall have the meanings given to them in the First Amended and Restated Loan Agreement identified below (as amended, the “Loan Agreement”), receipt of a copy of which is hereby acknowledged by the Assignee. The Standard Terms and Conditions set forth in Annex 1 attached hereto are hereby agreed to and incorporated herein by reference and made a part of this Assignment and Acceptance as if set forth herein in full.

     For an agreed consideration, the Assignor hereby irrevocably sells and assigns to the Assignee, and the Assignee hereby irrevocably purchases and assumes from the Assignor, subject to and in accordance with the Standard Terms and Conditions and the Loan Agreement, as of the Effective Date inserted by Administrative Agent as contemplated below (i) all of the Assignor’s rights and obligations in its capacity as a Bank under the Loan Agreement and any other documents or instruments delivered pursuant thereto to the extent related to the amount and percentage interest identified below of all of such outstanding rights and obligations of the Assignor under the Revolving Commitment (as defined in the Loan Agreement) and (ii) to the extent permitted to be assigned under applicable law, all claims, suits, causes of action and any other right of the Assignor (in its capacity as a Bank) against any Person, whether known or unknown, arising under or in connection with the Loan Agreement, any other documents or instruments delivered pursuant thereto or the loan transactions governed thereby or in any way based on or related to any of the foregoing, including, but not limited to, contract claims, tort claims, malpractice claims, statutory claims and all other claims at law or in equity related to the rights and obligations sold and assigned pursuant to clause (i) above (the rights and obligations sold and assigned pursuant to clauses (i) and (ii) above being referred to herein collectively as, the “Assigned Interest”). Such sale and assignment is without recourse to the Assignor and, except as expressly provided in this Assignment and Acceptance, without representation or warranty by the Assignor.

1.	Assignor:
2.	Assignee:
		[and is an Affiliate/Approved Fund of [identify Bank]1]
3.	Borrower:	Citizens, Inc.
4.	Administrative Agent:	Regions Bank, as Administrative Agent under the Loan Agreement
5.	Loan Agreement:	The First Amended and Restated Loan Agreement dated as of December 2, 2005 among Citizen’s Inc., the Banks party thereto, and Regions Bank, as Administrative Agent

¹ Select as applicable.

1

6. Assigned Interest:

Aggregate Amount of Revolving	Amount of Revolving	Percentage Assigned of
Commitment/Revolving Loan	Commitment/Revolving	Revolving
for all Banks*	Loan Assigned*	Commitment/Revolving Loan2
$	$		%
$	$		%
$	$		%

[7.      Trade Date:                                                   ]³

Effective Date:                                          ___, 20___[TO BE INSERTED BY ADMINISTRATIVE AGENT AND WHICH SHALL BE THE EFFECTIVE DATE OF RECORDATION OF TRANSFER IN THE REGISTER THEREFOR.]

The terms set forth in this Assignment and Acceptance are hereby agreed to:

ASSIGNOR
[NAME OF ASSIGNOR]
By:
	Name:
	Title:
ASSIGNEE
[NAME OF ASSIGNEE]
By:
	Name:
	Title:

*	Amount to be adjusted by the counterparties to take into account any payments or prepayments made between the Trade Date and the Effective Date.
2	Set forth, to at least 9 decimals, as a percentage of the Revolving Commitment/Revolving Loan of all Banks thereunder.
3	To be completed if the Assignor and the Assignee intend that the minimum assignment amount is to be determined as of the Trade Date.

2

[Consented to and]⁴ Accepted:

REGIONS BANK,. as
   Administrative Agent

By:
	Title:
[Consented to:]5
CITIZENS, INC.
By:
	Title:

4	To be added only if the consent of the Administrative Agent is required by the terms of the Loan Agreement.
5	To be added only if the consent of the Borrower is required by the terms of the Loan Agreement.

3

ANNEX 1

STANDARD TERMS AND CONDITIONS FOR
ASSIGNMENT AND ACCEPTANCE

     1. Representations and Warranties.

          1.1 Assignor. The Assignor (a) represents and warrants that (i) it is the legal and beneficial owner of the Assigned Interest, (ii) the Assigned Interest is free and clear of any lien, encumbrance or other adverse claim and (iii) it has full power and authority, and has taken all action necessary, to execute and deliver this Assignment and Acceptance and to consummate the transactions contemplated hereby; and (b) assumes no responsibility with respect to (i) any statements, warranties or representations made in or in connection with the Loan Agreement or any other Loan Document, (ii) the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Loan Documents or any collateral thereunder, (iii) the financial condition of Borrower, any of its Subsidiaries or Affiliates or any other Person obligated in respect of any Loan Document or (iv) the performance or observance by Borrower, any of its Subsidiaries or Affiliates or any other Person of any of their respective obligations under any Loan Document.

          1.2. Assignee. The Assignee (a) represents and warrants that (i) it has full power and authority, and has taken all action necessary, to execute and deliver this Assignment and Acceptance and to consummate the transactions contemplated hereby and to become a Bank under the Loan Agreement, (ii) it meets all requirements of an Eligible Assignee under the Loan Agreement (subject to receipt of such consents as may be required under the Loan Agreement), (iii) from and after the Effective Date, it shall be bound by the provisions of the Loan Agreement as a Bank thereunder and, to the extent of the Assigned Interest, shall have the obligations of a Bank thereunder, and (iv) it has received a copy of the Loan Agreement, together with copies of the most recent financial statements delivered pursuant to Section 6.2, and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment and Acceptance and to purchase the Assigned Interest on the basis of which it has made such analysis and decision independently and without reliance on Administrative Agent or any other Bank; and (b) agrees that (i) it will, independently and without reliance on Administrative Agent, the Assignor or any other Bank, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Loan Documents, and (ii) it will perform in accordance with their terms all of the obligations which by the terms of the Loan Documents are required to be performed by it as a Bank.

          2. Payments. From and after the Effective Date, Administrative Agent shall make all payments in respect of the Assigned Interest (including payments of principal, interest, fees and other amounts) to the Assignor for amounts which have accrued to but excluding the Effective Date and to the Assignee for amounts which have accrued from and after the Effective Date.

          3. General Provisions. This Assignment and Acceptance shall be binding upon, and inure to the benefit of, the parties hereto and their respective successors and assigns. This Assignment and Acceptance may be executed in any number of counterparts, which together

shall constitute one instrument. Delivery of an executed counterpart of a signature page of this Assignment and Acceptance by telecopy shall be effective as delivery of a manually executed counterpart of this Assignment and Acceptance. This Assignment and Acceptance shall be governed by, and construed in accordance with, the law of the State of Texas.

2 

EXHIBIT C

COMPLIANCE CERTIFICATE

Financial Statement Date:                                        

To: Regions Bank, as Administrative Agent

Ladies and Gentlemen:

     Reference is made to the First Amended and Restated Loan Agreement dated as of December 2, 2005 (such agreement, together with all amendments, the “Agreement”; the terms defined therein being used herein as therein defined), among Citizens, Inc., the Banks party thereto and Regions Bank, as Administrative Agent.

     The undersigned Authorized Signatory hereby certifies as of the date hereof that he is the chief financial officer [chief accounting officer] of Borrower, and that, as such, he is authorized to execute and deliver this Certificate to Administrative Agent on the behalf of Borrower and that:

     [Use following for fiscal year-end financial statements required by Section 6.2(a]

     Attached hereto are audited consolidated and unaudited consolidating annual financial statements required by Section 6.2(a) of the Agreement showing the consolidated and consolidating financial condition, results of operations and cash flows of Borrower and its Subsidiaries, as of, and for the fiscal year ended on, the last day of such fiscal year, accompanied by an unqualified opinion of nationally recognized independent certified public accountants, which opinion states that said consolidated financial statements have been prepared in accordance with GAAP consistently applied.

     [Use following for the fiscal quarter-end financial statements required by Section 6.2(b)]

     Attached are unaudited consolidated quarterly financial statements required by Section 6.2(b) of the Agreement, showing the consolidated and consolidating financial condition, results of operations and cash flows of Borrower and its Subsidiaries as of, and for the quarter ended on, such last day (subject to year-end adjustment), prepared in accordance with GAAP (other than the absence of footnotes).

     Such financial statements present fairly in all material respects the financial condition, results of operations and cash flows of Borrower and its consolidated Subsidiaries and the results of their operations (subject to year-end adjustment).

[select one:]

     [to the best knowledge of the undersigned during such fiscal period, no Default or unmatured Default exists.]

     —or—

     [the following covenants or conditions have not been performed or observed and the following is a list of each such Default or unmatured Default (and, to the best knowledge of the undersigned, are the only Defaults and unmatured Default that exist) and its nature and status:]

     The financial covenant analyses and information set forth on the attached Schedule 1 are true and accurate on and as of the date of this Certificate.

2

     IN WITNESS WHEREOF, the undersigned has executed this Certificate as of                                         , 20                    .

CITIZENS, INC.
By:
	Name:
	Title:

3

For the Quarter ended ___________________(“Reporting Date”)

SCHEDULE 1
TO THE COMPLIANCE CERTIFICATE

I.	Section 7.1(g) – Purchase Money Debt.
	1.   Purchase money debt for fiscal year through Reporting Date	$
	2.   Maximum permitted purchase money debt for fiscal year – lesser of
	a.    $3,000,000
	b.    $5,000,000 minus Aggregate Permitted Exceptions through Reporting Date
	c.    (lesser of 2.a. and 2.b.)	$
II.	Section 7.1(h) – Capital Lease Debt.
	1.   Capital Lease debt for fiscal year through Reporting Date	$
	2.   Maximum permitted Capital Lease debt for fiscal year – lesser of
	a.    $3,000,000
	b.    $5,000,000 minus Aggregate Permitted Exceptions through Reporting Date
	c.    (lesser of 2.a. and 2.b.)	$
III.	Section 7.9 – Leverage Ratio.
	A.   Funded Debt for Borrower and its Subsidiaries on Reporting Date (without duplication):
	1.    All obligations for borrowed money and all obligations evidenced by bonds, debentures, notes, loan agreements and other similar instruments	$
	2.    All direct or contingent obligations arising under letters of credit, bankers’ acceptances, bank guaranties, surety bonds and similar instruments	$
	3.    All accrued obligations in respect of earnout or similar payments payable in cash or which may be payable in cash at the seller’s or obligee’s option	$

	4.    All obligations in respect of Capital Leases		$
	5.    All obligations to pay the deferred purchase price of property or services (excluding trade accounts payable not more than 30 days past due)		$
	6.    All Guaranty Obligations with respect to obligations of other Persons of the type described in 1. through 5. above		$
	7.    Funded Debt (Lines III.A.1. + 2. + 3. + 4. + 5. + 6.)		$
	B.   EBITDA for Borrower and its Subsidiaries for four fiscal quarters ending on Reporting Date:
	1.    Net Income for such period		$
	2.    To the extent deducted in determining Net Income for such period (without duplication):
	(a)   Interest Expenses		$
	(b)   Federal, state, local and foreign income and franchise taxes		$
	(c)   Depreciation and amortization expenses		$
	(d)   Extraordinary losses		$
	(e)    Lines 2.(a) + (b) + (c) + (d)		$
	3.    To the extent included in determining Net Income for such period, extraordinary gains		$
	4.    EBITDA (Lines III.B.1. + 2.(e) – 3.)		$
	C.   Leverage Ratio (Line III.A.7. ÷ Line III.B.4.)	_____ to 1.00
	D.   Maximum Leverage Ratio	3.00 to 1.00
IV.	Section 7.10 – Fixed Charge Coverage Ratio.
	A.   EBITDA (Line III.B.4.)		$
	B.   Interest Expense for four consecutive fiscal quarters ending on the Reporting Date		$
	C.   Scheduled payments on obligations in respect of any Funded Debt for four consecutive fiscal quarters ending on the Reporting Date		$
	D.   (Lines IV. B. + C.)		$
2

	E.   Fixed Charge Coverage Ratio (Line IV. A. ÷ IV.D.)	_____ to 1.00
	F.   Minimum Fixed Charge Coverage Ratio	1.50 to 1.00
V.	Section 7.11 – Funded Debt to Tangible Net Worth Ratio.
	A.   Funded Debt (Line III.A.7.)		$
	B.   Equity		$
	C.   Intangible Assets		$
	D.   Funded Debt to Tangible Net Worth Ratio (Line V.A. ÷ (V.B. – V.C.)		$
	E.   Maximum Funded Debt to Tangible Net Worth Ratio	0.75 to 1.00
VI.	Section 7.12 – Debenture Coverage Ratio
	A.   Pro-forma Total Adjusted Capital of CICA on Reporting Date		$
	B.   Outstanding principal amount of Surplus Debentures on Reporting Date		$
	C.   Product of (i) three and (ii) Risk Based Capital of CICA on Reporting Date		$
	D.   Lines VI.A. + B. + C.		$
	E.   Funded Debt on Reporting Date (Line III.A.7.)		$
	F.   Debenture Coverage Ratio (Line IV.D. ¸ Line IV.E.)	_____ to 1.00
	G   Minimum Debenture Coverage Ratio	1.50 to 1.00
VII.	Section 7.17 – Leases.
	1.   Real and personal property operating leases and agreements for fiscal year through Reporting Date		$
	2.   Maximum permitted real and personal property leases and agreements for fiscal year – lesser of
	a.    $3,000,000
	b.    $5,000,000 minus Aggregate Permitted Exceptions through Reporting Date
3

	c.    (Lesser of 2.a. and 2.b.)	$
VIII.	Section 7.18 – Capital Expenditures.
	1.   Capital Expenditures for fiscal year through Reporting Date	$
	2.   Maximum permitted Capital Expenditures for fiscal year – lesser of
	a.    $3,000,000
	b.    $5,000,000 minus Aggregate Permitted Exceptions through Reporting Date
	c.    (Lesser of 2.a. and 2.b.)	$
IX.	Other Investments – clause (l) of Permitted Investments.
	1.   Other Investments under clause (l) of Permitted Investments for fiscal year through Reporting Date	$
	2.   Maximum permitted other Investments for fiscal year – lesser of
	a.    $3,000,000
	b.    $5,000,000 minus Aggregate Permitted Exceptions through Reporting Date
	c.    (Lesser of 2.a. and 2.b.)	$

     This Compliance Certificate is executed and delivered on the                      day of                                         ,                     .

CITIZENS, INC.
By:
	Name:
	Title:

4 

EX-21

EXHIBIT 21

Subsidiaries of Registrant

	State of		Percentage
Company Name	Incorporation	Tax I.D.	Ownership
CICA Life Insurance Company of America (CICA) (fka Citizens Insurance Company of America)	Colorado	84-0583103	100% Direct
Citizens USA Life Insurance Company (CUSA)	Illinois	37-0862705	100% Indirect
Citizens National Life Insurance Company (CNLIC) fka (Combined Underwriters Insurance Company) (Combined)	Texas	75-0892859	100% Indirect
Computing Technology, Inc. (CTI)	Colorado	84-1037266	100% Indirect
Funeral Homes of America, Inc. (FHA)	Louisiana	72-1148400	100% Indirect
Insurance Investors, Inc. (III)	Texas	74-1458561	100% Indirect
KYWIDE Insurance Management, Inc. (KYWIDE)	Kentucky	31-1561998	100% Indirect
Mid-American Associates Agency, Inc. (MAAAI)	Missouri	43-1437941	100% Indirect
Security Alliance Insurance Company (SAIC)	Arkansas	71-0572974	100% Indirect
Security Plan Life Insurance Company (SPLIC)	Louisiana	72-1308780	100% Indirect
Security Plan Fire Insurance Company (SPFIC)	Louisiana	72-1308781	100% Indirect

EX-23

EXHIBIT 23

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders
Citizens, Inc.:

We consent to the incorporation by reference in registration statements (Nos. 333-77698, 333-58698 and 333-118134) on Form S-3 of Citizens, Inc. of our reports dated March 16, 2006, with respect to the consolidated statements of financial position of Citizens, Inc. and subsidiaries (the Company) as of December 31, 2005 and 2004, and the related consolidated statements of operations, stockholders’ equity and comprehensive income and cash flows for each of the years in the three-year period ended December 31, 2005, and all related financial statement schedules, management’s assessment of the effectiveness of internal control over financial reporting as of December 31, 2005, and the effectiveness of internal control over financial reporting as of December 31, 2005, which reports appear in the December 31, 2005 annual report on Form 10-K of Citizens, Inc.

	/s/ KPMG LLP
Dallas, Texas
March 16, 2006

EX-31.1

EXHIBIT 31.1

Certification of Chief Executive Officer Under
Section 302 of the Sarbanes-Oxley Act of 2002

     I, Mark A. Oliver, Chief Executive Officer of Citizens, Inc., certify that:

     1. I have reviewed this Annual Report on Form 10-K of Citizens, Inc. (“registrant”);

     2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

     3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

     4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

     (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

     (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

     (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

     (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

     5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

     (a) All significant deficiencies and material weaknesses in the design of operation of internal control over financial reporting which are reasonably likely to adversely effect the registrant’s ability to record, process, summarize and report financial information; and

     (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:	March 16, 2006
Signature:	/s/ Mark A. Oliver
	Mark A. Oliver
Title:	Chief Executive Officer and President

EX-31.2

EXHIBIT 31.2

Certification of Chief Financial Officer Under
Section 302 of the Sarbanes-Oxley Act of 2002

     I, Larry E. Carson,Vice President, Chief Financial Officer and Treasurer of Citizens, Inc., certify that:

     1. I have reviewed this Annual Report on Form 10-K of Citizens, Inc. (“registrant”);

     2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

     3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

     4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

     (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

     (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

     (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

     (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

     5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

     (a) All significant deficiencies and material weaknesses in the design of operation of internal control over financial reporting which are reasonably likely to adversely effect the registrant’s ability to record, process, summarize and report financial information; and

     (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:	March 16, 2006
Signature:	/s/ Larry E. Carson
	Larry E. Carson
Title:	Vice President, Chief Financial Officer and Treasurer

EX-32.1

Exhibit 32.1

Certification of Chief Executive Officer
of Citizens, Inc. Pursuant to 18 U.S.C. §1350

     I, Mark A. Oliver, certify that:

     In connection with the Annual Report on Form 10-K of Citizens, Inc. (the “Company”) for the period ended December 31, 2005, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Mark A. Oliver, Chief Executive Officer and President of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1. the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Mark A. Oliver

Name: Mark A. Oliver

Title: Chief Executive Officer and President

Date: March 16, 2006

EX-32.2

Exhibit 32.2

Certification of Chief Financial Officer
of Citizens, Inc. Pursuant to 18 U.S.C. §1350

     I, Larry E. Carson, certify that:

     In connection with the Annual Report on Form 10-K of Citizens, Inc. (the “Company”) for the period ended December 31, 2005, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Larry E. Carson, Vice President, Chief Financial Officer and Treasurer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1. the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Larry E. Carson

Name: Larry E. Carson

Title: Vice President, Chief Financial Officer and Treasurer

Date: March 16, 2006